Optional Federal Charter Debate Likely to Continue Into
the Next Congressional Session
June 20, 2008
SOURCE: InsuranceNewsNet, Inc.
Some are
hopeful that Congress will decide on some reform measures
affecting the insurance industry by the end of the year, but
unfortunately the optional federal charter (OFC) is unlikely
to be one of the resolved issues. According to observers, even
the OFC's strongest allies say the remaining months of the
season do not give enough time to iron out the kinks and
complexities of the OFC.
In fact,
if the hearing on the matter conducted in April before a House
subcommittee is any indication, the proposed legislation is
set to go through a prolonged debate from within the industry
itself.
The OFC,
which will enforce a single central regulator to replace
current state-run systems, has been a long-time divisive issue
between members of the Optional Federal Charter Coalition and
the Coalition Opposed to a Federal Insurance Regulator.
Some of
the supporters of the OFC include the American Insurance
Association, the American Council of Life Insurers, the
American Bankers Insurance Association, the National
Association of Independent Life Brokerage Agencies, the
Reinsurance Association of America and the Financial Services
Forum.
Meanwhile,
those who are against it include the Independent Insurance
Agents, Brokers of America, the National Association of Mutual
Insurance Companies, Jackson National Life Insurance, the
Association of Financial Guaranty Insurers, Alfa Insurance and
Aflac.
The schism
and the recommendations coming from the two factions are
expected to make it even harder for lawmakers to agree on a
direction which will effectively regulate financial companies
and markets.
Treasury
Department Secretary Henry Paulson, Jr. said there is a clear
need to update the 135-year old state-run system as the
primary regulator for insurance as the system becomes
increasingly strained due to market changes.
“A
state-based regulatory system is quite burdensome,” Paulson
said in his speech on the Treasury’s blueprint for financial
services modernization. “It allows price controls to create
market distortions… hinder[s] development of national products
and… directly impact[s] the competitiveness of US insurers.”
Paulson
declared the creation of an OFC for insurance firms as the
most effective way to address the problems because it would be
built on a solid model based on the current dual-chartering
system for banking. That is, the OFC would give insurers the
choice of being regulated at the national level or continuing
to be regulated by the individual states.
Paulson
has the support of the American Insurance Association (AIA).
The organization believes a single regulator would cut costs
industry-wide by billions of dollars annually. Ultimately all
the savings could be passed on to consumers resulting in lower
premiums without cutting back on reducing consumer protections
said the AIA.
Testifying
on behalf of the AIA and the American Council of Life Insurers
(ACLI), insurance executive
The
Property Casualty Insurers Association of America contends
that the OFC would create a confusing – and more costly –
mixture of federal and state regulation for both insurers and
their customers.
Tom Minkler, who testified at the hearing for insurance
brokers and agents, expressed that the current system, while
far from perfect, is working well and does not need a major
overhaul. He condoned state insurance regulators for their
excellent work taking care of individuals and businesses’
insurance and claim needs.
Michael
McRaith, Illinois Director of Insurance for the National
Association of Insurance Commissioners, also said a federal
regulatory structure would hurt the insurance industry.
McRaith maintained that insurance transaction is local and
personal. The state-chartered system already promotes a
competitive self-policing market that escapes the expense that
enforced rate regulation is known for. In addition,
McRaith warned that a federal charter would entail tremendous
manpower, cost and time to be effective.
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