Sens. Sununu, Johnson Reintroduce Optional Federal Charter Legislation

United States Senators John Sununu, R-NH, and Tim Johnson, D-SD, reintroduced “The National Insurance Act of 2007,” legislation that aims to modernize insurance industry regulation by providing an optional federal charter (OFC) for insurers.

Under the legislation (SB 40), insurers operating under multiple state jurisdictions could choose to be regulated at the national level under a new “Optional Federal Charter.” Sununu and Johnson, members of the Senate Banking Committee, introduced similar legislation last year, using the dual-charter system in the banking industry as a model. The Committee held two hearings examining insurance regulation in 2006 and is expected to revisit the issue.

Aside from technical and clarifying changes, the primary update to The National Insurance Act of 2007 – in comparison to the legislation introduced last year – is the inclusion of provisions that would add surplus lines of insurance as a type of insurance that a person with a federal producer’s license would be authorized to sell under the federal charter program.

“America’s $5 trillion insurance industry operates in a global marketplace, highlighting the importance of a clear, consistent regulatory framework. The fragmented system currently in effect has no place in a modern economy. Given the needs of insurers, it inevitably must be modernized,” said Sununu. “This legislation provides a choice for insurers if they wish to become chartered at the national level, enabling them to work under a uniform set of regulations and an effective federal regulator. Some institutions may choose not to do so, and this bill does not weaken or undermine the current state system for these firms.”

The American Insurance Association’s (AIA) President Marc Racicot said his association supports OFC legislation because it is rooted in free-market principles, and would allow competition to flourish. “Consumers would be empowered by market-based regulation that would allow insurers to customize products and meet consumer needs more quickly, while retaining strong federal regulatory oversight of market behavior and financial condition,” Racicot said in a statement.

The Council of Insurance Agents & Brokers’ President Ken A. Crerar said the optional federal charter “simply makes sense.”

“At a time when more companies are operating in multiple states and when international business is becoming an important part of the insurance market, having the ability to be regulated at a federal level simply makes sense,” Crerar said. “It is time to recognize that industry players need to be able to choose which type of regulation, state or federal, suits their business plan best.”

Sununu added that since last year, the question has become not whether an optional federal charter should be implemented, but when. “Consumers will be the ultimate beneficiaries of this approach, enjoying more choices from companies that compete for their business by introducing new products, innovating in the marketplace, and acting in a way that responds quickly to their needs,” he said.

“Insurance regulation is not a simple issue, and therefore, there is no simple solution,” Sen. Johnson said. “That said, there is increasingly widespread consensus that the status quo for insurance regulation is unacceptable. … Insurance companies both small and large, agents and brokers, and most importantly, consumers, should all have the benefit of a system of regulation that allows the greatest choices and the greatest protections, and fosters competition,” Johnson added. “There is no reason why this country’s insurance industry, its agents, brokers and consumers they serve should be hamstrung by a system of regulation that is redundant, inefficient, burdensome, complicated, and costly.”

Joe Plumeri, chairman and CEO of Willis Group Holdings said that because insurance has grown to become not only a national but a global financial service, the concept of an OFC is needed. “As such, it needs a regulatory structure that matches its scope and leads to an efficient, solvent and innovative financial sector. The Financial Services Authority in the UK has taken steps toward that goal and I commend Senators Johnson and Sununu for advancing the debate in the United States Senate.”

Reinsurance Association of America (RAA) President Franklin W. Nutter noted that a critical feature of the bill is the single regulator’s authority to achieve bilateral regulatory arrangements with foreign countries that would provide for recognition and enforcement of substantially equivalent regulatory standards and enforcement in other regulatory jurisdictions. “Reinsurance regulation needs to be harmonized with the global structure of reinsurance regulatory transactions,” Nutter explained.

According to Nutter, bilateral recognition will allow U.S. and non-U.S. reinsurers alike to conduct trans-border business relying on the home country’s regulation. He stressed, “This can best be achieved through federal legislation.”

Johnson added, “Since Gramm-Leach-Bliley, Congress has modernized the regulatory schemes for every part of the financial services industry except insurance. We have a responsibility to promote a balanced regulatory system that will allow the insurance industry to meet the highest standards of performance, innovation and progress; I believe the National Insurance Act of 2007 will achieve this.”

The following groups have also expressed support for the National Insurance Act: the Agents for Change, the American Bankers Association, the American Bankers Insurance Association, the American Council of Life Insurers, the Financial Services Forum, the Financial Services Roundtable, the Life Insurers Council, the National Association of Independent Life Brokerage Agencies, and the Risk and Insurance Management Society.

The opposition
While nearly all insurance industry advocates agree that the current state-based system of insurance regulation needs reform, the issue has divided the industry.

The National Association of Mutual Insurance Companies (NAMIC)and the Independent Insurance Agents & Brokers of America (IIABA) have both strongly opposed the National Insurance Act.

NAMIC contends the bill would hurt consumers and insurers, especially small- and medium-sized carriers that comprise the bulk of the insurance industry.

“In addition to being completely unnecessary, this bill would likely lead to additional bureaucracy for insurers and, ultimately, higher prices for consumers,” said Justin Roth, NAMIC’s senior federal affairs director.

“It makes little sense to introduce legislation that would create a system that the vast majority of companies and agents in the property/casualty world strongly oppose,” Roth said.

Rather than creating a federal solution under an Optional Federal Charter (OFC) bill, the IIABA instead supports federal legislation to reform the state insurance regulatory system, such S.929, the Nonadmitted and Reinsurance Reform Act introduced by Sen. Mel Martinez (R-FL) and Sen. Bill Nelson (D-FL), which would help create uniformity in the surplus lines and reinsurance markets.

“There is no question in the insurance market that the existing regulatory system needs to be reformed,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “Change is overdue, and virtually every industry stakeholder agrees the existing system can be slow, inefficient, and duplicative. The Big “I” agrees with the need to update the regulatory system, but a one-size-fits-all scheme that creates a new federal bureaucracy is not the answer.”

The Big “I” says local insurance regulation works best for consumers. The dual state/federal system established by the National Insurance Act would be confusing to consumers and could create coverage gaps, according to the IIABA.

The Big “I” also believes the National Insurance Act would lead to additional regulatory burdens on agents and brokers and would negatively impact their ability to represent their customers by establishing a distant federal regulator in Washington, D.C.

The Big “I” also says the dual structure established by the National Insurance Act could have disastrous implications for solvency regulation by largely bifurcating this key regulatory function from guaranty fund protection. In addition, the association says it would negatively impact revenue through a loss of licensing fees and could threaten state premium tax revenue.

“While we acknowledge that the current regulatory system must be reformed, we think that those reforms can take place at the state level rather then creating an additional layer of federal bureaucracy that the insurance industry and their consumers would have to deal with,” NAMIC’s Roth said. “In fact, 17 states have adopted regulatory reforms in the last four years. Congress can play a meaningful role in helping to modernize insurance regulation while not adding additional regulation at either the state or federal level.”