Financial Services Reform Bill Ready For Final Passage When Senate Returns

The National Association of Insurance Commissioners voiced strong support for the bill, while comments from industry groups were based on whether they prefer continued state-based regulation or greater regulatory uniformity via interstate compacts or a federal insurance charter.

Senate action was delayed because of procedural reasons exacerbated by the unexpected death of Sen. Robert Byrd, D-W.Wa., and the fact that Republicans balked at a last-minute decision to add a tax on financial institutions to raise $19 billion estimated to pay for implementation of the bill over five years.

That forced the Democratic leadership to reopen the House-Senate conference to reconcile their respective bills and drop the tax in favor of other means of raising the money.

Ironically, the delay benefited the insurance industry. Blain Reithmeier, a spokesman for the American Insurance Association, explained that "this is a major development because in removing the proposed tax, insurers will no longer face the potential front-end assessments as was originally proposed in that title of the bill."

The insurance industry escaped most provisions of a regulatory reform measure that was seen mostly as "bank-centric."

The NAIC thanked negotiators that crafted the final bill for "largely preserving the critical role of state insurance regulators in protecting consumers and ensuring the viability of the insurance industry."

Specifically, NAIC officials said they supported the language creating a Federal Insurance Office. The final bill allows the FIO to provide Congress and the administration with information and expertise on insurance matters in the course of setting government policy and conducting trade negotiations.

"We were pleased to see that the Federal Insurance Office set up under the bill is narrowly designed to carry out its mission while not unnecessarily undermining strong state regulation," said NAIC President Jane Cline.

"In similar fashion, the addition of a state insurance regulator to the Financial Stability Oversight Council created by this legislation will add an important safeguard for consumers and provide an early warning system for other financial regulators if an insurance company were to become subject to systemic risk," added Ms. Cline, who is West Virginia's insurance commissioner.

Under the bill, federal regulators would have the authority to wind down troubled large institutions. But, as the NAIC noted, the measure also makes clear that state insurance regulators will continue to have the ability to "wall off" insurance companies from troubled holding companies, protecting insurance policyholders from other risks in the financial system. State regulators will also retain their role to monitor consumer protections in the insurance sector.

In the FIO, the Treasury Department will have to share the ability to conclude bilateral trade agreements on insurance that preempt inconsistent state laws with the U.S. Trade Representative's Office.

The FIO will have no regulatory authority but will have the power to monitor all activities related to the business of insurance–except for health insurance and long-term care coverage.

The final language also mandates that the new FIO conduct a study of insurance regulation and make recommendations to Congress within 18 months. The House added a provision requiring that the study include recommendations on the U.S. and global reinsurance markets.

The surplus lines provisions in the bill dictate that in any multistate placement, 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 (declinations), premium tax allocations and eligibility standards. The new rules will go into effect one year after President Obama presumably signs the measure into law.

FLOOD PROGRAM EXTENDED

In other Washington news, the Senate passed another extension of the National Flood Insurance Program, which had expired on June 1–this time until Sept. 30, 2010. The bill had been passed by the House on June 23.

The reauthorization is retroactive, according to officials of the Independent Insurance Agents and Brokers of America.

That means that once signed by President Obama, any new policy applications or renewals that were signed and submitted during the hiatus will be effective from the date of application (or in the case of waiting periods, the waiting period will start from the date of application).

But industry officials reacted by demanding that Congress restore certainty to the program by promptly adopting a long-term extension. This was the fourth time the program had been allowed to lapse.

Short-term reauthorizations have been the norm because of battles between Democrats and Republicans over other, unrelated priorities–for example, extensions of unemployment insurance and a program that subsidizes COBRA health care coverage for those who lost their jobs.

Action on a longer-term extension has also been problematic because the program has a deficit nearing $20 billion, yet Congress is reluctant to act to reduce it because raising rates to "market level" generates severe criticism from hard-pressed homeowners.

Industry reactions included comments by IIABA President and CEO Robert Rusbuldt, who said "it is alarming that the NFIP was allowed to remain expired for so long, causing so much confusion and potentially leaving desperate homeowners and small businesses unprotected for almost a month."

He added that "we are also greatly concerned that these short expiration periods and patchwork of temporary extensions will negatively impact the market."