Groups are lining up on both sides now that two members of Congress have formally introduced a bill seeking to create an optional federal charter through an Office of National Insurance.

Melissa Bean

Rep. Melissa Bean (D-Ill.) and Rep. Ed Royce (R-Calif.) introduced the National Insurance Consumer Protection Act, which seeks to overhaul the current state-based system of insurance regulation by creating the ONI within the U.S. Treasury Department. If approved, the proposal would give insurers the option of seeking federal or state regulation of new products, and it would provide agents with the opportunity to choose one federal producer’s license or state-by-state licensing.

A similar proposal for an optional federal charter (OFC) died last year when Congress failed to act.

“Comprehensive reform of our financial regulatory system, including systemic risk oversight, is a given,” said Frank Keating, president and CEO of the American Council of Life Insurers, which supports the bill. “The establishment of a functional insurance regulator at the federal level as envisioned by the Bean-Royce bill is an appropriate and essential adjunct to broader reform efforts. Moreover, it will ensure that the resulting overall regulatory system will be seamless and will provide consumers with a safe and stable financial services marketplace.”

Keating added that passage would mean the “federal government would be better able to negotiate and conclude international regulatory agreements, which are often important elements of marketplace stability.”

A ‘recycled’ idea vs. reducing redundancy

The National Association of Insurance Commissioners, whose responsibilities would be diminished with the bill’s passage, called the bill “a deregulation bill.”

“It is unfortunate that this idea keeps getting recycled,” said its president, New Hampshire Insurance Commissioner Roger Sevigny, in a statement. “Congress has rejected this kind of thinking time and again. This is not a reform bill, it is a deregulation bill – aimed at stripping the states of insurance oversight authority and denying consumers of the time-tested protections that regulatory power provides.”

Sevigny said the bill would “allow nearly any function of the so-called national insurance regulator to be carried out by self-regulatory industry groups, effectively handing the keys of supervision over to those being supervised. Akin to letting the fox guard the henhouse, this bill would essentially dismantle existing state-based consumer protections.”

Peter Ludgin, the executive director of Agents for Change, which has 7,000 members advocating reform, said “insurance agents and brokers continue to jump through unnecessary hoops to serve their customers. Whether it is redundant licensure forms and fees or a lack of speed to market of products the bottom line is insurance consumers are shortchanged by the antiquated mandatory state-based system.”

He said the bill “will open insurance markets and increase choice and competition” and “decrease bureaucracy for producers who are licensed in multiple states and better protect consumers.”

Bill gives ‘broad, ambiguous powers’

The National Association of Mutual Insurance Companies objected to the proposal. “This convoluted legislation would create a huge new bureaucracy that would have broad, ambiguous powers,” Jimi Grande, NAMIC’s vice president of federal and political affairs, said in a statement. “The ONI, as described in the legislation, would create multiple layers of regulation leading to confusion and higher costs for consumers.”

Since the bill calls for the creation of a National Insurance Guaranty Corporation to protect against the insolvency of federally regulated companies, nationally chartered insurance companies would be subject to assessments from the new federal fund as well as those in any states in which a company does business, according to Grande.

The bill also establishes a systemic risk regulator for all insurance companies within 90 days of the law’s enactment, which could subject even insurers who remain state-chartered to dual federal regulation, Grande said.

“The property-casualty insurance industry remains competitive and solvent – there is no crisis in the insurance segment of the financial services industry that warrants the creation of an entirely new regulatory structure,” Grande said. “At a time when our economy is in crisis, it would be irresponsible to experiment with a system that continues to weather the storm.”

State Farm, Allstate support legislation

State Farm supported the bill, saying it would “provide important consumer benefits by establishing a uniform, competition-based regulatory framework, which would bring consistency and efficiency,” according to a statement from Mike Fernandez, State Farm vice president of public affairs. “The nation’s current state-based regulatory system makes serving insurance customers complicated, costly and cumbersome.”

Allstate agreed. “The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures,” said Allstate Chairman, President and CEO Thomas J. Wilson.

Wilson said the current state-based system “has simply not kept pace with the level of innovation in the financial markets and the growing risks embedded in financial products.” He added that a system similar to banking’s regulatory method would “increase transparency and ensure the long-term stability of our capital markets.”

State organizations oppose bill’s measures

Three state legislative organizations-the National Conference of Insurance Legislators, the National Conference of State Legislatures and the Council of State Governments – joined to write a letter, dated April 2, opposing the bill.

“An OFC is not only unnecessary-it is dangerous. It would undermine ongoing efforts to modernize insurance supervision and maintain consumer protections,” the groups said. They called the bill “a needless proposal, one that would exacerbate the current economic crisis,” according to a joint statement, which noted that while they are “committed to financial stability,” they “strongly oppose an OFC or any such scheme that would further burden our already stressed economy.”

An OFC would create a dual system of insurance regulation and “result in confusing and overlapping federal and state directives,” the groups said in the letter. “By its very nature, a federal insurance office also could not respond-as state regulation does-to unique state markets and constituent concerns.”