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last updated on July 10, 2009

REGULATION OF THE PROPERTY/CASUALTY INSURANCE INDUSTRY

THE ISSUE IS

The future of insurance regulation by strengthening and reforming the current state-based system, and consideration of any role of the federal government in regulating the insurance industry, including the consideration of an optional federal charter.

IT IS IMPORTANT BECAUSE

The issue of insurance regulatory reform for the property/casualty insurance industry continues to be among the top legislative priorities for NAMIC.

Since the bailout of Wall Street and the federal loan to AIG, many have used the opportunity created by the instability in some segments of the financial services markets to renew efforts for calling on the Congress to create a federal regulator for insurance companies, agents, and brokers. Policymakers now understand that the collapse of AIG – a financial services holding company regulated by the Office of Thrift Supervision – stemmed from its Financial Products Division’s involvement in risky, unregulated credit-default swaps.

Many state insurance commissioners such as New York’s Superintendent Eric Dinallo, as well as the NAIC, have stated that because of stringent state regulation, AIG’s insurance companies are solvent and that a federal loan may not have been possible if not for the fact that the insurance companies can be sold to help repay the loan.

Mutual property/casualty insurance companies today are a critical component of the American economy. NAMIC members 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 serving main street America by protecting consumers. NAMIC’s surveys of its members (in which any interest in government loans or other support was overwhelmingly rejected) and numerous analyses of the industry bear out the stable financial performance of the industry during the current financial crisis.

A recent NAMIC analysis by Nat Shapo, former Illinois director of insurance, highlights the property/casualty insurance industry’s role – or lack thereof – in the current financial crisis. The report, titled “Financial Oversight Failure Highlights Effectiveness of Insurance Regulation,” shows how property/casualty insurance products are fundamentally different than the exotic financial instruments that played a major role in exacerbating the current economic meltdown. The analysis also points out that the comparative strength of the property/casualty insurance industry was due in large part to an effective state-based system of solvency regulation.

The issue of insurance regulation will be heavily debated during the 111th Congress as lawmakers examine systemic risk and the regulatory structures of the nation’s financial services sector. President Barack Obama’s Administration will unveil their recommendations for overhauling the financial regulatory structure by April 30. House Financial Services Committee Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., and their staff have begun holding legislative hearings.

On March 5, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing on "Perspectives on Systemic Risk." Subcommittee Chairman Paul Kanjorski, D-Penn., called a hearing to examine how to improve the federal government's ability to prevent private-sector activities from putting the stability of the U.S. economy at risk. This was the first in a series of hearings that will be held.

NAMIC submitted testimony to help further guide the debate on systemic risk and to ensure that policymakers do not pursue a course that could needlessly sweep up the entire property/casualty industry. The testimony made a strong, clear case that while reform may be needed to address systemic risk, policymakers should tread carefully to tailor reforms that specifically address the problems that are the root cause of the financial crisis.

The Senate Banking, Housing and Urban Affairs Committee convened its first hearing regarding insurance on March 17. The hearing entitled, “Perspectives on Modernizing Insurance Regulation,” was designed to be an examination of the future regulation of the insurance industry. NAMIC was invited to offer the perspective of those property/casualty insurance companies serving the main streets of America. Our message was delivered by John Hill, president and COO of Magna Carta Companies and NAMIC board chairman-elect, who made clear the fundamental differences between our members and those financial services institutions that have required unprecedented government intervention.

Mr. Hill used the opportunity as a witness to solidify NAMIC’s position by reminding Congress that the property/casualty insurance industry is diverse, competitive, and well capitalized. Instead of focusing on property/casualty insurance – an industry that did not cause this financial crisis and continues to successfully weather it – Mr. Hill recommended that Congress take a measured approach of targeted reforms to address the many issues that have emerged since this crisis began. For instance, if properly crafted, the combination of a systemic risk regulator overseeing financial products that pose a risk to the financial system (rather than particular institutions) and an Office of Insurance Information could accomplish many key reforms without the need for an overhaul of the entire insurance regulatory system.

While the majority of the recent regulatory debate has been focused on the banking and securities industries, many are persistent in their efforts to include insurance. On April 2, Reps. Melissa Bean, D-Ill., and Ed Royce, R-Calif., introduced H.R. 1880, the National Insurance Consumer Protection Act. NAMIC does not support this legislation because it would create a dual regulatory environment for property/casualty insurers by creating federal regulation for all insurers.

The legislation makes a number of changes from prior optional federal charter proposals, but retains features establishing a federal insurance regulatory body. The bill would create an Office of National Insurance located within the Department of the Treasury. The ONI would have the authority to organize, incorporate, operate, regulate, and supervise national insurers, national insurance agents, and national insurance producers.

The legislation is billed by supporters as optional; however, if an insurer is determined to be systemically significant, the insurer could be required to be federally chartered. Similarly, while a state-chartered insurer could elect to become federally chartered, a federally chartered insurer would have to obtain the approval of the ONI to revert to a state charter. The impact of these requirements makes the option of federal regulation an illusion.

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 – there is no need to diminish the ability to guarantee consumer policies.

Unlike previous versions of legislation, a new feature of the bill is an additional level of national insurance regulation in the form of a systemic risk regulator. The systemic risk regulator, an entity separate from the ONI, would regulate all insurance companies to determine their systemic importance and how to best regulate them. All insurers, regardless of whether they are regulated at the state or federal level, could be required to submit information on their activities and operations to the federal systemic risk regulator, who could then participate in state examinations. In addition, the systemic risk regulator would be authorized to direct a state regulator to enforce corrective actions, or, in severe cases, take direct action to regulate the activities of insurers or require that the company be federally chartered. The systemic risk regulator proposal singles out the insurance industry from other financial services and subjects all insurers to a dual regulatory system.

NAMIC is opposed to this confusing and overreaching legislation. NAMIC continues to urge lawmakers to concentrate efforts related to regulatory reform on fostering a better working relationship between state and federal regulators and international financial regulatory bodies, and assessing systemic risk by focusing on the impact of products or transactions used by financial intermediaries. Likewise, NAMIC supports the creation of an Office of Insurance Information to increase understanding of the insurance industry at the federal level and to engage with foreign jurisdictions on insurance matters.

On June 16, the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing entitled “System Risk and Insurance.” This hearing will likely be the last hearing on insurance before the House considers legislation to address the problems in the financial sector.

NAMIC chairman-elect John T. Hill, president/COO of Magna Carta Companies, testified on behalf of NAMIC. This was the second time in three months that Hill testified before Congress. In March, Hill sat before the Senate Banking, Housing and Urban Affairs Committee at the hearing “Perspectives on Modernizing Insurance Regulation.” Similar to the House hearing, it was the Senate’s key hearing on insurance to date.

In his testimony, Hill stressed the relative strength of the property/casualty insurance industry during these difficult economic times. He highlighted the unique characteristics of our industry that ensure that it can survive a severe downturn in the economy like we are currently experiencing. He made clear that property/casualty insurance companies do not pose a systemic risk and should not be included in any new regulatory scheme.

The debate over the regulatory structures of the nation’s financial services sector took center stage the following day, June 17, when President Barack Obama’s Administration unveiled their recommendations for overhauling the financial regulatory system. NAMIC was pleased that in the 85-page white paper, it mentions insurance on only two pages. The proposal recognized that property/casualty insurance is a major component of the financial system and plays a vital role in the functioning of the U.S. economy, but acknowledges that the property/casualty insurance industry does not pose a systemic risk.

The administration did not propose the consolidation of insurance regulation or the creation of a federal insurance charter. The paper suggested the establishment of an Office of National Insurance within the Department of the Treasury. The ONI would be tasked with monitoring all aspects of the insurance industry, including gathering information, negotiating international agreements, and coordinating policy. Specifically, the office would gather information and identify any problems or gaps in regulation that could contribute to a future crisis. The ONI would also have the responsibility of recommending to the Federal Reserve any insurance company that the office believes should be supervised as a top-tier financial holding company (Tier 1 FHC), which would be a company who’s “failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness.” The ONI would also assume all existing responsibilities for the Terrorism Risk Insurance Program.

NAMIC supports the creation of an Office of Insurance Information as outlined in legislation sponsored by Rep. Paul Kanjorski, D-Pa. Specifically, NAMIC supports limits on the information collection ability of the federal office, preservation of confidentiality and privilege protections, and prohibitions against regulatory actions.

Although the proposal did not call for the creation of a federal regulator for property/casualty insurers, it did leave open the possibility for Congress to create a federal insurance regulatory structure. The report suggested “increased uniformity through either a federal charter or effective action by the states.” Specifically, the administration outlined six principals to modernization and improvement of insurance regulation.

• Effective systemic risk regulation with respect to insurance.
• Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies.
• Meaningful and consistent consumer protection for insurance products and practices.
• Increased national uniformity through either a federal charter or effective action by the states.
• Improved and broadened regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business.
• International coordination.

The administration criticized the state-based regulatory structure for inconsistencies and inefficiencies and urged greater improvements in capital standards and consumer protections.

The chairman of the House Financial Services Committee, Barney Frank, D-Mass., has indicated that he will try and move a regulatory reform package through the House before the August recess. With such a full legislative calendar, the chairman of the Senate Banking Committee, Christopher J. Dodd, D-Conn., has said that he is not prepared to move legislation until possibly September or as late as October.

As you can see, the key to protecting our industry will be the efforts to educate decision-makers in Washington. NAMIC has been working hard on all levels to define and differentiate both mutual insurance companies as well as the broader property/casualty industry and we are prepared for a sustained, proactive campaign to cultivate a better understanding of the complexities of our industry.

LEGISLATIVE HISTORY

The debate over whether to reform insurance regulation became more sharply focused during the 109th Congress when Sens. Tim Johnson, D-S.D., and John Sununu, R-N.H., introduced S. 2509, the National Insurance Act of 2006. Rep. Ed Royce, R-Calif., introduced companion legislation, H.R. 6225. Both pieces of legislation would have created an optional federal charter system under which life and property/casualty insurance companies would have the option of choosing a federal charter rather than a state charter.

During the 110th Congress, Johnson and Sununu reintroduced a similar OFC bill, S. 40, the National Insurance Act of 2007. On the House side, Royce was joined 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 OFC legislation last Congress, several hearings were held by the House Financial Services and Senate Banking Committees to discuss the overall state of insurance regulation and examined possible solutions that addressed some of the deficiencies in the current state-based regulatory environment.

NAMIC POSITION

NAMIC supports a reformed system of state-based insurance regulation and believes effective modernization can be accomplished without creating a new federal bureaucracy, and opposes the creation of an optional federal charter 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.

CONTACT INFORMATION

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