Federal Insurance Office Authority Sparks Protest From State Regulators, Legislators

The regulators added that Washington "already has broad authority to enter into binding trade agreements to open foreign markets for U.S. insurers and to open U.S. markets for foreign insurers, and there is extensive consultation with Congress, governors, state legislators and regulators before any agreement preempts state insurance regulation."

The National Conference of Insurance Legislators, in its own letter to Congress, argued that "state regulation is successfully guiding insurers through the current economic downturn," and reiterated that state lawmakers "continue to disagree with the necessity for such an office and question its accountability and effectiveness."

Moreover, NCOIL officials said, "the office's enhanced preemptive power and lack of answerability are alarming to state officials who have seen the success of checks and balances in the state system."

NCOIL took particular exception to the fact that the proposed legislation "permits an FIO–to be led by an unconfirmed appointee of the [Treasury] secretary–to override existing [insurance] law without meaningful dialogue with the states."

"In fact, as currently drafted, the FIO only must consult the states prior to requesting insurance data from the private sector and after a determination that a state law will be preempted," NCOIL pointed out. "Other consultation with state officials is limited to the extent the director [of the FIO office] determines appropriate."

The National Association of Professional Insurance Agents also voiced support for state regulators, noting that if the FIO bill is passed as written, the House Financial Services Committee is "poised to take opposite positions on the same issue in the space of one week."

Specifically, PIA said, the committee approved an amendment to legislation creating a Consumer Financial Protection Agency that would make national banks and federally chartered savings associations subject to a broad range of state consumer protection and financial services laws, while exempting insurers.

"The Financial Services Committee made the right decision last week when it placed restrictions on the [Office of the Comptroller of the Currency's] rampant and unaccountable preemptions of state laws," according to PIA's executive vice president and chief executive officer, Leonard Brevik.

He said the committee can achieve consistency with its previous position by including the same preemption standards in H.R. 2609, the Federal Insurance Office Act of 2009.

Consumer Watchdog, a California-based consumer advocate group, made the same point. "We are at a loss to understand why you have proposed a measure to deregulate the insurance industry by preempting state laws as part of the financial re-regulation package," the group's officials said.

"Each version of the bill would restrict the ability of state lawmakers and regulators to protect insurance consumers by granting the Treasury Department and a new Federal Insurance Office the authority to preempt state laws and regulations on prudential matters on behalf of foreign insurance firms," said Consumer Watchdog.

"This proposal is even more perplexing in light of the strong fight, on the part of both the [Obama] administration and majority members of the Financial Services Committee, to preserve states' ability to protect their citizens during the debate over the Consumer Financial Protection Agency," the letter continued.

The measure has divided the insurance industry, as supporters see it as necessary to ensure that the Treasury Department has broad authority to negotiate with other countries on uniform solvency regulations. They include large domestic insurers and foreign insurers doing U.S. business.

"We're hopeful that Congressman [Paul] Kanjorski holds firm on his Oct. 16 draft that was circulated by the committee," said Blain Rethmeier, a representative for the American Insurance Association, noting that AIA was sending a letter to Rep. Kanjorski, D-Pa., chair of the Capital Markets Subcommittee of the House panel and chief sponsor of the legislation.

"Any further weakening of the Federal Insurance Office's international authority would be detrimental to the U.S.'s credibility on insurance regulatory matters in international negotiations and the property and casualty industry's ability to remain competitive," Mr. Rethmeier added.

But opponents of a strong federal role in insurance regulation oppose the bill as a significant intrusion into states' rights.

"We share the concerns expressed by the NAIC regarding some of the broad authorities granted to this new federal office. The preemption authorities under the current draft have the potential to create an unlevel playing field," said Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies.

On Capitol Hill last week, the leadership of the House Financial Services Committee made clear that any bill creating a Federal Insurance Office will include a strong role for the Treasury Department in negotiating international insurance agreements.

It came as the leaders of the committee announced the panel will delay action on the bill to consult with the Trade Subcommittee of the House Ways and Means Committee, which is looking to exercise jurisdiction, based on statements to that effect by Rep. Barney Frank, D-Mass., chair of the Financial Services Committee, and Rep. Kanjorski. Rep. Frank said action on the bill will come in a "very short period of time."

He added that he had not had "appropriate conversations with members of the House Ways and Means Committee about the international preemption provisions." He said he is delaying draft work on the bill "to allow the appropriate conversations to take place."

However, he emphasized that it is very much his intention to adopt legislation that will give the FIO the power to make international agreements.

Rep. Kanjorski made similar comments. "American interests are at a disadvantage under the current system with only a state commissioner at the table. There is an inequality in negotiating," he said.

He added that to have an effective federal representative at the negotiating table, preemption of state authority would be necessary, and that "we are moving in that direction."