Senate Told To Let Feds Oversee Insurers

The federal government should help regulate the insurance industry, a consumer group representative and a law professor urged a U.S. Senate panel last week.

Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, told the Senate Banking Committee that while CFA is in the midst of reevaluating its policies regarding insurance regulation, his group believes the "federal government should be the solvency/prudential risk regulator for all insurers."

This federal oversight office would also be a mechanism to monitor any systemic risk. "It is difficult to understand how a systemic regulator could function properly without the sort of understanding gained from total solvency/prudential analysis," Mr. Plunkett said.

However, the states should remain in charge of dealing directly with insurance consumers, he added.

"States handle almost a half-million complaints and an additional three million requests for information," Mr. Plunkett noted. "Several states average more insurance inquiries and complaints than the entire federal banking system does."

Hal Scott, a professor of international financial systems at the Harvard University Law School, supports creating an optional federal charter, which would let insurers choose between state and federal oversight.

The "status quo is undesirable" because "state-based regulation is inefficient," the current system stifles innovation, and "the fragmented framework puts the insurance industry at a competitive disadvantage with other firms offering the same products," according to Mr. Scott.

"We need to create an OFC to remedy these problems, although I acknowledge the political difficulties of doing so," he added.

As the hearing was taking place, a coalition of insurance industry trade groups that support an OFC for insurance sent a letter to Senate Banking Committee leaders urging prompt action. The organization said it supports a bill submitted last week creating an Office of National Insurance.

However, "our coalition believes that to effectively address gaps in regulation of insurance in a way that would be most beneficial for insurers, reinsurers, producers and most importantly consumers, Congress should also establish an appropriately crafted functional federal regulator for insurance," the coalition said in its letter.

"While state insurance regulation should remain available for those who choose it–particularly agents who may only do business in a few states–a federal alternative regulator could help spur innovation and competition, increase choice, reduce costs, and provide meaningful and consistent consumer protections," the coalition said.

The Coalition for Insurance Modernization includes Agents for Change, the American Insurance Association, the Council of Insurance Agents and Brokers, as well as the Reinsurance Association of America from the industry's property and casualty sector.

Also included in the coalition are the American Bankers Insurance Association, the American Council of Life Insurers, the Financial Services Roundtable, the National Association of Independent Life Brokerage Agencies, and the National Association of Insurance and Financial Advisors.

What to do about insurance regulation is complicated, Sen. Christopher Dodd, D-Conn., acknowledged during his opening statement at the hearing, convened by the committee he chairs. "Some have called for federal regulation of insurance, while others strongly defend the current system of state regulation," he said.

There is a "solid case to be made that state-based regulation of insurance has worked well for more than a century," he added. "There is also a case to be made that it's time for a change…. And, even though the insurance industry did not create the economic crisis, like almost every other industry it has been hit hard, and as a result many are calling on us to modernize regulations and reflect the 21st century in which the insurance industry exists."