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last updated on July 10, 2009

REGULATION OF THE PROPERTY/CASUALTY INSURANCE INDUSTRY

There are continuing efforts to create a regulatory role for the federal government in the insurance arena, including the potential creation of an optional federal charter.

NAMIC OPPOSES the creation of a duplicative federal regulatory system or other federal/dual regulation for property/casualty insurance companies. Property/casualty insurance is highly dependent on local factors and NAMIC believes that the introduction of a federal regulatory structure, even on an optional basis, could have unintended consequences for the entire industry.

BACKGROUND

Mutual property/casualty insurance companies today are a critical component of the American economy. Property/casualty insurance companies on the whole are very well capitalized and are in no danger of insolvency. Their prudent management and conservative approach to long-term stability are particularly well suited to protecting consumers on Main Streets across America.

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.

For years, the debate over insurance regulatory reform revolved around the creation of an optional federal charter (OFC). There were those in the industry that viewed the creation of an OFC proposal as a corrective to what they saw as a complicated and disjointed national regulatory structure for insurance.

There were also those that believed that effective modernization of the insurance regulatory structure could best be accomplished at the state-level. Those opposed to the OFC were concerned with the unintended consequences for the entire industry. They argued that allowing the federal government to set up a dual charter system for insurance had the potential to lead to costly, confusing, and duplicative regulations that could affect all insurers.

There are several important reasons why the federal government would not create a more effective regulatory regime for property/casualty insurers. In this political environment, creating new regulations at the federal level has the potential to go much further than necessary. What begins as an optional federal charter may well result in additional regulations and costs on the entire industry. Additionally, the property/casualty insurance industry remained stable and solvent throughout the financial crisis in part due to the state-based regulatory structure. Rather than simply creating an alternative regulatory scheme for those who seek it, the OFC could dilute the effectiveness of the current structure. For example, it is likely that the creation of an OFC would lead to the creation of a federal guaranty fund that would either replace the state guaranty funds or operate independently of them. In either case, this duplicative system would serve to damage all guaranty funds and threaten the solvency of the insurance industry.

On April 2, 2009, long-time supporters of an OFC, Reps. Melissa Bean, D-Ill., and Ed Royce, R-Calif., introduced H.R. 1880, the National Insurance Consumer Protection Act. The legislation would create an office located within the Department of the Treasury, that would have the authority to organize, incorporate, operate, regulate, and supervise national insurers, national insurance agents, and national insurance producers. It would also define national standards for company activities such as accounting, risk management, internal controls, investments, and reinsurance. The office would further be responsible for recommending to the new systemic risk regulator any insurance companies that would be required to be regulated at the federal level.

The bill would establish a division of consumer affairs with an office in each of the 50 states and a centralized call center would respond to consumer questions and complaints related to national insurers and producers. National insurers would also be required to appoint a consumer liaison to address consumer complaints or disputes. The creation of a duplicative federal insurance consumer protection system would be costly, confusing for consumers, and weaken existing consumer protections.

The legislation would also create a national guaranty fund financed by assessments on federally chartered insurers. In addition to participation in the federal guaranty fund, national insurers would be required to participate in state guaranty funds for every state in which they do business. This dueling set of national and state guaranty funds will weaken both systems. Interaction and coordination of the duplicative guaranty systems would confuse and delay settlements. The state guaranty fund system is a highly effective mechanism through which the industry polices and supports itself.

While H.R. 1880 is unlikely to be considered this Congress, there remains a significant constituency that continues to push for federal regulation of some kind. NAMIC however, believes that while the state-based system is far from perfect, continuing regulatory modernization efforts at the state level will ensure the best, most competitive future for the property/casualty insurance industry.

CONTACT INFORMATION

For more information please contact Marliss McManus, senior federal affairs director, at (202) 628-1558 or mmcmanus@namic.org.

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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.