Administration To Back Federal Charter Option

The Treasury Department has drafted a broad financial services regulation reform proposal that calls for creating a federal insurance regulatory agency.

The insurance regulation provision of the proposal would give both insurers and producers the option of choosing between state and federal regulation, according to a preliminary version of the proposal’s executive summary.

Several news organizations, including the New York Times, today posted copies of a draft of the executive summary on the Web.

Treasury Secretary Henry Paulson will unveil the proposal Monday, officials say.

In the draft, Treasury Department officials recommend creating an Office of National Insurance within the department.

The ONI commissioner should “have specified regulatory, supervisory, enforcement, and rehabilitative powers to oversee the organization, incorporation, operation, regulation, and supervision of national insurers and national agencies,” officials write in the draft.

“The current state-based regulation of insurance would continue for those not electing to be regulated at the national level,” officials write.

Insurers holding a federal charter would still have to comply with some state laws, including premium tax laws, and they would have to participate in state-mandated residual risk mechanisms and guaranty funds, officials write.

But the optional federal charter system should create a system of federal chartering, licensing, regulation and supervision for insurers, reinsurers, insurance agents and insurance brokers that choose to come under the jurisdiction of the ONI, officials write.

The ONI might issue a life charter that would include authorization for a life insurer to sell related products, such as annuities or long term care insurance. Because “the nature of the business of life insurers is very different from that of property and casualty insurers, no OFC would authorize an insurer to hold a license as both a life insurer and a property and casualty insurer,” officials write.

While Congress is debating the OFC proposal, it should create an Office of Insurance Oversight within the Treasury Department to work with state regulators on pressing international issues, such as reinsurance collateral, officials write.

In the long run, “to address the inefficiencies in the state-based insurance regulatory system, the optimal structure should establish a new [federal insurance institution] charter,” Treasury officials write. “An FII charter should apply to insurers offering retail products where some type of government guarantee is present. In terms of a government guarantee, in the long run a uniform and consistent federally established guarantee structure, the Federal Insurance Guarantee Fund…, could accompany a system of federal oversight, although the existing state-level guarantee system could remain in place.”

Another new agency, the Conduct of Business Regulatory Agency, “would be responsible for business conduct regulation, including consumer protection issues, across all types of firms,” officials write.

CBRA would take over the conduct oversight duties of state insurance regulators as well as those of the Federal Reserve, securities regulators and futures market regulators, officials write.

Eventually, “CBRA’s national standards would apply to all financial services firms, whether federally or state-chartered,” and the CBRA standards would preempt “state business conduct laws directly relating to the provision of financial services,” officials write.

To preserve an appropriate role for state authorities to respond to local conditions, “state authorities could be given a formalized role in CBRA’s rulemaking process as a means of utilizing their extensive local experience,” officials write. “States could also play a role in monitoring compliance and enforcement.”