WASHINGTON BUREAU — A consumer group representative and a law professor today told a Senate panel that they think the federal government should help regulate the insurance industry.
The witnesses appeared before the Senate Banking Committee for a hearing on the state of regulation of insurance, securities and banking.
Sen. Christopher Dodd, D-Conn., chairman of the committee, acknowledged during his opening statement that deciding what to do about insurance regulation is complicated.
“Some have called for federal regulation of insurance, while others strongly defend the current system of state regulation,” Dodd said.
There is a “solid case to be made that state-based regulation of insurance has worked well for more than a century,” Dodd said. “There is also a case to be made that it’s time for a change…. And, even though the insurance industry did not create the economic crisis, like almost every other industry it has been hit hard, and as a result many are calling on us to modernize regulations and reflect the 21st century in which the insurance industry exists.”
Travis Plunkett, legislative director, of the Consumer Federation of America, Washington, testified that the CFA is in the midst of reevaluating its policies regarding insurance regulation, but that the CFA believes that the “federal government should be the solvency/prudential risk regulator for all insurers.”
This federal oversight office would also be a mechanism to monitor any systemic risk. “It is difficult to understand how a systemic regulator could function properly without the sort of understanding gained from total solvency/prudential analysis,” Plunkett said.
But the states should remain in charge of dealing directly with insurance consumers, Plunkett said.
“States handle almost a half million complaints and an additional 3 million requests for information,” he said. “Several states average more insurance inquiries and complaints than the entire federal banking system does.”
Hal Scott, a professor of international financial systems at the Harvard University law school, said he supports creating an optional federal charter, which would let insurers choose between state and federal oversight.
The “status quo is undesirable” because “state-based regulation is inefficient,” the current system stifles innovation, and “the fragmented framework puts the insurance industry at a competitive disadvantage with other firms offering the same products,” Scott said.
“We need to create an OFC to remedy these problems, although I acknowledge the political difficulties of doing so,” Scott said.
As the hearing was taking place, a coalition of insurance industry trade groups that support an optional federal charter for insurance sent a letter to Senate Banking Committee leaders urging prompt action on OFC legislation.
The Coalition for Insurance Modernization includes Agents for Change, Washington; the American Bankers Insurance Association, Washington; the American Council of Life Insurers, Washington; the Financial Services Roundtable, Washington; the National Association of Independent Life Brokerage Agencies, Fairfax, Va.; the National Association of Insurance and Financial Advisors, Falls Church, Va.; and several property-casualty groups.
The group says it supports a bill submitted to Capitol Hill last week that would create an Office of National Insurance.
But “our coalition believes that to effectively address gaps in regulation of insurance in a way that would be most beneficial for insurers, reinsurers, producers and most importantly consumers, Congress should also establish an appropriately crafted functional federal regulator for insurance,” the coalition says in its letter.
“While state insurance regulation should remain available for those who choose it, particularly agents who may only do business in a few states, a federal alternative regulator could help spur innovation and competition, increase choice, reduce costs, and provide meaningful and consistent consumer protections,” the coalition says.