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Administration To Back Federal Charter Option

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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.”

The leaders of the National Association of Insurance Commissioners, Kansas City, Mo., have not yet seen the Treasury Department’s proposal, but “we will read [the proposal], review it and respond where it is called for,” NAIC President Sandy Praeger, Kansas insurance commissioner, said in an interview. “We will emphasize the importance of a state-based system, particularly to consumers.”

Praeger, who is in Orlando, Fla., at the NAIC’s spring meeting, today talked during meeting sessions about the actions state regulators and the NAIC take to protect consumers and ensure insurer solvency.

Praeger also cited efforts by New York regulators and the NAIC to win speedy approval for a new municipal bond insurer launched by Berkshire Hathaway Inc., Omaha, Neb

“We took it on ourselves to move it through the process quickly,” Praeger said.

“Just because we’re 55 [jurisdictions, that] doesn’t mean we can’t work together to effectively regulate,” Praeger said. “There is no need to pull the plug on something that is clearly working.”

But “now is not the time to rest on our laurels,” Praeger said. “The NAIC should continue to push ahead with efforts to create reciprocity for the states for producer licensing and also to get more states to join the interstate insurance compact.”

Rhode Island state Rep. Brian Kennedy, D-Hopkinton, R.I., president of the National Conference of Insurance Legislators, Troy, N.Y., who is attending the NAIC spring meeting, criticized the Bush administration’s OFC proposal and said the only silver lining is that a new administration will take office in 10 months.

“We will have a new Treasury secretary, and all of this will be forgotten,” Kennedy said.

Treasury officials had hinted that they would support an OFC proposal by including “leading questions” in a questionnaire seeking comments on financial services reform efforts, Kennedy said.

The American Council of Life Insurers, Washington, expects to issue a detailed statement Monday, after Paulson’s briefing.

The ACLI has welcomed what it has seen of the advance version of the proposal executive summary.

“The life insurance industry warmly welcomes Treasury’s support for an optional federal charter,” ACLI President Frank Keating says in a statement. “Treasury’s endorsement should provide a significant boost to this important initiative.”

Life insurance producer groups were not immediately available to comment on the Bush administration’s OFC proposal.

The American Insurance Association, Washington, and the Council of Insurance Agents and Brokers, Washington, longtime backers OFC backers, are welcoming the reports.

The Independent Insurance Agents and Brokers of America, Alexandria, Va., and the National Association of Mutual Insurance Companies, Indianapolis, said they support insurance regulatory reform but oppose an OFC system and direct federal regulation.

Jim Connolly contributed information to this article.


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