Optional Federal Charter
In his speech, Secretary Paulson said, “Insurance presents a clear need for modernization.” Treasury takes this position under the rationale that the 135-year old state-based insurance regulatory system, while appropriate at one time, is presently inefficient, costly, and harmful to U.S. competitiveness in international markets. The Secretary identified the use of price controls, which artificially distort prices and hinder the development of national products, as an example of inefficiency in the current insurance regulatory system.
The Blueprint provides insurance companies with the ability to be licensed at the federal level under an OFC and be regulated by a federal insurance regulator called the Office of National Insurance (“ONI”). Because the federal charter is optional, this proposed system closely resembles the current dual-chartering system for banks. Considered by the Treasury to be a proven model in the banking sector, the ONI would be housed in the Treasury Department and headed by a Commissioner of National Insurance (“CNI”).
Under the Blueprint, the current state-based insurance regulatory system will continue to provide regulatory oversight for insurance companies, reinsurance companies, and producers not licensed at the federal level. Insurers holding an OFC would still be subject to state tax laws, compulsory coverage for workers’ compensation and individual auto insurance, as well as the requirements to participate in state mandatory residual risk mechanisms and guarantee funds.
An insurer may either obtain an OFC to transact business as a property and casualty or life and health insurer. A federally chartered property and casualty insurer may be licensed to transact various types of business, including but not limited to, surety bonds, liability, automobile, and homeowner’s insurance. A life insurer with an OFC may obtain the additional authorities to transact annuities, disability, and long-term care insurance.
Federal Insurance Regulation
The ONI would also oversee reinsurers, agents and brokers opting to obtain a federal license. It would have specified regulatory, supervisory, enforcement, and rehabilitative powers to oversee the organization, incorporation, operation, regulation, and supervision of national insurers, reinsurers and agencies. A separate Division of Consumer Affairs and Division of Insurance Fraud will be established within the ONI to protect the interests of consumers.
Office of Insurance Oversight
The Blueprint recommends the establishment of the Office of Insurance Oversight (“OIO”) within Treasury to be the lead regulatory agency in the promotion of international insurance regulatory policy for the United States. It is contemplated that the OIO will use its authority to recognize international regulatory bodies for specific insurance purposes, such as reinsurance collateral.
The OIO would also have the authority to ensure that the state insurance regulators achieve the uniform implementation of the declared U.S. international insurance policy goals through a mechanism similar to the one used in the Gramm-Leach-Bliley Act of 1999 (“GLB”). Under GLB, Congress authorized the National Association of Registered Agents and Brokers (“NARAB”). NARAB was to become the national licensing body of insurance producers if a sufficient number of state regulators did not standardize producer licensing rules. However, because the requisite number of states achieved uniformity, NARAB never came into existence. It is contemplated under the Blueprint that Congress should provide legislation for a similar carrot and stick approach to achieving uniformity for declared U.S. international insurance policy goals.
Other Proposed Regulators with Oversight of the Insurance Industry
In addition to the federal insurance regulator, the Blueprint proposes a market stability regulator, housed in the Federal Reserve, which would evaluate the capital, liquidity, and margin practices across the entire U.S. financial system and their potential impact on overall stability of the U.S. economy. The market stability regulator would have the authority to collect information from commercial banks, investment banks, insurance companies, hedge funds, and commodity pool operators. This regulator’s focus would not merely be on the financial health of a particular organization or industry, but on its practices to determine whether an organization or its practices present a threat to stability of the U.S. financial markets. The market stability regulator will have broad powers with the authority to address and correct problems and deficiencies in U.S. financial markets.
Also proposed is a dedicated business conduct regulator, which will have the responsibility to protect consumers and investors by monitoring disclosures, business practices, chartering and licensing of certain types of financial institutions, and rigorous enforcement programs. This new agency would assume a wide variety of the consumer protection and enforcement roles of many of today’s regulators, including those of state insurance regulators.
Criticism and Support of the Blueprint
National Association of Insurance Commissioners President and Kansas Insurance Commissioner Sandy Praeger questioned why coordination and modernization of the oversight of the insurance industry must necessarily lead to federal regulation. According to Commissioner Praeger, “Insurance is a product sold on Main Street, and therefore it needs protection on a more local level – the kind that state governments provide.”
Click here and here to read our prior posts on the OFC.