By Tanya Bryant
As the economic turmoil worsened in 2008, it was thought that the insurance industry would not be significantly impacted by the collapse of the housing market and the fall in stock value. As a whole, the insurance industry has not experienced the problems that befell the major players in the banking and securities industries, such as Indie Mac, J.P. Morgan and Bernard Madoff, etc. However, the issues on how its securities holdings have made an impact on American International Group or AIG has helped to refuel the discussion that insurance should be regulated at the federal level. Although the insurance side of the organization is solvent, this has not helped to stem the public discourse with AIG. 2008 may have created the catalyst to bring the debate over insurance regulatory reform into clear view.
President Barack Obama recently laid out a plan for oversight of financial institutions posing systemic risks to financial markets on June 17. He also said that an overhauled regulatory structure “must be strong enough to withstand both systemwide stress and the failure of one or more large institutions.” This renewed discussion on changes to the regulation of insurance has produced different schools of thought regarding the regulation of this industry. The options are:
- A state regulated system
- A pure federal insurance regulator
- A dual charter system
State Regulated System
Benjamin Franklin, co-signer of the Declaration of Independence, is credited for having the first insurance company in 1752. In 1945, Congress adopted the McCarran-Ferguson Act, which enabled states to regulate insurance without interference from the federal government. Proponents of the current state system include smaller insurers, and state regulators who argue that the state system protects consumers even more than federal regulation, and reduces the risk of regulatory arbitrage.
Pure Federal Regulatory System
A pure federal insurance regulator would dismantle the regulation of insurance at the state level and would mean that the all insurance companies and its subsidiaries would be chartered at the federal level. It would require either the creation of a new national agency or a new department within an already established financial regulatory agency.
Dual Charter System
The dual charter system, otherwise known as the Optional Federal Charter (OFC), would allow insurance companies to choose its regulator—state or federal. The system will be set up similarly to the banking industry and how it is regulated. Proponents of the OFC include large insurance companies, reinsurers, life insurers, banks who are interested in moving into the insurance market, etc. They argue that the OFC would provide the following benefits:
- Produce a modernized regulatory process
- Create a single license
- Address systemic issues
- Increase the speed of introducing products to the market
- Improve competition
One congressional proposal focuses on creating an Office of National Insurance (ONI) in the US Department of the Treasury. The office would be headed by a commissioner who is appointed by the President and confirmed by Congress. The appointment would be for five years. The office would create a national agency where any licensed company would be able to sell in all 50 states. Any producer who is affiliated with the nationally licensed insurer would be able to sell in the national licensed state. Also, any state licensed producer would be able to sell a national product in its resident state. The office would also include an ombudsman for handling complaints and Office of Consumer Protection to oversee market conduct.
On May 22, 2009, Congressman Paul Kanjorski (D-Pa.) announced that he has reintroduced the National Insurance Modernization Act (previously called the National Insurance Act), which will create a national office of insurance. Kanjorski is chair for the House Financial Services Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee. The committee is fine-tuning the bill as the seven congressional cosponsors discussed key elements such as consumer access, uniformity and whether a federal charter would be optional or mandatory for insurers deemed systemically significant.
DISB is keenly watching the developments on Capitol Hill as it may alter the way the agency regulates financial-service businesses. Before President Obama laid out his plan, Commissioner Thomas E. Hampton recently visited Capitol Hill to urge congressional leaders to capitalize on the state’s strengths. With 35 other insurance commissioners, he stressed that reforms must provide consumers with the time-tested protections of the national system of state insurance oversight.
“It is imperative that we preserve and build upon the successful model of our national state-based regulatory system,” said Commissioner Hampton. “The American people want more financial stability, not less. Reform proposals must ensure consumers have accountable and local regulators who can provide continued stability despite these challenging economic times. As a state regulator, DISB works hard every day to make sure that insurers honor their promises to policyholders in the District of Columbia.”
Tanya Bryant is a public affairs specialist in DISB’s Office of Communications.