Treasury Insurance Agency Proposal Authorizes State Law Preemption Powers

Legislation sent to Congress last week by the Treasury Department, which details an Office of National Insurance that would have strong authority over solvency and international issues, is already dividing the property and casualty industry.

The legislation gives the proposed agency authority to designate insurers as systemically risky and subpoena power to collect information from insurers.

It is considered stronger than legislation recently introduced in the House creating an Office of Insurance Information, because the Treasury proposal specifically gives the ONI the power to designate insurers as "Tier 1 financial holding companies," which would trigger "systemic risk" regulatory oversight by the Federal Reserve.

In addition, according to several lawyers who commented on the condition of anonymity, there are state insurance law preemption provisions in the Treasury legislation that are regarded as tighter than the Office of Insurance Information legislation introduced in April by Rep. Paul Kanjorski, D-Pa., who chairs the Capital Markets Subcommittee of the House Financial Services Committee.

According to the proposed legislation, the ONI would establish federal policy on prudential aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors and assisting the Treasury Secretary in negotiating international insurance agreements. In addition, the ONI would have authority "to determine…whether state insurance measures are preempted by international insurance agreements on prudential measures."

One lawyer noted there is no provision in the Treasury legislation that would allow the Secretary of the Treasury to stay the preemption. The Treasury proposal 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, coverage requirements, or application of state antitrust laws.

Because of strong preemption authority, however, industry reaction was split.

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 United States to engage authoritatively with the global community on international insurance matters."

Joel Wood, senior vice president, government affairs for the Council of Insurance Agents and Brokers, said, "It's pretty hard to argue the point that there shouldn't be a seat at the international table for American insurers and that state laws that interfere with international obligations should be preempted.

"While we'd like to see the legislation go further on preemption, we think that this is thoughtful, measured, consistent with the ideology of House and Senate congressional leaders on financial services issues, and we hope that it will be a part of broader regulatory reform efforts this year."

But Jimi Grande, vice president of federal and political affairs for the National Association of Mutual Insurance Companies, and Charles Symington, senior vice president of government affairs for the Independent Insurance Agents & Brokers of America, voiced concerns.

Mr. Grande said NAMIC has "long supported" legislation proposed last year by Rep. Kanjorski creating the OII. He called this "a targeted approach to improving insurance regulation without upending the current state-based system that has protected consumers and companies throughout the financial crisis."

He added that NAMIC is "pleased" the administration's proposal for an ONI did not include regulatory authority or supplant the current state-based model, "but we have some concerns with the information-gathering provisions," he said.

The proposed legislation states that ONI may require an insurer or affiliate to submit data or information that it might reasonably require to carrying out its functions (with the exception of small insurers falling under size threshold to be determined). The ONI would have power to require the production of requested data by subpoena.

Mr. Grande said, "We hope the administration will consider endorsing the OII, which would meet the stated goals of the administration to create an agency that would gather information, develop expertise, negotiate international agreements and coordinate policy in the insurance sector." Additionally, Chairman Kanjorski's OII proposal "has already won support from key stakeholders and the majority of the industry," he said.

IIABA's Mr. Symington said, "We think the bill is a thoughtful proposal, but it does differ from last year's OII 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 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 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," 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.