A blueprint for broad changes in the way financial services companies are regulated, unveiled by the Bush administration last week that includes support for optional federal charters for insurers and agents, almost certainly faces a “difficult and ongoing” debate, as the Treasury Department acknowledged in the report.
The Treasury plan calls for separate property-casualty and life charters, and also includes a proposal to create an interim federal insurance regulator within Treasury to coordinate with state regulatory officials on “pressing” insurance regulatory issues.
Specifically, such “pressing” matters would include international regulatory issues, such as reinsurance collateral. The interim federal regulator would also “serve as an advisor to the Secretary of Treasury on major domestic and international policy issues,” the draft proposal said.
Robert Hunter, director of insurance for the Consumer Federation of America, also criticized the proposal. He said it would have the effect of “gutting consumer protections. “The Treasury proposals for an OFC/deregulation regime as part of a ‘solution’ to the ills caused in mortgage lending lack of oversight is laughable.
“More deregulation as a solution to too much deregulation is classic Bush Administration logic akin to more tax cuts to solve the crisis in our national debt caused by excessive tax cutting,” Hunter said.
The Treasury proposal implied support for legislation introduced in both the House and Senate that would create OFC for both life and p-c.
But in a background briefing for media after the proposal was unveiled, a senior Treasury official said support for an OFC for insurance as part of a broad overhaul of financial services regulation “speaks for itself,” but does not constitute an endorsement of a particular bill.
In discussing the insurance component of the blueprint, Treasury Secretary Henry Paulson said, “Insurance presents a clear need for regulatory modernization.
“States have been the primary regulator for insurance for over 135 years. While a completely state-based regulatory system for insurance may have been appropriate at one time, insurance market changes have put increasing strains on the system,” he said.
“Much like other financial services, over time the business of providing insurance has moved to a more national focus even within the state-based regulatory structure,” the report says. “The inherent nature of a state-based regulatory system makes the process of developing national products cumbersome and more costly, directly impacting the competitiveness of U.S. insurers.”
Under the Treasury proposal, an OFC structure should provide for a system of federal chartering, licensing, regulation and supervision for insurers, reinsurers and insurance agents and brokers.
It adds that such a plan “would also provide that the current state-based regulation of insurance would continue for those not electing to be regulated at the national level.”
States would not have jurisdiction over those electing to be federally regulated, the plan proposes. However, the Treasury plan would leave insurers holding an OFC still subject to continued compliance with certain state laws–such as on premium taxes and guaranty funds.
An OFC would be issued to specify the lines of insurance that each national insurer would be permitted to sell, solicit, negotiate and underwrite. For example, the report said, an OFC for life insurance could also include annuities, disability income insurance and long term care insurance.
However, the report said, “since 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.”
But, the Treasury official cautioned in the media briefing, the document is “aspirational,” in other words, what the Department hopes to see evolve in financial regulation over a period of time. “It will be a long, tortuous process,” the official said.
He also noted that Treasury believes that if an OFC is established, it will become most attractive to large, multinational insurance companies, whether based in the U.S. or outside the continental U.S.
In explaining the Treasury blueprint, the Treasury official cautioned that one overall theme is to ensure that consumer protection is consistent. “Consumers should be treated the same when they are buying similar products.” He cited as an example mutual funds and annuities as similar products, which over time, should be regulated uniformly in terms of consumer protection.
The blueprint also talks specifically about the problems states have in ensuring consumer protection, which officials of the National Association of Insurance Commissioners cite as their strong suit in arguing against federal oversight of insurers.
“Even though the NAIC’s accreditation program has succeeded in making solvency regulation somewhat more uniform and effective,” the blueprint explains, “achieving uniformity in other state regulatory functions, such as in the areas of consumer protection or market regulation, has failed.”
Specifically, it said these areas of concern “include regulation focusing on insurer practices, independent of solvency concerns, which might be detrimental to policyholders, such as deceptive advertising, unfair policy terms, or discriminatory or unfair treatment.”
Talking about what happens when an insurance company becomes insolvent, the blueprint cites with concern the fact that although all states have instituted guaranty funds to pay unearned premiums and the balance on outstanding claims often up to statutory limits, if any. “Yet, these payments are not uniform and can vary by state, type of insurance and net worth of the policyholder,” the blueprint says. “The funding for those claim payments derives from the guaranty funds’ assessments upon the licensed insurers in those states.”
It notes that each state has its own laws establishing separate guaranty funds for life and health insurance and for property and casualty insurance for specified lines of business written by licensed insurers.
Regarding licensing of producers, the blueprint notes creation of the National Association of Registered Agents and Brokers pursuant to the 1999 Gramm-Leach-Bliley law, and notes that although unable to meet the uniform test, 26 states, a majority, adopted the necessary laws and reciprocity arrangements to meet the “reciprocity” test, thus preventing the triggering of NARAB. “Since successfully preventing the triggering of NARAB by meeting the reciprocity statutory requirement, states have failed to achieve uniformity in licensing standards,” the report states.
The blueprint also notes that 7 categories of state policy form systems exist in various states. The blueprint also notes that in dealing with forms, the NAIC has attempted to achieve a high degree of uniformity and efficiency in form approval by creating the Coordinated Advertising, Rate and Form Review Authority to provide a centralized review of certain life insurance products based on a set of uniform standards.
“However, states have not used the Review Authority due to the standards being riddled with deviations,” the report said.