Treasury's Agency Proposal Has Strong Preemption Powers

NU Online News Service, July 23, 1:12 p.m. EDT

WASHINGTON–The Treasury Department last night sent to Congress legislation creating an Office of National Insurance (ONI) with strong authority over solvency and international issues.

Specifically, it gives the proposed agency authority to designate insurers as systemically risky as well as subpoena power to collect information from those insurers.

This is considered stronger than legislation recently introduced in the House creating an ONI by specifically giving it the power to designate insurers as "Tier 1 financial holding companies," which would trigger "systemic risk" regulatory oversight by the Federal Reserve.

For that reason, industry reaction was based on whether a trade group and its members support federal regulation or oppose it.

For example, Leigh Ann Pusey, president of the American Insurance Association said "we all agree" that the government must put in place the necessary regulations and consumer protections to safeguard and prevent future economic crises, and to fill significant regulatory gaps in its architecture.

The Treasury legislation, she added, "addresses some of those key concerns, particularly as they relate to building a strong federal knowledge base on the insurance industry, and allowing the U.S. to engage authoritatively with the global community on international insurance matters."

But Charles Symington, senior vice president, government affairs, for the Independent Insurance Agents & Brokers of America, said, "We think the bill is a thoughtful proposal, but it does differ from last year's Office of Insurance Information legislation that the IIABA supported.

"We will continue to analyze those changes and their impact on our membership and look forward to working with the House, Senate, and the administration as the bill moves through Congress," he added.

The new agency would also have authority to oversee the Terrorism Risk Insurance Program.

The legislation empowers ONI to craft federal policy on the prudential aspects of international insurance matters.

It also authorizes the agency to represent the U.S. in the International Association of Insurance Supervisors.

According to the document, as part of the latter responsibility, the ONI would be empowered to evaluate whether state insurance laws are preempted by "International Insurance Agreements on Prudential Measures."

According to the text, this is defined as including both bilateral and multilateral agreements "regarding prudential measures applicable to the business of insurance or reinsurance."

Several lawyers, who asked that their names not be used, said the preemption provisions in the Treasury legislation are regarded as tighter than the Office of Insurance Information legislation introduced in April by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee of the House Financial Services Committee.

Specifically, one lawyer said, there is no provision in the Treasury legislation that would allow the Secretary of the Treasury to stay the preemption.

It also does not provide Congress with the power to nullify a preemption determination.

It deals with potential conflict with state regulators by mandating a notice-and-comment procedure outlining "potential inconsistencies." This would permit interested parties to comment, after which the ONI will make a determination of inconsistency, and the preemption would become effective following a "reasonable period of time" to be determined by the proposed agency.

At the same time, the new bill prohibits the new agency from preempting state laws with respect to rates, premiums, underwriting practices, coverage requirements, or the application of state antitrust laws.

The legislation creating the ONI is title V of detailed legislation dealing with preventing systemic risk in the future.

It creates a Financial Services Oversight Council consisting of all federal regulators, and subjects all Tier 1 financial services holding companies to consolidated supervision and regulation by the Federal Reserve, "regardless of whether they own insured depository institutions." According to the Treasury Department, they will be subject to the nonfinancial activities restrictions of the Bank Holding Company Act whether or not they are banks.

These companies will be subject to stricter and more conservative prudential standards than those that apply to other bank holding companies–including higher standards on capital, liquidity, and risk management.

"These standards will be set with a focus on the risks that these firms could pose to the financial system as a whole, not just the risks to each institution," the Treasury statement said.

Tier 1 FHCs will be subject to a prompt corrective action regime that would require the firm and its supervisory agency to take corrective actions as the firm's regulatory capital levels decline. "This regime will mirror the prompt corrective action regime for insured depository institutions established under the Federal Deposit Insurance Corporation Improvements Act (FDICIA)," Treasury said.

This will include a requirement that all Tier 1 FHC prepare and maintain a credible plan for the rapid resolution of the firm, in the event of severe financial distress, according to Treasury.