April 03, 2009

Following yesterday's official introduction of a bill for federal insurance regulation by Representatives Melissa Bean (D-Ill.) and Ed Royce (R-Calif.) in Washington, D.C., reactions to the bill appeared along predictable lines.

The Bean/Royce bill, known as the National Insurance Consumer Protection Act (NICPA) would provide an alternative to an "antiquated, non-uniform system" of state regulation, according to a statement released by its sponsors.

The American Council of Life Insurers (ACLI) welcomed the introduction of the bill, which a statement by ACLI president and CEO Frank Keating characterized as calling for optional federal charter (OFC). As a complement to other regulatory efforts NICPA would "ensure that the resulting overall regulatory system will be seamless and will provide consumers with a safe and stable financial services marketplace," the statement said.

The National Association of Mutual Insurance Companies (NAMIC) opposed NICPA's provision for creating a federal Office of National Insurance within the U.S. Treasury Department, which would have the authority to regulate insurers and distributors, funded by companies who elected to participate under the optional federal system.

"This convoluted legislation would create a huge new bureaucracy that would have broad, ambiguous powers," Jimi Grande, NAMIC's vice president, federal and political affairs, said. "The ONI, as described in the legislation, would create multiple layers of regulation leading to confusion and higher costs for consumers."

A proposed systemic risk regulator called for by NICPA under the name National Insurance Guaranty Corporation would result in companies being subject to assessments from both federal and state regulators, NAMIC's statement contended. NAMIC's Grande also reiterated the organization's argument that, "there is no crisis in the insurance segment of the financial services industry that warrants the creation of an entirely new regulatory structure."

The Property Casualty Insurers of America (PCI) issued a statement crediting NICPA for raising "important issues" but faulting the bill as failing to "address the critical regulatory vulnerabilities that caused the current global crisis. The statement affirmed the priority of addressing systemic risk over correcting any shortcomings of the insurance industry's state regulatory regime.

"Before attempting to overhaul the entire financial services regulatory system, it is important to determine which sectors of the marketplace actually create systemic risk and to fix the dangerous gaps in federal oversight," said David A. Sampson, president and CEO, PCI. "It is crucial to the future of our economy to establish a viable system for systemic risk regulation before refocusing on a decades-old debate over federal insurance regulation."

Sampson added that optional federal charter should be left out of the systemic risk because it erroneously implies that only large companies can pose a systemic risk. "In fact, smaller companies can pose significant systemic risk, and larger companies may pose little or none," Sampson asserted. "Systemic risk concerns the interconnectivity of all industries, whereas an optional federal charter concerns only one industry."

A statement from The Independent Insurance Agents & Brokers of America (IIABA; the Big "I") expressed vehement opposition of NICPA, saying the attractive title of the bill belied the damage it would cause to the insurance industry and to consumers.

"While the bill reintroduced today has a few changes, it is basically the same concept, optional federal chartering and deregulation of strong state consumer protections, which has rightfully been rejected and ignored by previous Congresses," remarked Robert A. Rusbuldt, president and CEO, IIABA. "There is no doubt the current regulatory system needs more uniformity and efficiency, but there are more prudent ways to accomplish this via targeted federal legislation."

Even as the Big "I" opined, analyst firm Datamonitor announced the publication of a new research note titled "Why U.S. Insurance Agents Support State Regulations," and adduced the following highlights in support of its thesis:

"The IIABA's argument is tenuous. The fact that state-regulated insurers are more stable than federal-regulated banks does not simply mean that state-based regulation is superior to federal regulation.

"By moving to a federal regulator, insurers would be able to expand into new territories with greater ease. Such expansion would make a direct-to-consumer offering more viable, mainly because direct sales require a national branding effort.

"A move from state to federal regulations would tip the balance of investment in favor of the online channel. This has happened in Europe, where less disparate national regulations have enabled greater direct sales."

ABOUT THE AUTHOR
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek ...