Legislators in Washington have revived an old debate about the regulation of the insurance industry: Should a single federal authority replace the disjointed state-by-state system that is in place now?
House Representative Melissa Bean of Illinois and Representative Ed Royce of California outlined key points of the Consumer Protection and Regulatory Modernization Act last week, which includes a provision to create a federal insurance regulator. Lobbyists and regulatorsexpect they will introduce the bill some time within the next three months. Among other things, the bill would offer insurers the ability to opt for federal rather than state oversight. Currently there is no federal regulator, so the bill would also create the Office of National Insurance to oversee federally chartered firms, agents and producers. The regulator would have offices in each of the 50 states.
For insurance firms and insurance licensed investment advisors, a single federal regulatory authority would mean a streamlined standard of conduct and fewer licensing requirements. It would also mean reduced costs—and greater competition between insurance intermediaries. In 2007, the American Council of Life Insurers (ACLI) released a study that found life insurance producers could save hundreds of millions of dollars annually in licensing fees under an optional federal charter system. The study estimated that the savings in producer licensing associated with such a move could range from $268 million to $377 million annually. Further, the study found that brokerage general agencies spend $12,600 and 347 hours of staff time annually to be in full compliance with the differing insurance regulations that exist in each state.
Among those supporting an optional federal charter are large insurers that sell coverage to major corporations, reinsurers, brokerage firms, life insurers and banks that are moving into the insurance business, according to the Insurance Information Institute. The American Insurance Association, which represents about 350 major insurance companies that provide all kinds of property and casualty insurance, is one of a number of trade groups that have publicly supported such a move. “It’s clear that the current 56-jurisdiction patchwork of insurance regulation is outdated and limited,” says Leigh Ann Pusey, incoming president of the AIA.
Jack Dolan, spokesperson for the American Council of Life Insurers, a trade association representing 340 life insurance companies, says his group is also in favor of an optional federal charter for insurers. “A long time ago, we identified a need for federal presence in the life insurance industry,” Dolan says.
Meanwhile, The Council of Insurance Agents and Brokers, whose members are commercial insurance and employee benefits intermediaries, says the federal regulator should be modeled after the brokerage industry’s FINRA. “There are hundreds of licensing requirements an insurance producer deals with if he’s going to operate in multiple states. We’d rather see a higher professional standard enforced by an authority that’s similar to [FINRA],” says Joel Wood, spokesperson for the group.
Opponents of a federal insurance regulator argue that the current state by state system has worked far better than other financial services regulatory systems. “We are opposed to any effort that would bring the federal government to helm of the insurance oversight, or that would form dual regulation,” says Susan Nolan, spokesperson for The National Conference of Insurance Legislators (NCOIL), an organization of state legislators whose main area of public policy concern is insurance legislation and regulation.
The group says the optional federal charter would create a bifurcation of oversight since some firms would opt for a federal charter and others would remain under the state’s jurisdiction. According to Nolan, industry businesses are in favor of a federal insurance regulator because they expect it will be less strict and present fewer hurdles that state regulators. Why? “The federal government doesn’t have a great track record when it comes to regulation. Just take a look at the saving and loans crisis and now this latest financial crisis. We don’t see why there should be a federal regulator when state insurance regulators haven’t had nearly as many problems as they have had,” Nolan says.
NCOIL says AIG is a good example of how well the state insurance regulators do their jobs. In AIG's case, the insurance subsidiaries were healthy despite the parent company's troubles. Problems at AIG came from its financial services units, and primarily its business insuring mortgage-backed securities.
The National Association of Professional Insurance Agents feels similarly that state regulation has been very successful. "The state regulatory system has performed well in safeguarding insurance companies and their stakeholders, including consumers, compared to the crisis in the federal regulatory system," says PIA president Kenneth R. Auerbach. "Why would we let this success story be dismantled in favor of a federal regulatory system that has proven itself to be a failure?"
Some lobbying groups fear that the “optional” part will disappear from the new proposed legislation for a federal regulator. If that is the case, they may withdraw their support. “I will just say this. Our policy is to support an optional federal charter,” says Dolan of the ACLI.