State insurance commissioners were uniformly negative in their reaction to the Treasury Department’s sweeping proposal that calls for an optional federal charter and a national insurance office.

Treasury’s proposal was not officially released until the spring meeting here of the National Association of Insurance Commissioners was almost over, but various news organizations released details while the meeting was in progress.

During the latter part of the plenary session at NAIC’s meeting, commissioners and attendees watched a televised debate over the report on CNBC over the U.S. Treasury Department’s ‘Blueprint for Financial Regulatory Reform.’ The debate included Sandy Praeger, NAIC president and Kansas insurance commissioner, as well as Marc Racicot, president of the American Insurance Association, Washington, and former Montana governor. See Document Link.

At sessions during the meeting, the ability to help consumers was a theme taken up by Praeger. “We have a good story to tell,” she said.

She said NAIC leadership would “emphasize the importance of a state-based system, particularly to consumers.” Praeger noted, among other consumer initiatives, the “Get Smart About Insurance” program developed by the NAIC.

During the opening session both Praeger and host commissioner, Kevin McCarty, emphasized successes of state-based regulation including producer licensing streamlining, SERFF, suitability of product sales for seniors and the Interstate Insurance Product Regulation Commission. In comments before attendees, McCarty cautioned that those who want federal regulation “better be careful because they may get what they asked for.” Both emphasized the dangers of a bureaucracy.

Praeger told legislators represented by the National Conference of Insurance Legislators, Troy, N.Y., that “we need to be singing off of the same page.”

According to Roger Sevigny, NAIC President-elect and New Hampshire insurance commissioner, there is good reason for the two organizations to work together. He noted a proposal coming out of Washington he described as “NARAB II,” a new version of the National Association of Registered Agents and Brokers, which would be more like a self-regulated organization than a state regulatory body. The government board created under the proposal, he said, would be made up of 4 state regulators and 5 industry representatives. The original NARAB was a body that would have been established under the Gramm-Leach-Bliley Act if state insurance regulators did not establish more uniform producer licensing.

Sevigny said that further work needs to be done on making producer licensing more efficient as detailed by a detailed report that the NAIC had released earlier this year. He said legislators could help state regulators by working together to get laws passed.

Working together by visiting members of Congress was an issue raised by state Rep. Brian Kennedy, D-Hopkinton, R.I. “When you’re going to Washington, it is important to have us with you. We do speak the language.”

When asked about the Treasury report, Kennedy said that “I can’t imagine that between now and Jan. 1, 2009 that there will be too much discussion on an optional federal charter.” He called the report “biased,” noting that state legislators had not received the report or had any input into it prior to its development.

Following the television segment, Iowa Insurance Commissioner Susan Voss said she has sent a letter to all 150 Iowa state legislators about the report and the issue. The report is a “stepping stone” to discuss the issue of state insurance regulation, she says. “Nobody is talking about the consumer,” she notes. When there is a problem, Voss asked whether consumers will call 1-800-Washington, D.C.

It is important for state legislators to know that if such a system becomes effective, in many cases, when a consumer calls their office, they will have to tell constituents to “talk to your Congressman.”

While Voss said there are certainly improvements that can be made to a state insurance regulatory system, “there is no need to implode a system to make sure there are improvements.”

Joel Ario, Pennsylvania insurance commissioner, said problems that have arisen in regulating financial services have “originated from federal regulatory issues and not state issues. To drag the state system into the federal system makes no sense.” The strength of the state system is that it is accessible to the consumer, he said.

The problem with the subprime market was with the banks, said Sean Dilweg, Wisconsin insurance commissioner. “I don’t see where the federal government stepped in to deal with the problem.”

Dilweg said federal regulation of Medicare Advantage programs by the Center for Medicare and Medicaid Services is just one example of how state regulation could be more effective than federal regulation.

Mary Jo Hudson, director of the Ohio insurance department, called the Treasury report “a red herring to hide the failings of the federal system.”

She said that “having two systems will result in a race to the bottom.” Hudson pointed to state initiatives such as speed-to-market reform, insurance solvency issues and the Interstate Insurance Product Regulation Commission as evidence that state regulation is working.

Mila Kofman, the new Maine superintendent, said “any effort to federalize the regulation of insurance at the expense of existing state-based oversight and consumer protections is bad public policy.” She said that she still needed to review the details of the proposal and its impact on specific business lines.

NAIC-funded consumer advocate Kevin Lembo said, “There are many, very positive aspects of the Bush administration’s plan for greater oversight and intervention in the financial regulatory system. One element of the report that makes no sense at all, however, is the creation of an optional federal regulator for insurance companies.

“This industry-driven call for an Optional Federal Charter moves regulation and intervention further away from consumers, leaving them with only an “800 number” to protect them from abuses in the insurance market. The only one to benefit from such a move is the insurance industry. The big losers? Consumers,” Lembo said.

“Right now, consumers can hold their government accountable because our insurance commissioners are appointed by governors directly elected by the people. Once insurance is lost in the Washington abyss, who will we hold accountable?”