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McRaith: OFC Just A Wraith

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CHICAGO — Insurance regulation is likely to remain a state function, Illinois Insurance Director Michael McRaith said Thursday at a conference.

“State insurance regulation is under attack, but an optional federal charter won’t happen,” McRaith told attendees here at the national conference of the National African-American Insurance Association, Washington.

Advocates of the OFC concept want to give insurers a chance to choose between a state charter and oversight by the traditional state-run regulatory system, or a national charter and oversight by a federal regulatory agency.

When it comes to handling interstate licensing, state regulators “could do it better,” McRaith said, but, he defended the state regulatory system as making the most sense for products that are designed and sold to address local needs.

Proposed OFC bills would not work because of the inevitable conflicts that would arise when multiple regulators examine insurance products using multiple standards, McRaith said.

McRaith compared the push by many large insurers for optional federal chartering to the credit card companies’ efforts to pass the Bankruptcy Reform Act of 2005.

Insurance is too unique and personal to be lumped in with other financial products, and that reality was recognized even when Franklin Roosevelt was president, McRaith said.

McRaith noted that in 1932, 40% of all banks closed, ushering in the election of Roosevelt, the New Deal, and an unprecedented number of financial oversight initiatives.

But even the regulation-minded Roosevelt administration “never touched insurance,” recognizing it as a local product, sold as an interstate transaction, and not traded on any public exchange, McRaith said.

The 1945 passage of the McCarran-Ferguson Act, which permitted state regulation of insurance and granted insurance an antitrust exemption, further solidified insurance as a product best regulated at the state level, he said.

Other current efforts to involve the federal government in insurance operations could have larger, more serious implications for economic recovery, McRaith suggested.

Especially troublesome, he said, is the proposed “resolution authority” legislation that would enable the federal government to supersede all other authorities in the takeover of a large, failing financial services business.

“This is a concern because if you’re an investor, you don’t want to put capital into a company that could go to the government so you’d potentially lose access to that capital,” McRaith said.

On the subject of the federal limitation of executive compensation, he said that, although restrictions make sense for executives at companies that took federal Troubled Asset Relief Program money, “executive compensation is a matter of corporate governance,” and should be determined by the “commercial democracy” of a company’s shareholders and board of directors.

McRaith also talked about the need for more regulatory scrutiny of the life insurance settlement marketplace.

Life settlement volume has increased to $40 billion today, from $2 billion just 7 or 8 years ago, McRaith said.

In March he testified before Congress that some firms are misleading older consumers when buying the consumers’ policies.

Laura Mazzuca Toops is the editor of American Agent & Broker, one of National Underwriter Life & Health’s sister publications.