Flurry Of House Bills Set The Stage For D.C. Showdown Over Federal Regs

Washington

The introduction of a trio of bills before Congress departed for its Memorial Day recess, in addition to recent comments by the Obama administration, has set the stage for a contentious and probably lengthy debate here over the future of insurance regulation.

One of the bills introduced, H.R. 2554, would create a system for streamlined nonresident insurance agent and broker licensing. Another, H.R. 2571, would modernize and reform regulation of the nonadmitted surplus lines market, as well as the reinsurance industry.

The third, H.R. 2609–introduced without fanfare by Rep. Paul Kanjorski, D-Pa., chair of the Capital Markets Subcommittee of the House Financial Services Committee–would create an Office of Insurance Information (OII) within the Treasury Department.

Versions of all three bills have been approved by the House Financial Services Committee, and both the producer licensing legislation and the surplus lines/reinsurance bills have passed the full House.

The primary difference among the three bills is that the agent and broker measure (which would create a National Association of Registered Agents and Brokers) and the surplus lines/reinsurance legislation would leave the states in total control of regulation.

The OII bill, however, would impose federal regulation on insurance for the first time by giving Washington specific authority to set policy on international insurance matters, among other provisions.

The OII measure would create an office within the Treasury Department that would for the first time give a federal agency the power to collect and analyze data on insurance. The bill would also have OII:

o Advise the secretary of the Treasury on major domestic and international policy issues.

o Report to Congress every two years.

o Ensure that state insurance laws remain consistent with federal policy in coordinating international trade agreements.

The bill would establish an Advisory Group to help inform and advise the head of the OII. Those represented in this group would include state regulators, consumer groups and others parties in the insurance industry.

The bills were introduced as Treasury Secretary Timothy Geithner testified before a House appropriations subcommittee that a broad set of regulatory reform proposals should be unveiled soon by the Obama administration. This could include a new systemic regulatory entity that would have the authority to protect consumers of financial products, he said.

A representative for the Treasury Department added that the administration has not yet determined whether insurance products would be among those that would come under the umbrella of the new consumer protection entity.

Leigh Ann Pusey, president of the American Insurance Association–which has long supported an optional federal charter–said that setting up a U.S. Office of Insurance Information "could be a tremendously valuable tool in helping collect and analyze appropriate data on insurance-related issues at the national level."

She added that "to the extent the establishment of such an office helps create federal insurance expertise and facilitates a uniform national policy on domestic and international insurance issues, it is sorely needed."

Meanwhile, the National Association of Mutual Insurance Companies is "pleased" to see the bill introduced, according to Jimi Grande, NAMIC's vice president for federal and political affairs.

"A properly constructed OII will help bring a more focused understanding of insurance matters to federal policymakers, and would not preempt any of the sound solvency and consumer protections that the national system of state-based insurance regulation provides," he said.

He added that "this legislation can help fill some of the information gaps that exist without overreaching and creating unintended consequences that would harm consumers and reduce competition."

Eli Lehrer, a senior fellow at the Competitive Enterprise Institute–which describes itself as "a nonprofit public policy organization dedicated to the principles of free enterprise and limited government"–called the OII bill "simply a commonsense measure." He said the federal government, "if nothing else, needs a repository of expertise about insurance. That's been lacking to date."

He said that "even the [National Association of Insurance Commissioners] itself has endorsed the creation of an office of insurance information. Given the collapse of AIG, it's pretty clear that we need something like this. Even if no broader federal chartering legislation becomes law, I can't imagine that Congress would turn down a measure this modest."

The uniform agent licensing bill and surplus lines/reinsurance measure both have broad industry support and are consistent with the views of supporters of continued state regulation, in that the federal government should only serve to impose "targeted" and very limited reforms on the current state insurance regulatory system.

The agent licensing bill would preserve state insurance regulation and consumer protection provisions, but it would require agents applying for membership to submit to a federal criminal background check. Currently only 17 states have such a requirement for producers.

Brett Nilsson, chair of the Independent Insurance Agents and Brokers of America, said the bill "would achieve much needed reciprocity in producer licensing and help policyholders by permitting greater competition among NARAB members."

The bill makes NARAB membership optional, and does not create a federal regulator for insurance or aim to reduce current agent licensing standards, IIABA officials noted. Agents applying for membership would have to pay fees as established by the NARAB Board.

Under the bill, nonresident states would continue to have the power to discipline NARAB-licensed producers and to suspend their licenses.

IIABA officials said that under the bill, the NARAB board would coordinate disciplinary efforts with the states and establish a consumer complaints office, and could seek court orders to enforce its disciplinary actions when necessary.

Mr. Nilsson said that while the current state-based regulatory system "worked effectively" to ensure solvency and look after policyholders, "the system does need improvement in the area of agent licensing."

He added that "NARAB II would reform and improve the current state-based system of insurance regulation by providing one-stop, nonresident licensing reciprocity."

(NARAB was part of the Gramm-Leach-Bliley Act of 1999, which tore down barriers among financial services industries. However, NARAB's launch was never triggered because enough states demonstrated reciprocity in licensing laws to keep the entity dormant.)

As for the surplus lines and reinsurance legislation, it would establish national standards for how states regulate these two key industry sectors. It would also:

o Create a uniform system of surplus lines premium tax allocation and remittance.

o Establish one-state compliance on multistate surplus lines risks.

o Provide for direct access to the surplus lines market for sophisticated commercial purchasers.

"These are concepts long endorsed by NAPSLO and promoted with members of Congress during meetings over the past few years," noted NAPSLO President John Wood.

The IIABA and NAMIC voiced strong support for the measure. They believe the legislation represents the kind of targeted insurance regulatory reform that is preferable to federal regulation as represented by an optional federal charter.

NAPSLO officials said they believed companion legislation will be introduced soon in the Senate. Specifically, Mr. Wood said Sen. Evan Bayh, D-Ind., and Sen. Mel Martinez, R-Fla.–both members of the Senate Banking Committee–have announced that they plan on introducing a version of the bill in the Senate.