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Reform In Spotlight

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The National Conference of Insurance Legislators, the Consumer Federation of America and academic experts have been sharing their views on Obama administration financial system proposals this week.

The rush came as the House Financial Services Committee scheduled a series of hearings on financial system legislative efforts.

Members of the executive committee of NCOIL, Troy, N.Y., have approved a statement reaffirming NCOIL’s commitment to state insurance oversight.

“While state legislators recognize the need for targeted financial services reform, we believe that any reform should avoid preempting successful state insurance oversight,” New York state Sen. James Seward, R-Otsego, N.Y., NCOIL’s president, says in a statement. “State insurance regulation is one of the bright spots in the current otherwise bleak regulatory landscape and should be advanced, not pared back.”

NCOIL says in its resolution that it objects to Obama administration suggestions that the proposed Consumer Financial Protection Agency could have jurisdiction over credit-related insurance products.

NCOIL has resolved that “any Financial Product Safety Commission, Consumer Financial Protection Agency, or similar new or existing federal agency should not have direct or indirect jurisdiction over insurance products–including credit, mortgage, and title insurance–and/or insurance-related matters.”

Travis Plunkett, legislative director for the Consumer Federation of America, Washington, is supporting the idea of putting credit-related insurance products and similar products that are not technically defined as insurance products under CFPA jurisdiction.

Plunkett was scheduled to testify today at a hearing on consumer groups views on recent legislative proposals that was organized by the House Financial Services Committee.

Traditionally, states have done a poor job of regulating credit insurance rates, with the loss ratio for credit life insurance averaging just 47% in 2007, and the average loss ratio for credit disability insurance standing at just 37%, Plunkett says in written testimony submitted to the committee before the hearing began.

But Plunkett acknowledges that the loss ratio for mortgage guaranty products increased to 135% in 2007, from less than 25% in earlier years, as a result of the start of the mortgage crisis.

In some cases, Plunkett says in the written testimony, banks and other lenders sell “debt cancellation contracts” that may cancel debt when consumers die, become disabled or meet other criteria.

“To a consumer, DCCs and credit insurance are very similar – or even identical – products,” Plunkett says in an appendix to the written testimony. “The major difference between credit insurance and DCC is in regulatory oversight.”

Federal and state regulators have decided that, because DCCs are contracts between lenders and consumers, without the involvement of insurers, they are something other than insurance arrangements, Plunkett says.

“In practice,” Plunkett says, “DCC programs are administered in almost the same manner as credit insurance programs.”

Credit insurers sell and administer many DCC programs, Plunkett says.

“The difference in regulatory oversight of DCC versus credit insurance is dramatic,” Plunkett says. “With credit insurance, the products (policy forms) must be approved by state insurance regulators prior to use and the rates subject to prima facie maximum rate regulation. A credit insurer wishing to offer a national program must obtain approvals in all states and comply with different rates in all states as well as variations in product requirements among the states.”

But, under the rules developed by a federal bank regulatory agency, the Office of the Comptroller of the Currency, and other federal financial regulators, “lenders can offer a single DCC product nationally,” Plunkett says.

There are no limitations on DCC fees, and few limits on product designs and benefit provisions, Plunkett says.

“In prior reports and testimony, CFA has estimated the loss ratio for DCCs … to be less than 5%,” Plunkett says.

Steve Bartlett, president of the Financial Services Roundtable, Washington, testified Wednesday at another House Financial Services Administration hearing on recent legislative proposals, that the Roundtable, which represents large insurers as well as large banks, continues to support “the adoption of a federal insurance charter for national insurers, reinsurers, and producers under the supervision of a national regulator.”

“It is essential that this piece be included in the larger regulatory reform legislation,” Bartlett says in the written version of his testimony.

The United States is the only members of the G20 group of large economies without a national insurance regulator, Bartlett says.

The Roundtable also supports proposals for creating an Office of National Insurance within the U.S. Treasury Department, and it supports the Obama’s general principles for insurance regulation, which include an emphasis on effective systemic risk regulation, and comprehensive and consolidated regulation of insurance companies and affiliates, Bartlett says.

The Obama administration is suggesting that state insurance regulators should continue to oversee insurance.

The Roundtable wants to let a new National Financial Institutions Regulator serve as a “prudential and consumer protection agency for banking, securities and insurance,” Bartlett says.

“The NFIR would reduce regulatory gaps by establishing comparable prudential standards for all of these of nationally chartered or licensed entities,” Bartlett says.

In addition, the national insurance regulator should have a seat on a financial services oversight council and a new coordinating council, Bartlett says.

Edward Yingling, president of the American Bankers Association, Washington, testified at the same hearing that the ABA continues to support the creation of an optional federal insurance charter.

Patricia McCoy, director of the Insurance Law Center at the University of Connecticut law school, testified today at a House Financial Services Committee subcommittee hearing on the place of consumer protection in regulatory restructuring that having many different regulators competing to oversee the same market can be a good thing.

In recent years, for example, the OCC and the Office of Thrift Supervision used their ability to preempt state regulation to keep states from taking action against abusive mortgage practices, McCoy says in the written version of her testimony.

“In contrast,” McCoy says, “when the Securities and Exchange Commission succumbed to lax enforcement in the late 1990s and 2000s, state attorneys general retained the power to prosecute securities fraud on their own. That power resulted in landmark actions by the attorneys general of New York, Massachusetts, and Connecticut, among other states, and lit a fire under the SEC to initiate actions of its own.

In the insurance market, “the decentralization of enforcement among the 50 states meant that when there were serious market conduct problems, some states were likely to take enforcement even if others were not,” McCoy says.


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