On March 31, 2008, Treasury Secretary Henry M. Paulson, Jr. released the Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure (the “Blueprint”) in a speech given at the Treasury Department.  The Blueprint is a series of recommendations for regulatory reform for U.S. financial services industries intended to broaden consumer protections, increase efficiencies, and provide market stability through stream-lined regulatory oversight.  A high-level view of the Blueprint was originally introduced on June 27, 2007. (Click here to read the Treasury’s June press release.). The recommendations impact almost every aspect of the U.S. financial services industries, from the lightly regulated hedge fund, investment bank, and mortgage broker industries to the more heavily regulated depository bank system and insurance industry.  Of special interest to the insurance industry, the Blueprint recommends the implementation of an Optional Federal Charter (“OFC”) for insurance and reinsurance companies and federal licensing of agents and brokers.  This post provides an overview of the sections of the Blueprint aimed at reforming the regulation of the U.S. insurance and reinsurance industry.

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.

The ONI would eliminate price controls for national insurers.  So long as they conform to minimum coverage guarantees, insurers under a national insurance regulatory structure will not be subject to rate regulation nor be required to use any particular rate, rating element, or price.  To make certain that no price gorging results, the ONI would ensure that insurers are financially sound and that consumers are protected from misconduct by competing market participants.
On the transactional front, the ONI would provide oversight for acquisitions, mergers, and bulk transfers (i.e., sales of blocks of business), as well as transactions within an insurance holding company system involving a national insurer.  In the enforcement area, it is contemplated that the CNI will have the power to revoke or restrict a national insurer’s federal charter for conduct that is harmful to policyholders, violates any law, regulation, or written agreement, or that is inconsistent with the continuation of existing operations, and to appoint a receiver for financially distressed or insolvent national insurers for the purpose of rehabilitation or liquidation.

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.”

Meanwhile, former Montana Governor Marc Racicot, president of the American Insurance Association, applauded the recommendations of the Blueprint, citing the need for stability raised after the recent turmoil in the interconnected financial markets and the aspects of the Blueprint which focus on consumer protection, financial solvency and global competitiveness.
Click here to read the text of the Blueprint.

Click here and here to read our prior posts on the OFC.