House Financial Services Committee Chairman Barney Frank, D-Mass., gave insurance lobbying groups something to argue about yesterday. In a press conference about financial regulatory reform, Frank said he wants lawmakers to create an optional federal charter (OFC) for insurance companies. Such an OFC would allow all insurance companies to opt to be regulated by a federal authority—creating an SEC-like overseer for insurance firms. Currently, insurance companies are regulated by individual state regulators in the states where they operate.
In general, large insurance firms prefer federal charters while smaller ones prefer the current state-regulated system. For larger companies, a federal regulator would create more uniformity in the rules, making compliance easier and less costly, says Jack Dolan, a spokesperson for the ACLI. But smaller companies complain that having both a federal and state system would cause too much confusion for customers. A federal system might also be less strict, putting the smaller companies at a regulatory disadvantage.
The debate about state vs. federal charters has been ongoing, but Congress’s recent push for financial regulatory reform brings it front and center. Frank said an OFC is “overwhelmingly likely” and "because of our European allies' concerns, we will have to think about doing an optional federal charter for life insurance.” In the wake of AIG’s many meltdowns, and because the US insurance industry has become so intertwined with not just American, but also European financial markets, European politicians are also pushing for greater insurance oversight in the U.S.
The American Council of Life Insurers says failing to give the federal government oversight of an industry that touches nearly all Americans through life, group life, long-term care, disability and retirement products is just not a good idea. “Life insurers do business across state lines and national borders. We are interconnected with banks and securities firms. It is no longer acceptable to have a regulatory system that walls off the federal government from any oversight of an industry that plays such a large and vital role in the American economy,” says Frank Keating, president and CEO of the ACLI.
But groups like the National Association of Insurance Commissioners have their own powerful argument: state regulators have been successful in regulating the insurance industry, whereas federal regulators like the SEC have lately been shown to have failed time and time again. Why change a system that’s been working well for so many years?
The NAIC’s CEO, Therese M. Vaughan, Ph.D., testified before Congress Thursday, defending the successes of state insurance regulators. “Any framework established to regulate financial stability must integrate, but not displace, the successful state-based system of insurance regulation,” Dr. Vaughan said. “For more than 150 years, state insurance regulators—working together with state legislators—have continued to improve, enhance and modernize state-based insurance regulation for the benefit of consumers and industry alike.”
The National Association of Professional Insurance Agents says states have done a good job of regulating insurance firms, while the federal regulatory authorities have failed. In a statement yesterday, the group recommended that Congress focus on legislation reducing systemic financial risk before making broad changes to insurance regulation. In a report sent to all members of the Financial Services committee, PCI’s president, Dave Sampson sought to differentiate the industry from banks, noting that the vast majority of insurance markets are operating normally and continue uninterrupted. Click here for more on how insurance firms stay solvent.
Support for the optional federal charter is also split by insurance type: property and casualty insurers oppose the creation of an OFC while life insurers favor of it. The National Association of Mutual Insurance Companies, a group made up of property and casualty firms, explains its opposition by saying its members are “highly dependent on local factors.” And the NAIC has described property and casualty as “a local product, with local issues that require a responsive, local regulator to help resolve consumers’ complaints and address their concerns.” Click here for more on the Insurance Regulatory debate.