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INSURANCE REGULATION

(Current as of February 2003)

THE ISSUE IS: the development of proposals that would provide for an optional federal charter of insurance companies who would be primarily regulated by a new federal agency.

IT'S IMPORTANT BECAUSE: With the passage of the Gramm-Leach-Bliley Act (GLBA), financial services companies, including banking, insurance and securities, may form holding companies and create affiliate companies to conduct business in any of the financial industries. For many years, both the banking and securities industries have been licensed and regulated at the federal level, although licensing and regulation also occurs at the state level for banking institutions. In fact, of the total banking institutions operating in the United States today, approximately two-thirds are chartered by the states.

As both banking institutions and insurance companies seek to diversify and expand the services they provide, some institutions and their national trade associations are advocating that insurance companies should be given the option of obtaining a federal charter, as occurs in the banking industry. Supporters of an optional federal charter argue that it is cumbersome for insurance companies to be regulated by 50 different regulators and that insurers should be given the same option as banking institutions, to be charted and regulated by either the federal government or the states.

In 1945, Congress enacted the McCarran-Ferguson Act that specifically delegated to the states the regulatory authority over insurers. The act grants states primary and preemptive responsibility for regulation of insurance. The act reads, "No act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulation of the business of insurance.unless such act specifically relates to the business of insurance." In fact, the business of insurance has been regulated by the states since insurance companies first began operating in this country. For more than 200 years, the states have overseen insurance company operations with respect to solvency and market conduct. While state regulation of insurance is not a perfect system, it has worked very well as witnessed by the infrequency of insurance company failures. In addition, consumer protection has always been an element of state regulation that has been foremost in the minds of state regulators.

The state insurance regulators have acknowledged that the passage of the Gramm-Leach-Bliley Act (GLBA) has created the need to modernize and make more uniform state regulations. In fact, GLBA imposed two specific requirements on state insurance regulators while at the same time restating that the intent of Congress is that the business of insurance should continue to be regulated by the states. In addition to taking the lead to create privacy and producer licensing standards for the states, the 51 jurisdictions which belong to the National Association of Insurance Commissioners (NAIC) entered into a Statement of Intent in March, 2000 to bring focus to the issues of greatest concern to reform advocates. Emerging as the highest priority for change is the complex system of prior regulatory approvals that slows the availability of insurance products to consumers.

Despite the NAIC's status as a voluntary organization of regulators, their leadership has aggressively sought consensus for improvements to the present system. One concept with particular application to the life industry is the Coordinated Advertising, Rate and Form Review Administration (CARFRA) which would have pooled regulatory resources from several states in order to generate a speedier approval process. For a number of reasons the CARFRA test was unsuccessful. The single point of filing concept at the heart of CARFRA has been preserved in the form of an interstate compact. It remains to be seen however whether the compact will be approved by the NAIC or passed in any state.

The NAIC has also recommended specific operational efficiencies and further rate deregulation for commercial lines of insurance to state insurance officials. Regulators have assessed the legal requirements in their states and have begun to implement these reforms.

The threat has not been lost on state legislators who understand that over $10 billion in premium tax revenues could be at stake if state insurance regulation is curtailed. Possibly the most dynamic of the reform processes is being undertaken by the National Conference of State Legislators (NCSL) and the National Council of Insurance Legislators (NCOIL). NCSL and NCOIL are informally collaborating on an insurance task force intended to recommend state law amendments to insurance statues to create a more uniform and efficient system of oversight that will preserve state autonomy over the business of insurance. NCSL undertook a similar project more than 10 years ago, resulting in the accreditation standards passed by state legislatures in the early 90's. The new task force is not expected to complete its work prior to August 2003 with state action to follow in 2004.

The insurance community, companies and agents alike, recognize the need to modernize regulation of the business of insurance. In many respects, the industry is collaborating, informally, and working with the NAIC, NCSL and NCOIL to accomplish the goals of modernization and uniformity. State insurance regulation is well established within state government. The reform process will require some time before the improvements will be enacted and implemented. Insurance regulation is a complex matter and any change to the process should not be undertaken without thorough review and analysis of the impact of change to the business, companies and agents, but also to the consumers and policyholders the industry serves.

NAMIC POSITION: NAMIC supports state regulation of the business of insurance. The association also strongly supports the modernization and efficiency efforts that are underway through the individual state insurance departments and state legislatures. In addition, NAMIC believes consumer protection is best provided by state regulation of insurance. NAMIC has dedicated its resources to the improvement process being pursued by the state regulators and is working collaboratively with others in the industry to develop consensus on the nature of the reforms. Any significant change to a regulatory regime the size of the state based system requires time. NAMIC would urge the Congress not to pursue federal legislation. With the passage of GLBA, however, it is important that the necessary reforms occur in the foreseeable future.

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Every two years, NAMIC presents their coveted Benjamin Franklin Public Policy Award© to lawmakers who have supported a stronger insurance market at least 75 percent of the time. This is demonstrated based on their support of NAMIC's position on certain roll call votes taken, or being a principal player/sponsor on legislation affected the property/casualty insurance industry, during the previous Congress.