As it was preparing to hear the views of the Bush administration on the issue July 18, the Senate Banking Committee last week signaled a measure of bipartisan support for greater federal involvement in insurance regulation going forward.
At the same time, however, committee members indicated that if the insurance industry wants a revised regulatory structure, it will have to accept one that provides strong consumer protection provisions.
The broad scope of the pre-emption language in legislation that has been introduced “raises some interesting hypothetical possibilities,” said Sen. Paul Sarbanes, D-Md., ranking minority member, in voicing views that struck a chord on both sides of the aisle.
Ten people testified before the panel July 11, including representatives of the life and property-casualty industries, the National Association of Insurance Commissioners and the Consumer Federation of America.
“These should be examined very carefully, very thoroughly,” he said. “It raises the question of fundamentally changing the landscape. I’m not prejudging it, but it is a matter of some import and consequence.”
Specifically, Sarbanes was commenting on the only legislation introduced on the issue, S. 2509, the National Insurance Act of 2006. The bill was introduced in April by two members of the committee, Sen. John Sununu, R-N.H., and Sen. Tim Johnson, D-S.D.
In his comments, Sununu said he recognizes the proposal is “a framework for this debate–something substantive that people can look on, critique and look to improve.”
He said Congress appears to recognize that “national legislation is required at this stage” and without naming it, noted the State Modernization and Regulatory Transparency Act (SMART) proposal drafted by House Financial Services Chairman Michael Oxley, R-Ohio, and Capital Markets Subcommittee Chairman Richard Baker, R-La.
This legislation would create national standards for agent licensing and other functions, but it stops short of creating a federal charter. “Legislative proposals have been circulated in the House and reinforce the understanding that some action is necessary,” Sununu said.
Sununu and Johnson especially defended provisions in the bill dealing with consumer protection, pointing out that their bill would establish a separate division of consumer affairs within a federal regulator, would subject insurers to antitrust laws, and would mandate establishment of regional consumer protection offices.
Responding later to Sarbanes’ concerns, Jack Dolan, a vice president at the American Council of Life Insurers, said the industry is “prepared to support very strong consumer protections” in any optional federal charter legislation, citing the strong consumer protection language in the Sununu/Johnson bill. “We would support the best of the best of the state regulatory scheme on the national level,” Dolan said.
In another key move, Sen. Richard Shelby, R-Ala., chairman of the committee, for the first time appeared receptive to the idea of an optional federal charter and welcomed the work done by Sununu and Johnson, although he did not endorse any proposal.
The most outspoken critic of the Sununu/Johnson bill was Sen. Jim Bunning, R-Ky., who compared the legislation with the Federal Emergency Management Agency’s handling of the National Flood Insurance Program.
“We need to move with extreme caution when talking about reversing the entire history of insurance regulation in this country,” Bunning said. “There should be a high hurdle for expanding the federal bureaucracy and imposing new regulations.”
Once involved in a new area of regulation, Congress has a tendency “to create monsters of bureaucracies that only grow and never go away,” he said.
While there is a need for greater cooperation between the states for agent licensing and product approvals, the current system is not “broken,” Bunning said.
The next step will be the July 18 hearing on “Perspectives on Insurance Regulation.” Randal K. Quarles, Under Secretary of the Treasury for Domestic Finance, will represent the Bush administration.
Those also testifying include Dr. Scott Harrington, Alan B. Miller Professor, the Wharton School, University of Pennsylvania; and Dr. Terri Vaughan, Robb B. Kelley Distinguished Professor of Insurance and Actuarial Science, Drake University in Des Moines, and a former NAIC president and Iowa insurance commissioner.
At the July 11 hearing, a life insurance company CEO voiced strong support for the Sununu/Johnson bill, noting that “many life insurers believe regulatory modernization is nothing short of a survival issue.”
Moreover, said John D. Johns, chairman, president and CEO of Protective Life Corporation, “the speed with which progressive change [in insurance regulation] takes place is critical.”
Johns made his comments as a representative of the ACLI. Protective Life is based in Birmingham, Ala.
At the same time, Alessandro Iuppa, president of the National Association of Insurance Commissioners and Maine superintendent, panned the optional federal charter system that the life companies see as their salvation.
Iuppa told the committee that “a bifurcated regulatory regime with redundant and overlapping responsibilities,” as represented by the Sununu/Johnson bill, “will result in policyholder confusion, market uncertainty and other unintended consequences that will harm individuals, families and businesses that rely on insurance for financial protection against the risks of everyday life.”
For these reasons, Iuppa said, “the Senate Banking Committee and Congress should reject the notion of a federal insurance regime.”
The Consumer Federation of America chimed in with intense criticism of both federal legislative proposals now on the table–the OFC approach and the SMART Act.
The recent “conversion” of some insurers to the concept of federal regulation “is based solely on the notion that such regulation would be weaker,” said Travis Plunkett, CFA legislative director. “Insurers have, on occasion, sought federal regulation when the states increased regulatory control and the federal regulatory attitude was more laissez-faire,” Plunkett said.
Taking the opposite tack, Alan F. Liebowitz, president of Old Mutual (Bermuda) Ltd. and chairman of the American Bankers Insurance Association’s government policy committee, said insurance consumers will be better served with improved products at competitive prices under an optional federal charter system.
“The proposed National Insurance Act will advantage consumers by allowing them access to a wider array of products at more competitive prices,” Liebowitz said.
“If we are serious about serving American consumers and serious about safeguarding the ultimate consumer protection–namely, a strong, well-capitalized industry–then we need to make some changes to the way insurance is regulated in this country.”
Liebowitz cited the differences between foreign insurance regulatory schemes and the U.S. system as persuasive. “In these countries, unlike the U.S., insurance regulation is uniform.
“As a result, consumers and insurers are not subject to policy or pricing differences simply because of their location,” he said. “Meaningful changes to the insurance regulatory system must be instituted in the United States to keep our home markets healthy and to address the growing competitive disparity between our domestic market and the markets of other nations,” said Liebowitz.
Even before the hearing, the National Conference of Insurance Legislators ramped up its opposition to any federal involvement in insurance regulation.
The group disclosed that its president, Rep. Frank Wald, R-N.D., had written a letter dated July 10 to the leadership of the Senate Banking Committee criticizing both the Senate and House proposals. The NCOIL letter states that these initiatives, if enacted, would “shanghai state modernization efforts that are already in full swing,” including the interstate insurance regulatory compact for life insurance products, which now is becoming operational, as well as rate deregulation facilitated by flex rating, and more recent market conduct reform efforts.
The letter reaffirms NCOIL’s commitment to work with other advocates of what it termed “sound public policy” regarding regulation of insurance, such as the National Governors Association and the National Conference of State Legislators, “in order to oppose what NCOIL believes are flawed proposals–ones that would cause more harm than good to the industry and the clients it serves.”
The National Association of Insurance Commissioners immediately issued a statement voicing gratitude for the support of NCOIL, NGA and NCSL.