Optional Federal Charter Resurfaces

The topic of federal regulation of insurance is nothing new on Capitol Hill, and Optional Federal Charter legislation has again resurfaced. For a second straight Congress, Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.) have introduced OFC legislation, S. 40, the National Insurance Act of 2007 (NIA), a bill that the Big “I” strongly opposes. Representative Ed Royce (R-Calif.) has once again introduced companion legislation in the House. The legislation is very similar to OFC legislation they authored last year, which was the topic of two Senate Banking Committee hearings. According to OFC supporters, it is based on the dual-charter system in the banking industry and would allow insurers and producers operating under multiple state jurisdictions to choose to be regulated at the federal rather than the state level.

While the Big “I” agrees that the current regulatory system is in need of improvement, we strongly oppose OFC. We concur with the vast majority of industry stakeholders, including insurance companies and regulators, that there is a need for uniformity and greater efficiency. But we disagree with the bill sponsors and some in the industry who feel OFC offers the solution. Groups such as The National Association of Mutual Insurance Companies and the Coalition Opposed to a Federal Insurance Regulator and companies such as Aflac, Alfa, American Family, Jackson National and many others have joined us in opposing OFC. However, other groups, including the American Insurance Association, the American Bankers Association, the American Council of Life Insurers and the Council of Insurance Agents and Brokers strongly support the legislation.

OFC would be confusing to consumers and could cause coverage gaps by creating a federal/state regulatory system. This dual structure also could have disastrous implications for solvency regulation by largely bifurcating this key regulatory function from guaranty fund protection. Also, federal legislation would negatively affect licensing revenues and could threaten state premium tax revenue—critical funding in the billions of dollars that states rely upon for general treasury needs.

Although the NIA would address some agent licensing concerns, the proposed legislation would lead to additional regulatory burdens on agents and brokers and would negatively impact their ability to represent customers by establishing a distant federal regulator in Washington, D.C. With some companies choosing federal regulation and others state regulation, independent agents would have to understand and navigate the state system and an entirely new federal one. Also, by eliminating or drastically limiting regulatory review of policy language for the small commercial and personal lines markets, the NIA would leave consumers unprotected and would create a huge E&O liability for independent agents. Additionally, the bill would create a massive new bureaucracy for the insurance industry because it approaches regulation through a one-size-fits-all scheme, instead of recognizing the individual needs of each state.

Rather than creating an unresponsive regulator in Washington, D.C., the Big “I” supports targeted federal legislation to reform the state insurance regulatory system, which relies on the years of skill and experience of states as insurance regulators. The Big “I” believes that the current state insurance regulatory system ensures a level of responsiveness to consumers and agents that the federal level could not match.

This pragmatic approach is embodied in legislation introduced earlier this year by Florida Senators Mel Martinez (R-Fla.) and Bill Nelson (D-Fla.): S. 929, the Nonadmitted and Reinsurance Reform Act. S. 929. It would help bring needed uniformity to the surplus lines and reinsurance markets by largely relying on home state regulation without creating a federal regulator. A version of the legislation also was introduced in the House by Reps. Dennis Moore (D-Kan.) and Ginny Brown-Waite (R-Fla.). This targeted approach can be used for other areas in need of reform—most importantly, agent licensing—without all the risks associated with creating a new federal regulator.

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.

Key Legislators for OFC

Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.), with the introduction of S. 40, will remain at the forefront of the Optional Federal Charter issue. Both senators are up for reelection in 2008, but it’s unclear if Johnson will be running again due to medical reasons. Rep. Ed Royce (R-Calif.) will be leading the charge for federal regulation in the House of Representatives.

Another key congressman will be House Financial Services Capital Markets Subcommittee Chairman Paul Kanjorski (D-Pa.), who has said that products more national in scope, such as life insurance, could benefit from flexibility in selecting either a state or federal regulator. House Financial Services Committee Chairman Barney Frank (D-Mass.) will be crucial in the discussion on the House side because he chairs the committee with insurance jurisdiction, as will the committee’s ranking member, Rep. Spencer Bachus (R-Ala.).

On the Senate side, Banking Committee Chairman Chris Dodd (D-Conn.), who is also running for president in 2008, and Ranking Member Richard Shelby (R-Ala.) will be reviewing the issue through hearings later in the year.