To The Point—Short on title, long on content—The idea of the OFC generates much discussion on both sides 06/08

To The Point

Short on title, long on content

The idea of the OFC generates much discussion on both sides

By Emanuel Levy

The National Insurance Act of 2007, referred to familiarly as the optional federal charter (OFC), is 330 pages long and contains 616 sections. It sets up a federal insurance division, including a licensing, regulation and supervision system for insurers and insurance producers (although the body of the bill refers only to agents). It creates an Office of National Insurance (ONI) within the Department of the Treasury, headed by a Commissioner of National Insurance.

It is, of course, well known that the OFC concept has some strong backers in the insurance business, including the American Insurance Association (AIA) and the American Council of Life Insurers (ACLI). A major motivation for support of OFC by these groups is that the current state regulatory system is cumbersome, anti-competitive and no longer viable.

The principal reason for support, however, may be the brief but significant reference to product regulation for property/casualty insurance in Section 1215 of the proposed law. It states that a national insurer is required to “maintain copies of policy forms and to provide to the Commissioner a list of standard policy forms it uses.” That brief Section 1215, most important, also states that the “Commissioner is not authorized to require any particular element, price or form.” On the other hand, the bill applies differently to life insurance, stating in Section 1214 that the Commissioner is required “to establish by regulation standards for policies issued.”

The House bill and the Senate versions are essentially identical and are bipartisan. The House bill, H.R. 3200, was filed by Rep. Melissa L. Bean (D-Ill.) and Rep. Ed Royce (R-Calif.). The Senate bill, S.40, was introduced by Sen. John Sununu (R-N.H.) and Sen. Tim Johnson (D-S.D.). Not surprisingly, the bills are not making rapid progress, and on April 1 of this year Bean and Royce issued a request for co-sponsors, noting that the Department of the Treasury had issued a “Blueprint for a Modernized Financial Regulatory Structure.” The blueprint calls for the elimination of duplication in the financial regulatory system, including introduction of the optional federal charter for insurance.

Representatives Bean and Royce urge fellow House members to become co-sponsors of “this important legislation” that “provides a viable alternative to the current state-based regulatory system.” In their co-sponsor request, they refer to the Treasury “blueprint” and to earlier reports from New York Senator Charles Schumer (D-N.Y.) and NYC Mayor Michael Bloomberg and the U.S. Chamber of Commerce, “which make the compelling case to update our insurance regulatory environment.” They assert that “an optional federal charter will improve efficiencies, which will enhance consumer choice and industry competitiveness.”

The representatives criticize the current system of state regulation by asserting in their co-sponsor memorandum that “America’s insureds and insurers have had to operate under an outdated and duplicative regulatory system consisting of individual state regulations for over 135 years. As a result,” the memorandum continues, “fewer insurance products are available nationwide and the products that are available reflect the additional operating costs imposed by inefficient regulation.”

This is hyperbole although it is true that the current system results in duplicative requirements. The representatives’ assertion about the availability of insurance products does not hold water. The American insured has had effective protection for virtually every contingency one can think of. In addition, establishment of the optional federal charter will hardly end the state regulatory system, and it is not intended to do so. Nor does the charter wholly free the national companies from state regulation.

For example, under Section 1125, while the law generally exempts national insurers from state insurance requirements, including licensing, examinations, reporting, regulation or other supervision relating to insurance sales, solicitation, negotiation or underwriting, it calls for continued state jurisdiction in areas of unclaimed property, escheat, state tax and state law relating to participation in assigned risk plans, mandatory joint under-writing associations or other manda-tory mechanisms designed to make insurance affordable to those unable to obtain it. There are some exceptions.

Another indication that the state and proposed federal regulatory systems would not be totally separated can be seen in Section 1153 of the bill, which calls for cooperation between the national commissioner and state commissioners. It requires that the national commissioner “notify the State Insurance Commissioner [of a state] in which a national insurer or national agency is doing business within 20 days of any action regarding revocation, suspension or restriction of authority to transact insurance, entry of a federal order to restrict premium writing, obtain additional contributions to surplus, reinsure all or part of its business, or increase capital, surplus or any other account for the security of policyholders or creditors, or placement of a national insurer into receivership.”

No slam dunk

The transfer of state insurance companies into the national venue is hardly a slam dunk. The law requires that the national commissioner provide for the organization, incorporation, operation and regulation of national insurance companies and national insurance agencies. Further, the commissioner “shall consider the character and competencies of the parties seeking it, and the financial resources and future prospects of the applicant.”

Though this may prove to be pro forma, it is still starting at square one. The section also provides that a national agency may not sell, solicit or negotiate any line of insurance for which it does not hold a federal producer license. Another restriction, this one in Section 1203, states that a national insurer may not obtain both a property/casualty and a life license, or a license for title insurance. Section 1232 of the bill relates to consolidations and acquisitions of national insurers subject to approval by the commis-sioner and asserts clearly that the continuing entity “shall not hold any state license to sell, solicit, negotiate or underwrite insurance.”

The same holds true for agencies. Under Title 111, Section 1301 of the bill, an insurance producer licensed by a state may sell, solicit or negotiate insurance in such state on behalf of a national insurer without a federal producer license. The bill does not state whether the state or federal commissioner has jurisdiction over such a transaction.

As everyone knows, the industry is divided over the question of the optional federal charter, so the lobbying may be intense if the legisla-tion moves into further hearings or an effort is made to enact it. The company and agency organizations that favor the OFC have made their positions clear based on their belief that state regulation is too restrictive and duplicative.

The National Association of Insurance Commissioners (NAIC), on the other hand, opposes the proposed federal regulatory system and affirms its support for the current state system, which it asserts is addressing issues of concern to those who cite duplication of cost and effort. But those who favor OFC believe reform at the state level is too slow and that relief is called for.

Those who favor the status quo, of course, are unequivocally opposed to the regulatory system that would be implemented under OFC. I spoke with Dale Longfellow, who heads Hobson Insurance in the small Montana town of Hobson. His well-established agency specializes in national program business, including sporting goods businesses. (The agency was profiled in Rough Notes’ May 2006 issue).

He told me that the state regulatory system is not broken and has been improving tremendously. Longfellow, who was president of the Independent Insurance Agents of Montana, has served the agency system for more than 40 years and has many years of experience handling large national accounts. About the current criticism of regulation as to gaining state licensing, he said that was inaccurate because the process can be outsourced and handled expeditiously.

Longfellow said that in the view of many agents, there is no reason to change the regulatory system, and he said every agent in the country needs to get involved in efforts to oppose the OFC.

In this observer’s opinion, there is no good reason to abandon the state regulatory system for one that is untested and offers what may be illusory benefits, particularly because it would fall into the not always competent hands of the federal government.

The existence of a dual regulatory system in banking is not a persuasive rationale for applying such a system to the insurance business, and the changeover would be disruptive and possibly inimical to the public interest. Those who favor the OFC are correct in being critical of the state system’s failures to update its practices and to end its duplicative costs in money and time. But to opt for a dual system that has shown weakness in providing regulatory protections is shortsighted. *

The author
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined the weekly insurance news magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producers’ and other industry associations, and is the recipient of many awards and citations. He served on the faculty of the College of Insurance for the annual orientation course for incoming insurance regulators and staff members, lecturing on the debate over state and federal regulation of the insurance business. He wrote insurance articles for The Economist magazine and, for many years, was insurance section editor of the World Book Encyclopedia’s annual historical review book.