National Regulatory System Proposed For US Insurance Industry

Originally published May 14, 2009

Article by

Lawrence R. Hamilton ,

Kenneth R. Pierce ,

Thomas J. Delaney and

David R. Sahr

Keywords: insurance, reinsurance, National

Insurance Consumer Protection Act, NICPA, optional federal charter,

Office of National Insurance, systematic risk regulator, insurance

chartering

Citing the ongoing economic crisis and the US government's

bailout of American International Group, Inc. (AIG),

Representatives Melissa Bean (D-IL) and Ed Royce (R-CA) have

introduced the National Insurance Consumer Protection Act (H.R.

1880) ("NICPA" or the "Act") in the US House of

Representatives. NICPA would create an optional federal charter for

insurance companies, insurance agencies, and insurance

producers.

Although similar legislative proposals failed to generate broad

support in prior sessions of Congress, concern among policy makers

over the systemic risk presented to the US financial system by

firms such as AIG, and growing concern among life insurers,

reinsurers, and some segments of the property and casualty industry

over the efficiency and responsiveness of the current system of

state regulation have led to renewed interest in the establishment

of an optional federal charter (OFC). In introducing NICPA, Rep.

Royce stated that "[l]eaving the business of insurance

regulation solely to the various state insurance commissioners,

while the federal government provides taxpayer-funded assistance is

simply irresponsible."

NICPA has been referred to the House Committee on Financial

Services, the House Judiciary Committee, and the House Committee on

Energy and Commerce; the Subcommittee on Capital Markets, Insurance

and Government Sponsored Enterprises of the House Financial

Services Committee has scheduled a hearing for May 14, 2009, on the

role of the federal government in insurance regulation. Companion

legislation has not yet been introduced in the Senate.

Overview

NICPA is an updated version of previously introduced legislation

that called for a national regulatory system to charter and oversee

insurers and insurance producers. Specifically, NICPA creates an

Office of National Insurance (ONI) that would be headed by a

National Insurance Commissioner (the "Commissioner"). The

Act authorizes the Commissioner to issue charters for life

insurers, reinsurers, and property and casualty insurers, as well

as to issue charters and licenses for insurance agencies and

producers. It also provides for the conversion of state-regulated

entities to a national charter and the conversion of federally

regulated entities to a state charter.

Significantly, unlike prior OFC proposals, NICPA would direct

the President to designate a systemic risk regulator for insurers,

whether state or federally chartered, and a Coordinating Council

for Financial Regulation (the "Council"). NICPA would

also add stricter consumer protection standards and allow for the

establishment of self-regulatory organizations for nationally

chartered and licensed insurers, agencies and producers.

The Act's consumer protection provisions include the

establishment of local consumer affairs offices and mandated

membership of federally chartered insurers in state, as well as

federal, guaranty funds. These provisions are intended, in part, to

address concerns leveled at prior OFC proposals, which were

criticized for advancing the interests of insurance companies

without including provisions to ensure appropriate market practice

and insolvency protections for consumers.

Establishment of a Federal Regulator

The ONI would be established as an independent bureau within the

Department of the Treasury, much like the Office of the Comptroller

of Currency and the Office of Thrift Supervision. The ONI would

implement a national system for regulating and supervising

federally licensed insurance entities, including: (i) life,

property and casualty, and reinsurance companies and (ii) insurance

agencies and producers (i.e., agents and brokers).

The ONI would directly regulate federally chartered insurance

companies and would also serve as the federal government's

insurance liaison to the systemic risk regulator (SRR), helping

identify "systemically important" insurance entities that

if not already federally licensed would be required to convert to a

national charter. The ONI would otherwise have no authority over

state-licensed insurance entities. Such entities would continue to

be regulated solely by the states, and state regulation would

continue to be coordinated by the National Association of Insurance

Commissioners (NAIC). The ONI would be financed through

assessments, examination fees and penalties paid by insurers.

The Commissioner would be appointed by the President for a

five-year term, subject to the advice and consent of the Senate.

The Commissioner could delegate certain of the ONI's duties to

one or more self-regulatory organizations. Such self-regulatory

organizations would have no authority over state-chartered

insurance entities. The Commissioner also would have the authority

to engage in international efforts to secure bilateral and

multilateral agreements with foreign insurance regulators and

regional and global regulatory organizations.

Systemic Risk Regulator

One of the most significant new provisions contained in NICPA is

the creation of the SRR. The SRR would be an agency separate from

the ONI, designated by the President, and tasked with monitoring

the stability of the insurance system (both state and federal), and

with guarding against future crises caused by the weakening of the

insurance market or the failure of an insurer.

All insurance regulatory bodies (state and national) would be

required to share information with the SRR. The SRR would be

authorized to recommend to the Commissioner, or to the relevant

state insurance regulator, that corrective action be taken to avoid

conduct by insurers or affiliates that could have adverse effects

on economic conditions and financial stability. In emergency

situations, if the Commissioner or state insurance regulator failed

to respond to the SRR's recommendation, the SRR (with approval

from the Council) would be able to override the state regulator. As

noted above, the SRR, in conjunction with the ONI, also would have

the power to require an insurer to be federally chartered if that

insurer is deemed to be "systemically important." Thus,

under NICPA, some...