Taking a cue from the Bush administration, a key House lawmaker last week introduced legislation that would create an interim federal insurance office within the Treasury Department, with backers and detractors alike seeing it as most likely the first step toward establishing an optional federal charter.

Rep. Paul Kanjorski, D-Pa., chair of the Capital Markets Subcommittee of the House Financial Services Committee, introduced H.R. 5840, the Insurance Information Act of 2008, creating an Office of Insurance Information within Treasury a day after holding a hearing on “Examining Proposals to Reform Insurance Regulation.” (The bill had not been named or numbered as this story went to press.)

In his opening statement at the hearing, Rep. Kanjorski also said he is prepared to give opponents of federal insurance regulation–especially agents–what they want in the form of legislation streamlining agent and broker licensing, in exchange for their support for his bill creating the new Treasury agency.

H.R. 5611–creating a National Association of Registered Agents and Brokers, designed to establish a voluntary national licensing system, is backed by, among others, the Independent Insurance Agents and Brokers of America and the National Association of Insurance and Financial Advisors.

The Council of Insurance Agents and Brokers introduced the NARAB concept years ago, but instead of a stand-alone measure, it was shoehorned into the Financial Modernization Act of 1999–better known as the Gramm-Leach-Bliley Act–as a provisional measure. However, enough states cleared the agency licensing uniformity hurdle under the act to prevent NARAB's activation.

“As we proceed today, the members of the Capital Markets Subcommittee should remain open to considering all reform ideas,” Rep. Kanjorski said.

“The status quo on insurance regulation, however, no longer works,” he added. “We live in an increasingly global marketplace, and insurance policy must keep pace. We have lost many manufacturing jobs overseas. We must ensure that jobs in the insurance industry do not suffer a similar fate.”

He warned that “we must move swiftly, but we also need to be smart about it.” Holding out an olive branch, he added that “we will need the help of experts from the states, and I urge those here today to work cooperatively with us.”

The idea for an interim insurance official within Treasury came from the financial services reform “blueprint” released by the department on March 31.

The blueprint called for creating an interim insurance office within Treasury that would focus on gathering information about the industry and coordinating with state regulators on “pressing” regulatory issues–particularly those with international implications, such as reinsurance collateral for foreign carriers. The interim federal regulator would also “serve as an advisor to the Secretary of Treasury on major domestic and international policy issues,” the blueprint said.

In comments to National Underwriter during a break in the hearing, New York Insurance Superintendent Eric Dinallo, who testified on behalf of the National Association of Insurance Commissioners, said state regulators “should be proud of 100 years of exceptional work,” adding that insurance has seen “little of the blowups you see in other areas of financial services.”

Mr. Dinallo acknowledged that “the current system is not perfect, and there are important steps to be taken to reach those goals.” However, he added, “insurance regulators have been improving their skills and policies and enhancing resources over the past several years.”

He also said state regulators “are equally mindful of the need for further changes in the law and the need to standardize.”

Mr. Dinallo said state regulators have done very well in the key areas of assuring solvency and consumer protection, but acknowledged that it's a “clunky” system in need of reform. “To that end,” he said, “the NAIC is open to a partnership that involves the federal government” that would help move toward uniformity on issues such as producer licensing and product registration.

There are already bills in Congress that would set federal benchmarks for regulation of surplus lines and reinsurance, for example, which the states would apply.

However, Mr. Dinallo expressed concern regarding the bills creating NARAB and Rep. Kanjorski's legislation establishing an interim federal oversight office.

On NARAB, he said one concern was the facility's independence given the level of industry involvement called for on its board, adding that states need to be able to refuse licenses to agents if they have had prior regulatory problems.

On the legislation introduced by Rep. Kanjorski creating an Office of Insurance Information, he said “there is a perfectly justifiable need for the federal government to understand insurance better,” but expressed concerns if the bill was seen as leading to an OFC.

In an initial industry response to Rep. Kanjorski's proposal, Justin Roth, a senior lobbyist for the National Association of Mutual Insurance Companies–which opposes an OFC–said that “to have expertise on insurance at the federal level, it is unnecessary to create a new federal bureaucracy such as the proposed OII.”

Mr. Roth said that “from the recent blueprint to their involvement in the [Terrorism Risk Insurance Act] debate, it appears that there is a great deal of expertise on insurance issues within the Treasury Department without the need for creation of a new federal agency.” He added that “while we've not had the opportunity to thoroughly review the legislation,” NAMIC is “concerned” about this proposal.

He said if one looks at the Treasury Department's blueprint or listens to the comments of Rep. Ed Royce, R-Calif., and Rep. Melissa Bean, D-Ill. (authors of H.R. 3200, the National Insurance Act, which would establish an OFC), “it appears that the creation of an OII is just a first step in the move toward a federal regulator.”

During the same hearing, Assistant Treasury Secretary David Nason endorsed in principle both H.R. 3200 and its Senate companion, S.40, creating an OFC implemented within the Treasury. “These bills contain many of the core concepts surrounding the establishment of an OFC structure,” he said. “We look forward to evaluating further the specific provisions of these bills.”

In his opening statement, Mr. Nason said “the establishment of a dual federal/state system with an OFC provides the best opportunity for the establishment of a modern and comprehensive system of insurance regulation.”

As for Rep. Kanjorski's plan to set up an interim federal regulatory office, Mr. Nason said he's “delighted” about it and that “we look forward to working with him on legislation.”

Rep. Bean and Rep. Ed Royce issued a statement “commending” Rep. Kanjorski for his bill, calling it “a vital step toward providing a modern regulatory alternative to the antiquated and patchwork system of state insurance regulation.”

Speaking for supporters of an OFC within the industry, a representative of the American Insurance Association and the American Council of Life Insurance said consumers would be the “major beneficiaries of an OFC system of insurance regulation, enjoying strong, national consumer protection standards and a more competitive and efficient marketplace.”

Alastair Shore, chief underwriter of CUNA Mutual Group, added that an OFC “represents our best opportunity to advance regulatory modernization in a manner that works for consumers, the industry and the economy.” He said “at its core,” the proposed National Insurance Act is a “strong consumer protection bill, which focuses on a robust centralized system that emphasizes safety and soundness and consistent market conduct regulation.”

Mr. Shore also cited the Treasury blueprint, which, he said, “recognizes the need for OFC and the role that the insurance industry plays in the new world of integrated and interconnected financial markets.”

He added that “Treasury's report also notes that the disjointed state insurance regulatory system imposes increased cost and efficiency burdens on insurers and consumers alike.”

But representatives of trade groups representing agents for property-casualty insurance products defended the current, state-based system.

Tom Minkler, chairman of the Government Affairs Committee of the Independent Insurance Agents and Brokers of America, testified that “as we have for over 100 years, IIABA supports state regulation of insurance–for all participants and for all activities in the marketplace–and we oppose any form of federal regulation, optional or otherwise.”

Mr. Minkler, who is also president of the Clark-Mortenson Agency in Keenem, N.H., added that Congress can still play a “vital role” in helping modernize the state system and overcome obstacles to reform without establishing on OFC. “Such an effort need not replace or duplicate at the federal level what is already in place and working well at the state level,” he said.

Specifically, he asked Congress to enact the NARAB Reform Act, which “would streamline nonresident insurance agent licensing but is deferential to states' rights. Day-to-day state insurance laws and regulations would not be affected…”

Donna Pile, immediate past president of the National Association of Professional Insurance Agents, testified that “the important thing to remember when you talk about uniform licensing for insurance producers is that we already have a system that is up and running in almost all jurisdictions and can be completed in other jurisdictions soon. There is no need to build it again from scratch. The most substantial portion of the investment has already been made by the states.”

Offering “a little baseball analogy,” she said “the National Insurance Producer Registry is the diamond that connects all the bases needed for a one-stop process for producer licensing. Right now, we have already rounded third base. Now all we have to do is hustle a little more before we can cross home plate.”