The Bush administration will testify on insurance oversight this week before the U.S. Senate Banking Committee in another sign of growing federal interest in revamping the industry's regulatory landscape.
The July 18 hearing will follow last Tuesday's session on regulatory reform, during which representatives of industry groups clashed--while senators argued among themselves--over what should be done. Industry lobbyists said it is likely the committee will hold another hearing in September.
Offering the White House's "Perspectives on Insurance Regulation" this week will be Randal K. Quarles, Treasury undersecretary for domestic finance. However, a Treasury Department representative sought to dampen speculation the administration might use the hearing to outline its views on optional federal charter legislation introduced in the Senate in April.
At the time that bill--S. 2509--was introduced, Treasury said that "we view introductions of these discussions as a positive development," because insurance regulation "is in need of comprehensive review." However, the Treasury representative said last week that the earlier comment should not be viewed as supportive of S. 2509, and that Mr. Quarles was still preparing his testimony.
Members of the U.S. Senate Banking Committee voiced deep divisions as to what steps--if any--they should take to improve insurance regulation during a lengthy July 11 hearing on insurance regulation reform.
The core concern of those who appeared willing to support legislation creating an optional federal charter was that it would gut state consumer protection provisions as well as rate and form regulations. This was especially voiced by Democrats--specifically, Sen. Paul Sarbanes, D-Md., the ranking minority member.
The broad scope of the preemption language "raises some interesting hypothetical possibilities," he said. "These should be examined very carefully, very thoroughly. It raises the question of fundamentally changing the landscape."
Sen. Sarbanes later voiced concern about the broad preemption authority of the Office of the Comptroller of the Currency--especially its move to preempt certain state consumer protection laws dealing with mortgage disclosure and financial products.
The U.S. Supreme Court has agreed to take up several cases dealing with OCC preemption of state consumer protection laws in its fall term. The cases deal with whether a state can examine an operating subsidiary of a federally-chartered bank on issues involving licensing of those selling financial products, investigating consumer complaints and inspection of records.
Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D., voiced strong support for their OFC legislation. They said S. 2509 was a "work in progress," as stated by Sen. Sununu, and urged members of the committee to work with them to improve it.
They especially defended provisions dealing with consumer concerns, pointing out their bill would establish a separate office of consumer protection within a new federal insurance regulatory agency; would subject insurers to anti-trust laws; and would mandate creation of regional consumer protection offices.
"Unlike the modernization of banking and securities of the late 1990s under the Gramm-Leach-Bliley Act, the insurance industry remains subject to a patchwork of state regulations that have stifled competition, innovation and growth," Sen. Sununu said.
However, Sen. Jim Bunning, R-Ky., was particularly critical of the OFC approach, comparing the legislation for federal regulation to the Federal Emergency Management Agency's mishandling of the National Flood Insurance Program.
"We need to move with extreme caution when talking about reversing the entire history of insurance regulation in this country," Sen. Bunning said. "There should be a high hurdle for expanding the federal bureaucracy and imposing new regulations." Once involved in a new area of regulations, Congress has a tendency "to create monsters of bureaucracies that only grow and never go away," he added.
While there is a need for greater cooperation between the states for agent licensing and product approvals, the current system is not "broken," Sen. Bunning said.
The industry is also split on the issue. At last week's hearing, the representative of the Independent Insurance Agents and Brokers of America testified that consumer protections provided by state insurance regulation outweigh any efficiency advantage of a dual, federal/state regulatory system.
The comments by Thomas Minkler, president of the Keene, N.H.-based Clark-Mortenson Agency, who chairs IIABA's government affairs committee, were supported by the president of the National Association of Insurance Commissioners, Alessandro Iuppa, Maine's superintendent.
Later in the week, the president of the National Council of Insurance Legislators, State Rep. Frank Wald, a Republican from North Dakota, sought to buttress support for continued state regulation. In a letter to the leadership of the Senate Banking Committee, he criticized both the Senate OFC bill and legislation pending in the House Financial Services Committee that would revamp state regulation of the surplus lines and reinsurance industries.
The Wald letter said NCOIL would seek to ensure support for state regulation by enlisting the help of other advocates of what he termed "sound public policy" on insurance regulation--naming the National Governors Association and the National Conference of State Legislators.
The NCOIL letter suggests that the two legislative proposals, if enacted, would "shanghai state modernization efforts that are already in full swing," including the interstate insurance regulatory compact for life insurance products, which is now becoming operational, as well as rate deregulation facilitated by flex rating and more recent market conduct reform efforts.
The NAIC immediately "commended" NCOIL "for underscoring the importance of state-based insurance regulation."
However, representatives from the American Insurance Association and the Council of Insurance Agents and Brokers both urged the panel to support S. 2509, the National Insurance Act of 2006. The bill would provide both property-casualty and life insurers with an option to have either a state or federal charter. It would also eliminate all forms of rate and form regulation--an issue that raised some concern among committee members.
IIABA's Mr. Minkler and a representative of the National Association of Mutual Insurance Companies made clear that changes need to be made to the current state-based regulatory system.
However, Mr. Minkler supported the "federal tools" approach being pursued in the House Financial Services Committee, aimed at retaining the strengths of the current system by using federal legislation, not federal regulation, to improve agent and company licensing, "speed-to-market" of insurance products, and more.
Speaking for NAMIC, Robert A. Wadsworth, chairman and CEO of Preferred Mutual Insurance Company of New Berlin, N.Y., admitted the present system of state regulation is too slow and cumbersome, and "often denies consumers the benefits of competition." However, he added, "NAMIC believes that reform at the state level is more likely to produce better results than federal involvement in insurance regulation."
He called for an end to price regulation, which happens to be a key component of the OFC bill recently introduced in the Senate.
Scott Sinder, a Washington, D.C. lawyer representing the CIAB, suggested there is still time this year "to enact some easy, achievable changes that could have a major impact on the marketplace," notably the bill modernizing regulation of surplus lines and reinsurance now awaiting action in the House Financial Services Committee.
"The proposal does not deregulate the nonadmitted insurance marketplace or reduce consumer protections," he said.
Written and oral statements by the Property Casualty Insurers Association of America sought to express support for reforms to the current system, especially in rate and form filing freedom, but in "no way" voiced approval of a specific piece of legislation to achieve those reforms.
The Consumer Federation of America blasted both federal legislative proposals--S. 2509's OFC approach, as well as the so-called SMART (State Modernization and Regulatory Transparency) Act circulating in the House Financial Services Committee for several years.
The recent "conversion" of some insurers to the concept of federal regulation "is based solely on the notion that such regulation would be weaker," said CFA's legislative director, Travis Plunkett. "Insurers have, on occasion, sought federal regulation when the states increased regulatory control and the federal regulatory attitude was more laissez-faire."
In his testimony, NAIC President Iuppa panned the OFC proposal. "A bifurcated regulatory regime with redundant and overlapping responsibilities will result in policyholder confusion, market uncertainty and other unintended consequences that will harm individuals, families and businesses that rely on insurance for financial protection against the risks of everyday life," he said, adding that for these reasons, "the Senate Banking Committee and Congress should reject the notion of a federal insurance regime."
Jaxon White, chairman, president and CEO of Medmarc Insurance Group in Chantilly, Va., said, "Insurers are currently subject to a complicated, expensive and uncertain regulatory system that stifles competition, discourages innovation, adds costs and reduces consumer choice."
Mr. White testified that the core problem of the current system is the reliance by many states on antiquated price controls. He said lawmakers "should place the highest priority on competitive market reforms as they consider proposals to enhance the regulatory environment."
"One of the inherent problems with the system is the inconsistency of the regulatory environment from state to state," he said. "A patchwork quilt of rules and regulations adds up to a bureaucratic nightmare that creates delays and roadblocks for companies to expand into new states, reduces the flow of capital to certain markets, increases the cost of regulatory compliance, and limits consumer choice."
Joseph J. Beneducci, president and chief operating officer of Fireman's Fund Insurance Company in Novoto, Calif., representing the AIA, called for an OFC to address the industry's uniformity problem. "The current insurance regulatory structure inhibits innovation and actually perpetuates commoditization of insurance products to the detriment of consumers," he said.
He cited an urgent need to overhaul the insurance regulatory landscape so that consumers are empowered by having a more innovative market to meet their expanding need for product and pricing options.
"Government regulation should focus on those areas where government oversight protects consumers in the marketplace, such as financial integrity and market conduct, rather than on those activities that distort the market, such as government price controls and hostility to innovation," he said, adding that regulation should also be "uniform, consistent and efficient."
Sounding Off
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