From the August 2008 issue of Investment Advisor • Subscribe!

August 1, 2008

Careful What You Wish For

Treasury proposes big change, but will insurance companies be happy?

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Last month we talked with Sandy Praeger, president of the National Association of Insurance Commissioners (NAIC) about changes suggested for the insurance industry within the Blueprint released by the Department of the Treasury back in March. (For more on the Blueprint got to www.ustreas.gov/offices/domestic-finance/regulatory-blueprint.) Not surprisingly, Praeger was critical. The suggested modifications, she said, would cause more problems than they would solve, and impair the effectiveness of current regulation and consumer protections.

You might think the insurance industry would be united on the opposite side, jumping up and down and cheering for the proposed Optional Federal Charter (OFC) and all the rest. Not so, however. While some segments of the industry are very pleased, others are just as opposed as NAIC, if not for the same reasons.

American Council of Life Insurers (ACLI)

ACLI's Jack Dolan says that his group is, of course, very much in favor of the OFC; in fact, it was one of its earliest supporters. Why? To ACLI, the OFC represents "modernization of insurance regulation, which is sorely needed." Dolan points out that insurance regulation originated "with the concept that all insurance was local, and of course that's no longer the case." Citing "serious and global" challenges facing the life insurance industry, Dolan says that a federal presence in regulation is needed. Among other things, he says the life insurance industry needs to "have a seat at the table" when public policy decisions are made, dismissing the possibility that that seat might be adequately filled either by ACLI or NAIC--"neither one is congressionally authorized, and we're both just trade organizations"--and pointing out the fact that states have a "constitutional inability . . . to enter into regulatory agreements with their international counterparts."

National Association of Mutual Insurance Companies (NAMIC)

Jimi Grande, vice president of federal and political affairs for NAMIC, says it's much more a mixed bag where he sits. The OFC is "not what we think is the right solution," he says, nor does he consider it politically feasible. Members of NAMIC, he explains, range from small farm and county mutuals--"guys that write in one county"--to the bigger companies offering coverage in ten to twelve states within a region, to "megagiants." The biggest companies are the ones who want the OFC, he says, smaller companies are "scared to death of federal regulation," and for that matter, NAMIC wonders if the way the OFC is currently envisioned is "at all the way Washington would create it."

In fact, he sees federal regulation as simply adding a second layer of regulation on top of what the states already require. Grande also points out that life insurers are a "different industry" than property/casualty insurers. Other nationally regulated financial institutions are in a different category: "a mortgage is a mortgage and the same with life insurance, pretty much wherever you live." However, the perils and risks of consumers in the property/casualty market are very regionalized. If, he adds, the intent is to create more on-hand expertise in Washington in case of disaster that "seems pretty reasonable." But he cautions that property/casualty "by and large" has never had a taxpayer bailout, whereas, among other federally regulated groups, "everybody has trouble."

Reinsurance Association of America (RAA)

RAA's membership is made up of reinsurance companies in the property/casualty arena that run from large to small, and also includes subsidiaries of foreign companies. Tracey Laws, senior vice president and general counsel, says that RAA's official position is to support the OFC, so that companies can be chartered at a federal level, but "we also support a single national regulator at the state level if that can be achieved more quickly." Since reinsurance is essentially "insurance for insurance companies" and much of the risk in case of catastrophe is spread throughout the world (in testimony before the Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Laws pointed out that, in the wake of 9/11 and Hurricane Katrina, reinsurers bore the brunt of losses, 60% and 61%, respectively), the ability for reinsurers to function at a global level argues the need for regulation at the federal level. The Blueprint's proposed Office of Insurance Oversight would accommodate that, she says, with international regulatory bodies talking to one another "without companies having to be licensed in that country."


Marlene Y. Satter, a freelance business writer who can be reached at harpwriter@verizon.net.
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