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Regulation and Compliance > State Regulation

Senate Panel Hears Optional Federal Charter Debate

By Matt Brady, Arthur D. Postal

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The life industry made another pitch for an optional federal charter Wednesday at a Senate Banking Committee hearing.[@@]

But, speaking on behalf of state insurance regulators, New York Insurance Superintendent Gregory Serio made the opposite plea, arguing that modernization of the current, state-based insurance regulatory system is “on time and on target.”

J. Robert Hunter, director of insurance for the Consumer Federation of America, Austin, Texas, also criticized the optional federal charter proposal in the strongest possible terms. “Consumer organizations strongly oppose an optional federal charter, where the regulated, at its sole discretion, gets to pick its regulator,” Hunter told the panel.

“This is a prescription for regulatory arbitrage that can only undermine needed consumer protections,” Hunter added. “Indeed the drafters of such proposals have openly stated that this is their goal with the optional charter approach. If elements of the insurance industry truly want to obtain ?speed to market’ and other advantages through a federal regulator, let them propose a federal approach that does not allow insurers to run back to the states when regulation gets tougher. We could all debate the merits of that approach.

“CFA and the entire consumer community stand ready to fight optional charters with all the strength we can muster.”

But life industry representatives, like their property-casualty brethren, criticized the current state of insurance regulation as burdensome due to the fact that the rules vary from jurisdiction to jurisdiction.

“Life insurers today operate under a patchwork system of state laws and regulations that lacks uniformity and is applied and interpreted differently from state to state,” said Arthur F. Ryan, chairman of Prudential Financial Inc., Newark, N.J., and chairman of the American Council of Life Insurers, Washington. “The result is a system characterized by delays and unnecessary expenses that hinder companies and disadvantage their customers.”

Many of the variations between states have been created with little or no reason, according to Brian Atchinson, executive director of the Insurance Marketplace Standards Association, Washington.

“There are no logical reasons for so many different and inconsistent standards or to impose those extra and superfluous costs on companies and consumers,” Atchinson said.

Ryan said the ACLI has been pressing for reforms to be made, with the goals of increasing speed to market, creating uniformity in agent licensing and making market conduct exams more efficient. The ACLI, he said, has been working with state regulators to achieve those goals, but at the same time has also begun work with Congress to achieve a federal solution, which he said, “can ultimately best be achieved through an optional federal charter.”

The ACLI and other trade groups have proposed an optional federal charter bill that would establish a dual federal and state regulatory system modeled largely on the current system of bank regulation.

However, defending the current state-based regulatory system, Serio said, “NAIC and the states are well under way in our efforts to modernize state regulation where improvements are needed, while preserving the benefits of local consumer protection that is the real strength of state insurance regulation.”

The NAIC’s adoption in September 2003 of a regulatory modernization action plan shows that state regulators can create a more efficient system of state-based national insurance regulation, Serio said.

In some areas, Serio said, “our goal is to achieve regulatory uniformity nationwide because it makes sense for both consumers and insurers. In areas where different standards among states are justified because they reflect regional market conditions, we are harmonizing state regulatory procedures to facilitate compliance by insurers and agents doing business in those markets.”

The process for regulating insurance products has to be different from the system for banking and securities because insurance is a different type of product, Serio added.

“Federal intervention in supervising insurance will simply add additional layers of uncertainty, confusion, and cost for policyholders and claimants regarding ?who is in charge’ of supervising insurance payments when they are most vulnerable to the stresses of life’s disasters and personal losses,” Serio said.

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