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last updated on April 18, 2006

INSURANCE REGULATION

THE ISSUE IS. Whether to change the current state-based system of insurance regulation. Two major proposals before Congress are an optional federal charter bill and the State Modernization and Regulatory Transparency (SMART) Act discussion draft.

IT'S IMPORTANT BECAUSE. The issue of Insurance Regulatory Reform was among the top legislative issues for NAMIC over the last several years. The debate over whether to reform insurance regulation became more sharply focused in the 108th Congress when House Financial Services Committee Chairman Mike Oxley (R-Ohio) circulated a discussion draft of his SMART Act in August 2004.

The NAMIC Board of Directors considered this matter at its December 2004 meeting and adopted the position that NAMIC would neither support nor oppose the SMART Act discussion draft with the understanding that the policy would be re-examined when legislation was formally introduced in the 109th Congress. As of February 28, 2006, the SMART Act had not yet been introduced. NAMIC opposes federal regulation of property/casualty insurance or an optional federal charter.

On April 5, Sens. Tim Johnson, D-SD, and John Sununu, R-NH, introduced S. 2509, The National Insurance Act of 2006. The bill would create an optional federal charter system, under which life and property/casualty insurance companies could choose a federal charter rather than a state charter. S. 2509 would also force states from preventing or restricting producers with a state license from selling, soliciting or negotiating insurance on behalf of national insurers. It is anticipated that Sen. Richard Shelby, R-Ala., Chairman of the Senate Banking Committee will hold a hearing on legislation, although no formal action on the bill is expected this year.

Why NAMIC Opposes An Optional Federal Charter for Property/Casualty Insurers:

The insurance industry is not a monolith. Life, property/casualty and health are all distinct businesses with different concerns. Politically, the industry is divided. The life side appears to favor optional federal charter because they sell products (retirement) that competes with bank and securities products. Whereas, the property/casualty side is much more locally-based and not subject to competition from banks and securities firms. It would make no sense for the federal government to regulate insurance that is tied to local conditions.

• Different states are prone to different natural perils - such as hurricanes, tornados and earthquakes - and people in states without them should not be paying for people in states with them. Moreover, the relevant states understand the risks of these perils far better than the federal government.
• Unlike in the retirement field, banks and securities firms do not sell products that are similar to auto, homeowner or business insurance.

An optional federal charter would usurp states' rights. States have been the sole regulator of most insurance products since the beginning of the United States. In adopting the McCarran-Ferguson Act in 1945, the Congress recognized the central role of the states in the regulation of insurance and the states have done nothing to warrant a federal takeover of state regulation of the property/casualty business.

The states have made great progress addressing some key issues of concern, such as price controls and company licensing. State regulation has not been perfect but the states have been working hard to address legitimate issues of concern. In fact, today only 16 states require statutory prior approval of rates. In addition:

• 24 states have established no filing requirements, mostly for large commercial risks
• 14 states have adopted the more flexible use and file system
• 9 states have adopted flex-band rating systems for property/casualty products to replace the rigid system of price controls.
• With respect to insurer licensing, the Uniform Certificate of Authority Application (UCAA) is now used in all insurance jurisdictions.

Specific concerns about an OFC for property/casualty insurers:

• The big mistake. When a state regulator makes a mistake, the damage is localized and can be more easily "fixed." But what if a national regulator gets it wrong?
• Social regulation. Federal legislation invariably comes with strings attached in the form of rules designed to correct perceived abuses in the marketplace. Rather than let markets perform their role of economic efficiency and have the government directly subsidize people they believe warrant special consideration, the government imposes such obligations on business. The effect is to distort economic judgments and harm other insureds. This harm can take many forms, including cross subsidies, moral hazard and adverse selection.
• Dual regulation. While proponents of an optional federal charter argue that the legislation would simply create an alternative regulatory scheme for those who seek it, their best intentions could well result in dual regulation for insurers. For example, banks can choose either a federal or state charter but all banks are subject to some regulation by the FDIC, regardless of their charter. Congress could well decide, in the context of optional federal chartering, to replace the state guaranty funds with a federal insurer similar to FDIC. That is one way that the legislation could produce dual regulation.
• Increased costs and bureaucracy. If the optional federal charter proposal put forth by the bill's proponents is adopted in the form proposed, with federal chartering and regulation of most aspects of the insurance business and state regulation of guaranty funds, then not only will the bill produce dual regulation for those that select the federal charter, it would inevitably increase costs as insurers would have to comply with the rules of multiple regulators.

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 reforming the state-based system of insurance regulation through legislation in the state capitals. NAMIC opposes federal regulation of insurance or an optional federal charter. NAMIC neither supports nor opposes the SMART Act discussion draft.