Obama Regulatory Reform Plan Praised By Backers, Critics Of Federal Oversight

The ONI would also recommend which insurers represent a systemic risk and should be overseen by the Federal Reserve Board, in addition to state regulators.

The paper also said that down the road, the administration would support "increased national uniformity through either a federal charter or effective action by the states," but did not call for a direct federal insurance regulatory agency to be created this year.

The National Association of Insurance Commissioners lauded President Obama for proposing a reform plan that basically leaves the state insurance regulatory system intact.

However, NAIC CEO Therese Vaughan said the group would work to include state insurance commissioners in the council of regulators with functional expertise that would be created under the new regime.

"While no one proposal is completely perfect, our initial read of the administration's financial overhaul plan seems to reflect what is most important to us–preserving the consumer protections and financial solvency oversight of the historically strong and solid system of state-based insurance regulation," she said.

Ms. Vaughan argued that the state system's strong solvency programs and consumer protections "have served consumers well, as evidenced by the relative stability in the insurance markets." She said the proposal "appropriately focuses on the problems that need fixing," citing systemic risk and other regulatory gaps.

Among those reacting with positive comments were insurance groups that support retention of the current state-based regulatory system–the Independent Insurance Agents and Brokers of America, the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies.

Also reacting positively were groups that back creation of an optional federal charter for insurers–including the American Insurance Association, the Council of Insurance Agents and Brokers, and the Financial Services Roundtable–which characterized the proposal as an important first step in establishing a stronger federal role in regulating insurance.

IIABA President and CEO Robert Rusbuldt said his group "strongly supports" President Obama's decision not to propose a complete overhaul of insurance regulation.

"We are pleased that the Obama administration's proposal retains the current state regulatory system and does not directly call for the creation of a federal regulator," he said.

IIABA's senior vice president for government affairs, Charles Symington, said his group is "optimistic that the President's plan will not be used as a precursor to federal regulation, and that this proposed ONI will be designed to work with the existing state system to protect consumers and the marketplace and ensure international coordination."

While Ken A. Crerar, president of The Council of Insurance Agents and Brokers, said his members "support the proposed establishment of the Office of National Insurance within the Treasury Department," he said his group "hope[s] this will serve as the first step toward establishing an optional federal charter, which the administration identifies as one method of reaching the objectives in its proposal."

Echoing that sentiment was Frank Nutter, president of the Reinsurance Association of America, who said his group was "encouraged" that the white paper indicated the administration is "open to a federal role in the regulation of insurance," since last year's financial crisis "clearly demonstrated the need for international coordination and communication across all financial services industries."

"Because of the increasingly global nature of the reinsurance business, it is essential that we have resident expertise about the industry at the federal level, and further, the authority to effectively negotiate international agreements," he said.

He noted that the United States is the only country in the International Association of Insurance Supervisors not represented by a national regulatory body, charging that "our industry is sorely disadvantaged by this in an increasingly global marketplace."

Leigh Ann Pusey, president of the American Insurance Association, which backs federal regulation, said the white paper "recognizes that the property-casualty insurance industry remains significantly hampered by an outdated and fragmented state-based regulatory system that is inherently limited and cannot effectively meet today's global economic challenges."

In her view, the Obama white paper "supports efforts to modernize and improve the state-based insurance regulatory framework, specifically referencing the federal charter as an alternative."

Further, Ms. Pusey said, "it addresses the need for a strong national policy voice on insurance matters by establishing an Office of National Insurance–a critical step."

Others saw the proposal as an affirmation of the current, evolving state oversight system.

PCI President and CEO David A. Sampson said his group supports targeted reforms, and "agrees with the need to create a federal systemic risk overseer to help ward off future crises in the financial services sector." However, he said p-c insurers, "who have remained well-capitalized and solvent throughout the current fiscal crunch, do not present a systemic risk and did not cause the existing crisis."

The Obama plan, he said, would not "add a duplicative layer of federal regulation" to a "successful state system."

NAMIC President and CEO Charles Chamness said "the paper implicitly recognizes that property-casualty insurance companies–particularly mutual insurers whose sole focus is the policyholder–have performed exceptionally well throughout this crisis and do not pose a risk to the financial system."

At the same time, he said, "the paper recognizes that a financial holding company such as AIG, which contained well-regulated insurance subsidiaries as well as a poorly regulated non-insurance subsidiary that engaged in risky non-insurance activities, should be considered systemically important and thus subject to oversight by the Federal Reserve."

The proposed ONI has a structure with limited authority that "closely parallels the Office of Insurance Information that has been proposed in legislation currently pending in the House of Representatives and which NAMIC has endorsed," he noted.

However, the Financial Services Roundtable–which represents large financial institutions, including multinational insurers–said its members "applaud the initial legislative proposal of an Office of National Insurance, but believes we must go farther."

"The ideals of consolidated supervision, consistent consumer protection, uniform regulatory treatment, among others, necessitate the enactment of a comprehensive, uniform federal charter," said FSR President Steve Bartlett. "State regulation has simply failed to keep pace with what, today, is a national and international business."

In related news, the chair of a key House subcommittee, warning that Congress can no longer "sweep insurance regulation under the rug and cross our fingers that nothing will go wrong," called for federal oversight starting with bond insurers, mortgage insurers and reinsurers.

The comments came from Rep. Paul Kanjorski, D-Pa., who heads the Capital Markets Subcommittee of the Financial Services Committee.

To start, Rep. Kanjorski said, the federal government should "actively regulate" some specific insurance lines–especially those that pose systemic risk or which have a national significance."

He also said that he believes the federal government should directly examine all complex financial holding companies, including those whose primary activities involve underwriting insurance and "those who play with credit default swaps."

"I also believe that we should examine how we can promote greater uniformity in the industry, with or without the establishment of a federal charter," he said.

For international issues, insurers "must have" a federal regulatory voice on a par with the banking and securities sectors "so that the industry can communicate with its peer regulators at home," Rep. Kanjorski said at a hearing on insurance and systemic risk that he convened the day before the Obama plan was unveiled.

"I believe that only ostriches can now deny the need for establishing a federal insurance resource center and a basic federal insurance regulatory structure," he said.