On April 2, 2009, two House members introduced legislation that would create an alternative to the current state-based regulatory structure for insurance companies.

The bill, introduced by Reps. Melissa Bean, D-IL, and Edward Royce, R-CA, is called the National Insurance Consumer Protection Act, and it gives insurers the option of adopting a federal charter or remaining with the state charters and state regulation.

According to a summary released by Royce and Bean, however, an insurer could be required to be nationally regulated if it is deemed “systemically important” by the national commissioner and a newly created systemic risk regulator. The definition of “systemically important” is unclear.

The summary further explained that the bill would create a “parallel, national system of regulation and supervision for insurers, insurance agencies, and insurance producers, similar to the dual banking system.”

The legislation also:

  • Creates an Office of National Insurance, which would be responsible for issuing charters for life, property/casualty, and reinsurance companies, as well as licenses to producers. Its commissioner would be appointed by the president for a five-year term, subject to Senate approval.
  • Permits the national insurance commissioner to examine producers in response to a complaint, or if there is evidence that they broke a law or regulation. The commissioner will also be able to examine insurers every two years.
  • Creates the position of a systemic risk regulator, with whom state and national commissioners would be required to share information. The regulator could make “corrective action recommendations” to the national and state commissioners “to mitigate or avoid actions taken by an insurer or affiliate that would have serious adverse effects on economic conditions and financial stability.”
  • Authorizes the systemic risk regulator to circumvent an insurance regulator in some “emergency circumstances.”
  • Sets up a federal Division of Consumer Affairs, which in turn establishes offices in each state to act upon questions and complaints involving federally regulated insurers.
  • Establishes a Coordinating National Council for Financial Regulators. The council would “serve as a forum for financial regulators to collectively identify and consider issues related to the health and competitiveness of the financial services industry.”

Many insurance industry groups welcome the bill, including the American Council of Life Insurers, The American Association of Insurance and Financial Advisors, and the Council of Insurance Agents and Brokers.

But Roger Sevigny, president of the National Association of Insurance Commissioners (NAIC), has issued a statement saying that this is the wrong time for members of Congress to try to change states’ insurance oversight authority.

“In light of the current financial turmoil, the American people have called for strengthened regulatory systems — not abdication of control to those who are regulated. Indeed, [Treasury] Secretary [Timothy] Geithner and key Congressional leaders have stated that charter shopping — where the regulated picks its regulator — should be eliminated in financial reform efforts,” Sevigney said in the statement.

“While we agree that reforms are needed, we believe that federal and state regulators should work together in a way that continues to protect consumers and promote financial stability,” the statement continues. “There are areas in which we might need federal assistance, but that assistance should streamline the strong state-based regulatory framework — not supplant it with a new federal bureaucracy.”

NAIC’s principles for regulatory modernization include a strong emphasis on state, local, and regional oversight, and information sharing between state and federal regulators.