Trade groups representing life insurance agents and companies are divided over legislation proposed by the Treasury Department that would create an Office of National Insurance with strong authority over solvency and international issues.
Specifically, officials of the National Association of Insurance and Financial Advisors said they supported the proposal, but company trade groups cautioned that an ONI should not be a substitute for an optional federal charter for life insurers.
The legislation gives the proposed agency authority to designate insurers as systemically risky and subpoena power to collect information from insurers.
Shortly after, Treasury sent to Capitol Hill additional legislation that provides federal regulators with enhanced resolution authority over non-banks, including insurance companies.
According to an analysis by a Washington law firm, the legislation gives the Federal Deposit Insurance Corporation and Securities and Exchange Commission resolution authority over bank and nonbank holding companies that are determined to be systemically important.
According to the analysis, this could include insurance holding companies, but specifically excludes insurance company subsidiaries of insurance holding companies.
“The proposed legislation is likely to implicate only a small number of insurance holding companies because it appears likely that there are few that would be designated as Tier 1 financial holding companies, and, moreover, the bill’s application is limited to situations in which the failure of a company and its resolution under other federal or state bankruptcy or related laws would have ‘serious adverse effects’ on the financial stability or economic conditions of the country,” said the analysis of the resolution authority legislation.
The legislation creating an ONI is considered stronger than that recently introduced in the House creating an Office of Insurance Information by specifically giving it the power to designate insurers as “Tier 1 financial holding companies,” which would trigger “systemic risk” regulatory oversight by the Federal Reserve.
The legislation creating the ONI is title V of detailed legislation dealing with preventing systemic risk in the future.
The ONI legislation deals with potential conflict with state regulators by mandating a notice-and-comment procedure outlining “potential inconsistencies.” This would permit interested parties to comment, after which the ONI will make a determination of inconsistency, and the preemption would become effective following a “reasonable period of time” to be determined by the proposed agency.
The legislation empowers the ONI to craft federal policy on the prudential aspects of international insurance matters.
It also authorizes the agency to represent the U.S. in the International Association of Insurance Supervisors.
According to the document, as part of the latter responsibility the ONI would be empowered to evaluate whether state insurance laws are preempted by “International Insurance Agreements on Prudential Measures.”
According to several lawyers who asked that their names not be used, the preemption provisions in the Treasury legislation are regarded as tighter than the OII legislation introduced in April by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee of the House Financial Services Committee.
Specifically, one lawyer said, there is no provision in the Treasury legislation that would allow the Secretary of the Treasury to stay the preemption.
It also does not provide Congress with the power to nullify a preemption determination.
Cliff Wilson, president of NAIFA, said his group “supported” Treasury’s proposal.
Wilson explained there are a “myriad” of federal agencies that have a role in regulating different aspects of the insurance sector, “and yet we remain the only financial services industry for which there is no one central federal body of expertise.”
But officials of the American Council of Life Insurers, Financial Services Roundtable and American Bankers Insurance Association said an OFC is still needed.
For example, Frank Keating, president and CEO of the ACLI, said, “We hope that the ONI represents the first step towards creation of a modern, efficient insurance regulatory system that includes an optional federal charter.
“Life insurance is a national industry and should have the opportunity to function under a national regulator,” Keating said.
Kevin A. McKechnie, executive director of the American Bankers Insurance Association, added, “While there is no question that the federal government should play a greater role in regulating insurance, we are concerned that Title V may fall short of fully delivering the reform envisioned by the Obama administration.”
For example, he said, the proposed legislation contains a provision that weakens preemption authority and favors state laws as they pertain to rating, premiums, underwriting, sales practices and coverage requirements.
“This works against the goal of greater uniformity and effectiveness in the regulation of the insurance industry,” McKechnie said. Also, he said, Title V does not seem to allow the Director of ONI to preempt provisions or rulings of the administration’s proposed consumer financial regulator.
Financial Services Roundtable officials said they support establishment of an ONI as part of the Obama administration’s six principles for insurance regulation as outlined in its “New Foundation for Financial Regulatory Reform.”
However, “we feel equally strong that history has proven these principles can only be accomplished by giving that Office the authority to charter and exclusively regulate national insurers and reinsurers,” FSR officials said.