Take a deep breath. An optional federal charter for insurers–or any other legislation impinging on state regulation–will not be enacted this year. Beyond that, in this election year, it is unclear even which party will be in power come January.

However, my tea leaves say, the debate over some form of federal involvement in insurance regulation will intensify next year, with some action inevitable.

One reason is that insurance is the only global activity federal regulation doesn’t dominate. Energy, communications, drugs, real estate, product safety–all are business sectors where state regulators were formerly in charge but which have since seen a large and growing federal presence.

It is a tribute to the persistence of state regulatory backers that insurance has maintained its status quo all these years. Indeed, the 1999 Gramm-Leach-Bliley Act forthrightly reemphasized that insurance should be regulated by the states.

But times are changing. Discussions about federal standards for insurance regulation under way in the House are one sign, and introduction of legislation creating an optional federal charter in the Senate several weeks ago was a milestone.

Members of Congress are gun-shy about taking on any huge interest group, so for Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D., to step up to the plate on OFC represents a huge political calculation they thought long and hard about.

The reaction of opponents was stark. “We adamantly, adamantly, adamantly oppose the optional federal charter,” PIA CEO Leonard C. Brevik said at the group’s Federal Legislative Summit. J. Robert Hunter, insurance director at the Consumer Federation of America, called the Sununu- Johnson bill “a wish list of regulatory giveaways promoted for years by large insurance companies that would be extraordinarily harmful to consumers.”

The National Association of Insurance Commissioners predictably attacked the OFC bill and has resisted efforts by the House Financial Services Committee to help draft its SMART federal standards counterpart.

However, outright rejection of any federal involvement in the industry’s oversight may be counterproductive in the long run. It might be smarter to help steer the train to the destination you desire, rather than get run over trying to derail it.

Besides the Sununu-Johnson bill, bipartisan legislation is being developed in the House that may wind up being introduced as a life-only federal insurance charter but which could mirror the Sununu-Johnson bill in many ways.

Specifically, Reps. Ed Royce, R-Calif., and Paul Kanjorski, D-Pa., are talking with stakeholders about what they would like in a bill. Initially, one lobbyist said, “they’ve indicated that they’re interested in a life-only charter, but they haven’t precluded a broader bill.”

Meanwhile, industry officials say, it’s important to keep an eye on the Senate. While industry lobbyists don’t cherish the notion of a Democratic Senate, those who support an OFC would be delighted for Sen. Chris Dodd, D-Conn., to take over the committee next year, one lobbyist admitted. With the retirement of Sen. Paul Sarbanes, D-Md., Dodd will at least be the ranking minority member.

While he has kept his distance from the development of the Sununu-Johnson bill, Dodd is known to be more sympathetic to progressive regulation than the current chairman, Sen. Richard Shelby, R-Ala., and some lobbyists say he is “intrigued” by the support both life companies and agents are voicing for the Sununu-Johnson bill.

All of these events imply that the issue of federal involvement in the regulation of insurance will not go away, and thus influencing rather than rejecting a work in progress would be the best approach.

Arthur D. Postal

Washington Editor