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Regulation and Compliance > State Regulation

The Waiting Game

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It is unlikely that the much-awaited Federal Insurance Office report on reforming and modernizing state insurance regulation will be unveiled for several weeks.

However, signs are emerging that one component of the report will be resurrection of a proposal unveiled in 2004 that was embodied in legislation called the SMART Act, or State Modernization and Regulatory Transparency Act.

This means that an administration facing a tough re-election battle will acknowledge that the insurance industry needs modernization and greater uniformity, but dump the onus of accomplishing that on Congress.

It would do so by forcing Congress to take the political heat for establishing federally-mandated standards for uniformity that states would have to comply with by invoking the federal government’s power to preempt state laws.

By resurrecting the SMART Act, the administration would be able to point out that the starting point for modernization would be legislation sponsored by the then-Republican leadership of the House Financial Services Committee, Rep. Mike Oxley, R-Ohio, chairman of the committee, and Rep. Richard Baker, R-La., a senior member of the committee and chairman of its Capital Markets Subcommittee.

That would diminish the argument likely to be advanced by state’s rights supporters and ultraconservative Republican critics that the report’s recommendations constituted a power grab by the federal government.

In other words, according to several industry officials, it would likely insulate the administration from use of the report as a weapon against President Obama in the fall election.

The SMART Act, its supporters said, provided a “road map” for modernization and standardization of insurance industry oversight that would leave the day-to-day burden of regulation in state hands.

The bill would, in theory, have created a “state-national partnership” on insurance oversight. Among other steps, the bill would reform agent licensing rules and set uniform market conduct standards and speed-to-market initiatives.

It would also impose commercial and personal lines property and casualty insurance rate and form modernization.

Industry officials would likely support the proposal in theory because this would call for a phased move to an open competition model that would allow companies to raise and lower rates without prior regulatory approval.

Supporters of the current system voiced vehement opposition to the SMART Act proposal, first unveiled in 2004. For example, in a 2005 report, the National Association of Insurance Commissioners said the legislation would substantially and negatively impact state regulatory authority to supervise property/casualty, life, and health insurance, as well as reinsurance, by establishing federally-mandated standards and preempting state laws.

“As a result, insurance consumers would be denied the benefits of important state consumer protection laws and regulations,” an NAIC study said.

The bill was hotly debated for several years, but interest in it waned when Democrats took control of Congress in 2007, and both Oxley and Baker left Congress within several years.

Support for change then was manifested in legislation that would create an optional federal charter, which never came up for a vote in either House.

The latest interest in regulatory change was contained in the Dodd-Frank financial services modernization law, which mandated that a study of how the system should be modernized and made uniform should be written by the FIO and Treasury. Under the DFA, the study was  due Jan. 21.

But industry officials say the report must be approved by the Office of Management and Budget, and speculated that its release could up to three weeks away.

These sources expect that the report will acknowledge that the federal government will have to play a stronger role in international regulation, which even advocates of continued state regulation support.

They cite recent protectionist policies in certain countries, as well as demand for much higher capital standards for financial companies with global businesses.

According to several industry officials, they also expect the report to outline proposed ways of dealing with important consumer issues, including the affordability and availability of both life insurance and property and casualty insurance products.

By using the SMART Act as a starting point for modernization, the administration would be able to say that it didn’t shy away from acting in taxpayer’s interest in proposing changes in insurance regulation in the wake of the American International Group debacle, industry officials said.

But, at the same time, the administration could deflect criticism by noting that the proposal has bipartisan roots.

The administration could also point to comment letters by groups who assert federal insurance regulation constitutes a government takeover, such as insurance agents.

In its comment letter to the FIO on insurance modernization, officials of the Independent Insurance Agents and Brokers of America said that, “Obtaining and maintaining the necessary licenses is often a costly, burdensome and time-consuming endeavor, and the need to focus on these administrative matters hinders the ability of insurance agents and brokers to effectively address the needs of consumers.”

In its letter, the IIABA said it did not support federal insurance regulation, but said it did support targeted legislation “that would create true agent-licensing reciprocity across the country.”

Both property and casualty and life insurance agents support such legislation, a key component of the SMART Act proposed in 2004.

Calls for the FIO and its parent Treasury Department to play a strong role in international insurance issues would also have strong political support within the industry.

For example, in comment letters to the FIO, the Property Casualty Insurers Association of America and one of its members, Liberty Mutual, note that only the federal government has the power to prevent imposition of “bank-centric” international-financial regulation by Europeans.

The PCI and Liberty Mutual letters appear to acknowledge that only the federal government has the power to slow or moderate the demands of European regulators for high capital and rigid accounting rules for financial firms doing business in the international marketplace.

For example, the PCI letter says, “In particular, FIO’s leadership is necessary in ongoing international discussions where theU.S .marketplace faces both opportunities and threat of bank-centric Eurocratic regulation that could impose harmful standards or at best significant transition costs as we head towards global convergence.”