Rather than implement an optional federal charter or sweeping regulations, the Obama Administration is proposing a national office of insurance to oversee the industry.

Today (June 17), President Barack Obama unveiled a wide array of financial reform efforts, including new powers for the U.S. Federal Reserve to supervise holding companies and large financial institutions to avoid their collapse and impact the entire economy, as occurred with American International Group.

The president noted that the U.S. has plans in place for when a bank fails, “but no system for the failure of an AIG” in an afternoon press conference outlining his administration’s response to “a culture of irresponsibility” that lead to the nation’s current economic climate.

Obama said one of the goals of his administration’s plan is to require regulators not to look only at individual institutions, but the “stability of the system as a whole,” through a network of regulators under the Treasury to monitor risk across the financial system.

“Regulators were charged with seeing the trees, not the forest …and as a result, the failure of one large firm threatened the viability of many others and that effect multiplied,” he said.

While he did not address or outline insurance reform during his press conference, an 85-page document issued by the White House outlines a new Office of National Insurance to be included within the U.S. Treasury to “gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector.”

This new office would monitor all aspects of the industry, according to the plan, identify the emergence of any issues that could contribute to a future crisis, recommend to the Federal Reserve any insurer that should be considered an institution whose failure could pose a threat to financial stability due to its size and leverage, and also carry out the government’s existing responsibilities under the Terrorism Risk Insurance Act.

The document states that the Treasury Department will support proposals to “modernize and improve our system of insurance regulation in accordance with six principles.”

Those principles include effective systemic risk regulation, meaningful and consistent consumer protection and increased national uniformity “either through a federal charter or effective action by the states,” the plan says.

Critical of current system

The plan calls the current insurance regulatory system “highly fragmented, inconsistent and inefficient.”

“While some steps have been taken to increase uniformity, they have been insufficient,” the report states. “As a result, there remain tremendous differences in regulatory adequacy and consumer protection among the states.”

The goal is for increased consistency in the regulatory treatment of insurance, according to the report, including “strong capital standards and consumer protections” to enhance financial stability, increase economic efficiency and “result in real improvements for consumers.”

Another goal is to improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including affiliates outside of the insurance industry, the administration’s plan says.

It cites the example of AIG, now the recipient of nearly $180 billion in federal aid after its near collapse jeopardized the national economy.

“As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy,” the report states. “Any new regulatory regime must address the current gaps in insurance holding company regulation.”

Concurrent legislation

The idea of a national insurance office is not a new one and is the subject of two current bills being debated by Congress.

In May, Rep. Paul Kanjorski (D-Pa.), the chairman of the House Financial Services Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, introduced HR 2609, calling for a National Insurance Office.

A similar bill introduced by the congressman last year died from inaction in Congress.

Kanjorski’s bill also advocates for a national office within the Treasury to provide advice and expertise on insurance regulation to the Obama Administration and Congress.

The bill mirrors much of what Obama is calling for. It would have an Office of Insurance Information collect and analyze data on insurance; establish federal policy on international insurance matters; and ensure that state insurance laws remain consistent with federal policy in coordinating international trade agreements, according to a text of the proposed legislation.

Another bill back for consideration in Congress is one by Reps. Melissa Bean (D-Ill.) and Ed Royce (R-Calif.), which seeks to create an optional federal charter through an Office of National Insurance. The bill would also house the national office within the U.S. Treasury, but give insurers the option of seeking federal or state regulation of new products and provide agents with the opportunity to choose one federal producer’s license or state-by-state licensing.

Both bills were referred to the House Committee on Financial Services for consideration.