Treasury Power Over Trade Pacts Limited

The Treasury Department's authority to conclude bilateral trade agreements on insurance with foreign countries will be considerably watered down in final financial services reform legislation.

Final language on Title V–the insurance provisions of H.R. 4173–were approved last week by House and Senate negotiators.

Under the agreement, Treasury will share negotiating authority with the Office of the U.S. Trade Representative. It will also be required to consult with four congressional committees before pacts are agreed to, and may have to defend such agreements in court. In addition, an individual state's consumer protections must be preserved in any bilateral trade pact.

Larger insurers and the reinsurance industry sought broad powers for a newly created Federal Insurance Office and strong preemption authority in negotiating international agreements, while trade groups representing smaller insurance carriers and agents sought to limit the FIO's authority.

"We believe that the legislation marks a step forward in providing the U.S. with a stronger voice in international insurance negotiations," according to Blain Rethmeier, a representative for the American Insurance Association (www.aiadc.org). "The secretary of the Treasury and the U.S. trade representative are given clear authority to negotiate covered international insurance agreements regarding prudential measures."

However, he added, "we continue to have concerns with provisions that could restrict the ability of the federal government to reach agreement on international matters regarding insurance and thus hinder the competitiveness of the U.S. insurance industry."

Representing smaller insurers, Jimi Grande, senior vice president of federal and political affairs at the National Association of Mutual Insurance Companies (www.namic.org), said that "since the bill was first introduced, NAMIC has been concerned by the creation of any federal insurance office and the potential for it to ultimately hinder companies with duplicative oversight and data calls."

He said NAMIC "will likely have to fight each day to prevent [FIO's] growth and expansion," but added that "we are pleased the conferees have heard our arguments and exercised restraint. As written, this office has no regulatory authority and focuses solely on its intended purpose as a source of information and expertise for federal policymakers."

Mike Becker, director of federal affairs for the National Association of Professional Insurance Agents (www.pianet.com), said his group "remains concerned with the overall intent of the FIO because this is the first step toward federal regulation."

However, he added, "we are pleased to see that the FIO, in its current state, does preserve state regulation, which is our top priority. As the [FIO] is established, we'll be working to ensure that the scope of the office does not encroach on state authority."

The reinsurance industry also voiced support for the provisions creating the FIO, as well as for non-admitted and reinsurance market reform language, and the provision calling for the FIO to study the U.S. and global reinsurance markets before reporting back to Congress within 18 months.

Tracy Laws, senior vice president and general counsel at the Reinsurance Association of America (www.reinsurance.org), said RAA was "particularly supportive of the ability of the FIO to educate and study the reinsurance markets at the federal level."

Regulation of the surplus lines industry will be modernized and substantively streamlined under a provision of the bill approved by House-Senate conferees.

The provision stipulates that in any multistate placement of surplus lines, the only state whose rules govern access to the products is the state in which the insurance is placed–the "principal place of business" for the insured.

Under the provision, those rules include diligent search requirements, premium tax allocations and eligibility standards. The new rules will go into effect one year after the bill becomes law.

"The wholesale and excess and surplus lines insurance markets have worked hard in collaboration with our industry colleagues to achieve needed insurance reform and modernization in respect of the premium taxation on E&S multistate risks. The Senate and House conferees have brought this one step closer to realization," said Bernd Heinze, executive director of the American Association of Managing General Agents (www.aamga.org).

"Our joint efforts will continue with the state stamping and surplus line offices and insurance departments once the legislation is signed into law, to develop a framework for the collection of data and allocation of the taxes in a manner that benefits the policyholder, agents, brokers and insurers by bringing uniformity to these transactions."

The next step is for the National Association of Insurance Commissioners (www.naic.org) to attempt to create an interstate compact governing surplus lines transactions and premium tax allocations, according to Ken Crerar, president of the Council of Insurance Agents and Brokers (www.ciab.com).

Mr. Crerar said CIAB would support a compact, "but if states are unsuccessful, we nonetheless are happy with the home-state approach that this legislation will create."

Negotiators also agreed last week to a key industry request–that the resolution authority created to wind down systemically risky financial firms not be prefunded. AIA's Mr. Rethmeier said, "We have long advocated against the prefund and are glad it has been removed."

He said the property and casualty industry "already has a mechanism for state-based resolution proceedings for failed companies in addition to enhanced consumer protection of policyholders through the guaranty fund system."

The current plan is for the House and Senate to pass final legislation in time to be on President Barack Obama's desk by Independence Day.

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