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last updated on July 17, 2008

INSURANCE REGULATION

THE ISSUE IS. The future of insurance regulation: strengthening and reforming the current state-based system, and consideration of the role of the federal government in regulating the insurance industry including the consideration of an optional federal charter (OFC).

IT'S IMPORTANT BECAUSE. The issue of insurance regulatory reform continues to be among the top legislative issues for NAMIC. The debate over whether to reform insurance regulation became more sharply focused in the 109th Congress when Sens. Tim Johnson, D-S.D., and John Sununu, R-N.H., introduced S. 40, the National Insurance Act of 2007. Rep. Ed Royce, R-Calif., introduced companion legislation, H.R. 6225. Both pieces of legislation would have created an optional federal charter (OFC) system, under which life and property/casualty insurance companies would have the option of choosing a federal charter rather than a state charter. Among other things, these bills would have completely pre-empted all state consumer protections, eliminated rate and form filings, and allowed companies with a federal charter to be exempted from any additional state licenses.

In the 110th Congress, Sens. Johnson and Sununu reintroduced a similar OFC bill, S. 40, the National Insurance Act of 2007. On the House side, Rep. Royce was joined this year by Rep. Melissa Bean, D-Ill., in introducing companion legislation, H.R. 3200. This marked the first time that the proponents of an OFC bill were successful in having a democratic member of the Financial Services Committee sponsor this legislation.

While there was no movement on either OFC bill last year, two hearings were held to discuss the overall state of insurance regulation. On October 3, 2007, House Financial Services Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee Chairman Paul Kanjorski, D-Pa., held his first hearing on insurance regulatory reform, The Need for Insurance Regulatory Reform. This hearing was the first in a series of hearings to discuss insurance regulatory reform issues. NAMIC Chairman John A. Bykowski testified before the committee. Chairman Bykowski delivered a detailed explanation on why creating federal regulation would be devastating to the property/casualty insurance industry and the consumers they serve. He did an excellent job of describing areas in which the states regulate the industry well and also pointed out the areas that clearly needed reform. He also outlined several suggested reforms that NAMIC supports at both the state and federal levels.

The second hearing in the series was held at the end of October 2007, with another panel consisting of three witnesses supporting the creation of an OFC and three witnesses opposed. This second hearing was a continuation reviewing the need to improve insurance regulation. As was the case with the first hearing, the insurance industry is completely divided on this issue and some in Congress are hesitant to move any piece of legislation that does not have the support of the majority of the industry.

On March 31, 2008, the Treasury Department released their “Blueprint for a Modernized Financial Regulatory Structure.” The report makes recommendations for short, intermediate and long-term structural and operational changes affecting all sectors of financial services, including insurance. The report calls for an immediate creation of an Office of Insurance Oversight (OIO) within the Department of Treasury. The new office would be charged with the authority to address international regulatory issues and to provide advice and counsel on domestic and international policy issues affecting insurance. Treasury also recommends the adoption of an optional federal charter (OFC) for both property/casualty and life insurers. These Treasury recommendations represent a fundamental shift in regulatory philosophy and structure, which NAMIC strongly opposes.

On April 16, 2008, House Financial Services Subcommittee Chairman Kanjorski held a third hearing on insurance regulation. This hearing focused on possible solutions that address some of the deficiencies in the current regulatory system. NAMIC submitted testimony to the subcommittee stressing the need for open-competition and market-oriented regulation to best serve the insurance industry and its customers, and the way to achieve that is by improving the existing state regulatory structure.

During the hearing Chairman Kanjorski announced the introduction of H.R. 5840, the Insurance Information Act of 2008. The legislation would create a federal Office of Insurance Information (OII) within the Department of the Treasury. Among other responsibilities, the OII would collect publicly available data on insurance, analyze the data, and issue reports; advise the Treasury Secretary on major domestic and international insurance policy issues; establish federal policy on international insurance matters; and ensure that state insurance laws are consistent with international trade agreements with regard to such federal policy. To the extent that state insurance laws and regulations are inconsistent with international trade agreements, the OII would have limited preemptive powers. A state shall have the right to appeal any determination of inconsistency to the Secretary.

NAMIC had several concerns with the legislation as introduced, such as the broad preemption of state law and regulation, the lack of clarity regarding the collection of data and information as well as access to the data, and maintaining the confidentiality of the information provided. Since the initial introduction of this legislation, NAMIC has participated in a series of meetings with Chairman Kanjorski’s staff to discuss our concerns with the legislation.

In June, Chairman Kanjorski conducted a hearing on H.R. 5840. During the hearing, a new discussion draft was released and, although there were many positive changes included in the discussion draft addressing some of the issues we raised, such as a significant narrowing of the preemption language, NAMIC remained concerned with the legislation. In testimony submitted to the congressional panel, NAMIC raised concerns with the deference given to the NAIC. Noting the lack of legal certainty regarding the ability of the NAIC to retain confidentiality and privilege, NAMIC recommended the use of statistical agents to provide data. NAMIC also encouraged Congress to replace specific identification of the NAIC with references to state regulators and requested expansion of the advisory group to include state legislators.

With respect to confidentiality, NAMIC noted specific problems with the release of insurer-specific data and urged Congress to bar the republication of non-aggregate data and to attach the same privacy protections to insurer data as provided to taxpayer information. NAMIC, likewise, stressed the need to provide judicial redress to states or parties with standing related to any preemption.

In July, the subcommittee considered a revised version of the legislation that addressed the issues raised by NAMIC. The legislation establishes an Advisory Group to include a state legislator representative and representatives of the property/casualty industry, life insurance industry, producers, and reinsurance. At our request, the committee also added language applying the Administrative Procedures Act, including judicial redress, to further alleviate the preemption concerns; deleted various references to the NAIC; and added improved confidentiality language. While the role of the NAIC is not entirely removed from the legislation, its role is dramatically diminished because it will not be the sole provider of data to the OII. The subcommittee favorably approved H.R. 5840. The subcommittee-approved proposal clarifies that the office will have absolutely no regulatory authority.

NAMIC believes the OII is a generally benign new office and its dual purpose will eliminate the two most compelling arguments for a federal regulator … and do so without altering the insurance regulatory environment for our members. While we wish no federal office was necessary for any insurance issues, we know 1) that information on the industry (especially in times of crisis) and 2) agreements on international trade cannot be effectively addressed by our current structure. Establishment of the OII – if accompanied by the strongest confidentiality and privilege protections, limited scope, well-balanced advisory panel with limited preemptive authority, and congressional oversight – could help modernize the insurance regulatory system.

NAMIC conditionally supports the legislation and will work to ensure that as the OII moves through the legislative process it continues to be structured so as to prevent any federal regulatory role and effectively addresses our other concerns including preemption, empowering the NAIC, confidentiality of data collected and access to the data.

NAMIC OPPOSES AN OPTIONAL FEDERAL CHARTER FOR PROPERTY/CASUALTY INSURERS

States have been the sole regulator of most insurance products since the beginning of the insurance industry in America. In adopting the McCarran-Ferguson Act in 1945, Congress recognized the central role of the states in the regulation of insurance.

State and local laws determine coverage and other policy terms. Reparation laws affect claims. Local accident and theft rates impact pricing. Climate – hurricanes, earthquakes, etc. – differ significantly from state to state. The state regulatory system recognizes and responds to these differences.

NAMIC has some very specific concerns regarding the creation of an OFC for property/casualty insurers and the potential risks involved, such as:

• 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? In addition, states now serve as laboratories to test improvements for regulation being adopted in other states.
• 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 OFC 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 OFC proposal put forth by the bills’ 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, it would inevitably increase costs as insurers would have to comply with the rules of multiple regulators.

NAMIC strongly supports the need to modernize the regulation of the business of insurance and believes effective modernization can be accomplished without creating a new federal bureaucracy. NAMIC is collaborating with the various individual state insurance regulators and legislatures, as well as other organizations such as NCOIL and NCSL, 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, as well as the consumers and policyholders the industry serves.

NATIONAL UNIFORMITY

In addition to federal regulation, another approach to reforming the industry is by Congress promoting national uniformity. This would streamline the current regulatory system by passing targeted federal legislation, while leaving the day-to-day control at the state level.

Last year, the House unanimously passed H.R. 1065, the Nonadmitted and Reinsurance Reform Act of 2007, introduced by Reps. Dennis Moore, D-Kan., and Ginny Brown-Waite, R-Fla. The legislation would modernize the regulation of nonadmitted insurance and reinsurance companies.

On the Senate side, Florida Sens. Mel Martinez, (R), and Bill Nelson, (D), have introduced companion legislation, S. 929. However, Sens. Johnson and Sununu have expressed concern that this bill has the potential to slow down their push for an OFC. It is anticipated that Sen. Jack Reed, D-R.I., will introduce legislation that is similar but will make some small corrections to the existing Senate bill.

NAMIC supports H.R. 1065/S. 929 because the legislation would improve the system and address problems of surplus lines and reinsurance, and possibly ease some of the burden of availability and affordability issues that impact coastal regions.

With the strong bipartisan support of the targeted reform of surplus lines and reinsurance, NAMIC believes that there are other targeted reforms that can be addressed such as agent and company licensing. Currently, insurance agents and companies must obtain a license from each state in which they plan to operate. Licensing requirements vary from state to state and companies, brokers, and agents must comply with each state’s requirements in order to be licensed. Improvements have been made through state standardization of applications/forms, but many needless state-specific requirements still exist. NAMIC believes that, if crafted properly, a national uniform approach towards licensing could provide for streamlined producer and company licensing, while preserving the rights of states to supervise and discipline insurance producers and companies.

NAMIC POSITION. NAMIC supports a reformed system of state insurance regulation and, at this point, opposes the adoption of an OFC or other federal/dual regulation for property/casualty insurance companies. In fact, the vast majority of property/casualty insurance companies and agents support insurance regulation at the state level. While we agree with many of the criticisms leveled against the current system, we are skeptical that the creation of a new federal bureaucracy will solve the problems of insurance regulation.