Agency and company groups disagree
on need for national charters
By Phil Zinkewicz
State vs. federal regulation of the insurance industry has been the subject of debate between legislators and insurance industry representatives for more than 30 years. Traditionally, the industry wanted to preserve its state-based system of regulation, and legislators questioned the ability of 50 individual, separate state insurance departments to do the job. But that debate is now over. Some kind of federal role in the regulation of insurance has been accepted by all parties.
Now a new debate is taking place, and participants in this debate are sectors within the insurance industry itself. The contention was created by passage of the Gramm Leach Bliley Act, which struck down the Glass-Steagall Act. Gramm Leach Bliley erased the barriers between insurance companies, banks and securities firms; insurance factions are at odds as to how to satisfy the law's mandate for uniformity in the regulation of insurance. Last year, the National Association of Insurance Commissioners (NAIC) called for proposals from the insurance industry on ways to streamline insurance regulation at the state level and make it more efficient and more in line with the underlying tenets of the Gramm Leach Bliley Act.
The American Insurance Association (AIA) was among the first to "tentatively" speak its mind and offer a proposal--tentatively, because at that time the AIA admitted it did not have the full vote of its own membership on the proposal. The AIA described its approach as a "state-based system," established under the McCarran-Ferguson Act, for the creation of national insurance charters for property/casualty insurers. Under this system, a property/casualty insurer could get a national charter from any state. Once issued, the charter would authorize the insurer to underwrite property/casualty coverages across the nation. A nationally chartered insurer would have "scaled-back" antitrust protection, but would neither have its rates subject to state regulation, nor be required to file its policy forms with the state.
Nationally chartered insurers would otherwise be subject to state regulation in such areas as guaranty fund requirements and premium tax laws. As a backup mechanism, however, insurers could get national charters from "an appropriate agency of the United States government "if authorizing legislation was not enacted in any state."
Well, now the AIA has made it official. Recently, the AIA announced that its board of directors formally endorsed draft legislation that would allow property/casualty companies to obtain federal charters. "This proposal fleshes out our collective vision of how an optional federal charter for insurers could look and work," says AIA President Robert Vagley. "We offer it as a template for policymakers working to create the optimal regulatory systems for insurers, consumers, and regulators."
Vagley says that the proposal, at present, applies only to property/
casualty insurance companies and does not contain provisions for life insurers, reinsurers, agents or brokers. However, he points out that such provisions could be added in the future and that the AIA "hoped for extensive dialogue with other industry groups and individual companies interested in advancing optional federal chartering."
Noting that the insurance industry environment has changed dramatically in the past few years--technology, trade liberalization and the establishment of a global market for insurance--Vagley says that the industry cannot ignore the "realities" of today's marketplace. "AIA's principles and our new draft legislation envision a progressive, market-based insurance regulatory model that both levels the playing field for insurers with respect to competitors at home and abroad, and provides strong consumer protections."
A list of the AIA principles follows, with a brief description of how each is applied under the association's draft legislation:
* A market-based system. To facilitate speed to market, competition--rather than regulatory approvals--should dictate the products sold by insurers and the prices charged. AIA's bill preempts state rate and form review and approval requirements for federally chartered companies. An effective market conduct oversight mechanism ensures that rates and forms used by each company are consistent with applicable federal and state legal requirements. In addition, the bill scales back the McCarran-Ferguson antitrust exemption in recognition of the reduced role of government in approving the prices and products offered by individual companies.
* National treatment. Companies that opt for a federal charter will be able to do business in all 50 states and Washington, D.C., (in all lines of business) without obtaining separate licenses in every jurisdiction. Federal risk-based capital and surplus requirements will be one of the regulatory tools to assure solvency in lieu of state capital and surplus requirements. States will be prohibited from discriminating against federally chartered companies in favor of those that are licensed by each state where they do business.
* Uniform regulatory requirements. For federally chartered insurers, a new regulatory authority will promulgate and enforce federal requirements governing market conduct activities, claims practices, solvency, liquidation, and other areas where uniform and effective regulation is in the consumer interest. The often-conflicting, state-specific requirements in these areas will be preempted.
* Timely and impartial implementation. Enforcement of regulatory requirements by the new federal authority will be timely, impartial, and professional; fines and other penalties will be proportional to the violation at issue.
* Level playing field. The new federal insurance regulator, to be located within the Department of Treasury, will provide a level regulatory playing field for insurers when compared to other financial services firms.
* Technology for the 21st century. The new federal regulatory system will embrace the use of new technologies by federally chartered insurers in every aspect of their business and will preempt inconsistent state requirements.
It is interesting to note that in last year's version of this same proposal, the AIA called it a "state-based" approach and yet, in the principles listed above, the word "federal" is emphasized frequently.
Immediately after the AIA released its optional federal charter proposal, the Council of Insurance Agents and Brokers (CIAB) released a statement in support of the AIA's position. "The Council is grateful to see the AIA endorse draft legislation to provide property/casualty insurance companies with the option to obtain federal business charters," said the CIAB statement. "The optional federal charter is perhaps the most fundamental and important issue affecting regulation of the insurance industry. We support the AIA without reservation."
In its statement, the CIAB also referred to "Big Brother," in its own way. "The Council's own experience in the agent/broker licensing arena is proof that the AIA is doing the right thing. After decades of effort to streamline the antiquated--and often protectionist--system of line-by-line, class-by-class, producer-by-producer, state-by-state licensing, it was only the threat of federal intervention through NARAB (National Association of Registered Agents and Brokers) that has, for the first time, resulted in changes that are making a difference."
"The problem is not a lack of will or leadership on the part of many state regulators," continued the CIAB. "The problem is that the pace of reform has not kept up with the pace of domestic and international marketplace convergence in the financial services industry."
AIA membership consists of primarily large, national insurance companies and the CIAB membership consists of the larger brokers. The Alliance of American Insurers (AAI), on the other hand, represents more of a cross section of insurance companies, many of them regional. The AAI does not take a very positive view of the AIA proposal.
"We are disappointed with this shift in AIA's position, particularly since we have historically worked with them to improve the state regulatory system," says AAI President Rodger S. Lawson. "The Alliance and our members do not share the view that the federal government would be a more benign regulator or that total federal preemption is a reasonably obtainable objective. We believe that there would be additional political costs that are not clearly understood. Once a majority of insurance companies fully realize the ramifications of this federal chartering initiative, we are confident that they will oppose it."
A spokesperson for the Independent Insurance Agents of America (IIAA) said that the association has not taken an official position on the AIA proposal for optional federal chartering, except that the IIAA still supports state regulation of insurance. "The NAIC is moving rapidly to establish uniformity in the regulation of insurance," the spokesman said. "For example, the number of states needed to meet the mandates of Gramm Leach Bliley in the area of agents licensing has been met and so there is no need for a federal role there. We believe that the NAIC will further streamline the regulatory system and that there will be no need for the federal government in the regulation of insurance."
So, there it is. Only a year ago, the AIA tested the waters in terms of its recommendation for an optional federal charter. None of the industry proponents of state regulation and functional regulation spoke out in protest then. They preferred to take a wait-and-see attitude. But the AIA's tentativeness is now gone and proponents of state regulation will either have to fight or lie down and take it. It will be interesting to see what happens in the coming year and whether AAI's vehement objections to the AIA proposal will draw followers. *