Federal insurance regulation
Industry organizations debate proposals for streamlining insurance regulation
Last year, when Congress passed the financial services modernization law and the president attached his signature to the landmark document, all interested parties breathed a sigh of relief. Finally, after decades of dickering, full financial services had become a reality Insurance companies, banks and securities firms cheered the fall of the Glass-Steagall Act and the breakdown of boundary lines which had previously prevented these industries from crossing borders. Nevertheless, despite the shouts of joy that filled the business community, one lingering questioned remained. Who would regulate the free-for-all that was bound to ensue?
When pressing for the law, proponents waved the flag of functional regulation, meaning that if an entity was involved in insurance, banking and securities, those particular functions would be regulated as they had always been (i.e., insurance regulated by state insurance regulators and banks and securities primarily by the federal government). Yet before the ink was dry, special interests in the banking community and the securities industry were calling for federal regulation of everything-even insurance-and that specter of federal regulation is now haunting the insurance business more than ever. Moreover, that specter is wailing and shaking its chains, not only at insurance companies, but at agents as well.
The state system of regulating insurance is viewed by many-even within the industry itself-as being too cumbersome and inefficient for insurers to be able to compete with their federally regulated competitors in banking and securities. Banks have called for the establishment of a federal agency to regulate insurance. In addition, a group of 30 life insurance companies is said to be exploring such options as creating a federal charter or national standards. Representatives of this group discussed these options in great detail at the National Association of Insurance Commissioners meeting last December.
Almost immediately after he took office, George Nichols III, NAIC president, said that while he recognized the fact that some states are opposed to any kind of national standards for insurance regulation, he believed that uniform standards for insurance regulation are needed. He believes the standards should enhance the state system of regulation, turning the NAIL, in effect, into a “superregulator.” He called for proposals from the insurance industry on methods of streamlining insurance regulation at the state level and to make it more efficient and more in line with the underlying tenets of the financial services modernization law.
Now comes a proposal from the American Insurance Association (AIA). On the surface, the proposal seems to champion state regulation, but beneath it might actually represent a move towards more federal involvement in insurance. It is a proposal that is being examined carefully by other insurance company associations and agents’ associations.
The AIA-which upon offering the proposal, admitted that it did not yet have the full vote of its own membership-describes the plan as a “state-based system,” established under the McCarran-Ferguson Act for the creation of national insurance charters for property and casualty insurers. Under this system, a property and casualty insurer could get a national charter from any state. Once issued, the charter would authorize the insurer to underwrite property and casualty insurance in every sate. A nationally chartered insurer would have “scaledback” antitrust protection but would neither have its rates subject to state regulation nor be required to file its policy forms with the state.
Nationally chartered insurers would otherwise be subject to state regulation, guaranty fund requirements and premium tax laws. No state would be “required” to authorize the issuance of national charters. As a back-up mechanism, however, insurers could get national charters from “an appropriate agency of the U.S. government” if authorizing legislation was not enacted in any state. Some might interpret this “state-based” proposal as giving final say to Big Brother.
According to the AIA plan, “Each state shall accord fill faith and credit to a national charter issued by another state and may not discriminate against any insurer who obtained its national charter in any other state.” This in itself raises questions as to how the state system of regulation would benefit. If a state such as New York, for example, must recognize the national charter issued by Rhode Island, Delaware or New Jersey, there could be dissension rather than unity, which could weaken the system of state regulation and perhaps call for a federal arbiter.
Another part of the AIA proposal says that a state may “recommend” to the chartering state that a charter be suspended or revoked, but that “any decision by the chartering state on that request is subject to a federal court review” Here again, “federal” seems to be the operative word. Under the proposal, each state will continue to issue state licenses, but having a state license will not be a condition for a nationally chartered insurer to do business in the state. Also, states could continue to undertake market conduct examinations, but could not apply state standards that were inconsistent with national charter standards. That again raises the question of whether those standards will be set by the federal government or the NAIL.
Proponents of state regulation have been curiously quiet about the AIA proposal. The National Association of Independent Insurers (NAII) has said that it was a “good step forward for AIA to continue discussion” of licensing of insurance companies. “Clearly, this is an area where reform and modernization are needed,” says the NAII. However, the NAII adds that the AIA proposal “does contain elements of federal regulation” which is of concern to the NAII.
Gary Eberhart, executive vice president of the Professional Insurance Association (PIA-national), says that the association has not issued an official statement regarding the AIA proposal. “We are in the process of reviewing it,” he said. “This is one of many proposals that will be presented and considered. The regulatory process needs to be changed, and it will be a long process in determining how that change will develop. The PIA has had a long history of supporting state regulation of insurance and only state regulation. Nevertheless, all proposals will be examined before final decisions will be made-decisions that will affect generations of insurance people to come. Every insurance organization, association and group will have to commit its ‘regulatory intellect’ to the good of the overall.”
Jeff Meyers, vice president of public affairs of the Independent Insurance Agents of America (IIAA), says that his association has examined the AIA proposal but has not offered an official statement as of yet. “There will be a great many proposals regarding streamlining insurance regulation coming down the pike and they will all be considered,” says Meyers. “We remain committed to state regulation and not a bifurcated regulatory structure,” he says.
Meanwhile, while the AIA proposal addresses the issues pertaining to the regulation of insurance companies, agents are also being haunted by the ghost of federal intervention. As part of the financial services modernization law, Congress included a “NARAB” provision, which calls for the establishment of the National Association of Registered Agents and Brokers designed to streamline the multistate licensing process of agents and brokers. The provision requires the creation of the insurance agent licensing clearinghouse if a majority of states-defined as 29 states-do not enact licensing reciprocity by November 12, 2002.
“In essence, the NARAB provisions put the ball in the states’ court,” says Ronald A. Smith, a spokesman for the IIAA. Smith, who is president of the Rochester, Indiana, firm of Smith, Sawyer & Smith, testified before a Senate hearing and said that in AAA’s estimation, the NAIL and individual state insurance departments have begun to respond to Congress’s NARAB message and are making considerable progress toward heading off the proposed agency’s creation. He said that most notably, the NAIC recently approved a new agent licensing model law-the Producer Licensing Model Act-that will serve as the starting point for agent licensing reform in every state and will promote uniformity and reciprocity in the licensing arena.
“The NAIL model contains provisions that allow a state to become NARAB-compliant by establishing the requisite level of reciprocity,” said Smith. “While it is not a perfect proposal, the model act makes great strides in the effort to enhance, improve and streamline the agent licensing process, particularly in the area of nonresident licensing.”
Smith says that IIAA believes that states are up to the challenge and will take the steps necessary to forestall establishment of this new federally created entity.
The PIA has also come out in support of the NAIC’s efforts to streamline agent licensing. At its May 7 board of directors meeting, the PIA adopted a policy position favoring “a newly evolved system of oversight and guiding PIA participation in the insurance regulatory efforts of the National Association of Insurance Commissioners.” The policy provision supports state regulation of insurance. “The changes that have been made necessary by financial services modernization represent both an opportunity and challenge to PIA members,” says Eberhart. “The financial services marketplace is evolving and our system of statebased insurance oversight must also evolve to be more responsive to our members’ needs and the needs of consumers.”
At press time, Kentucky was the only state to pass the NAIC model licensing law. That means that 28 states need to jump onto the bandwagon if federal oversight of agent licensing is to be forestalled.
The threat of federal regulation of both companies and agents looms larger than it has ever before. The next year will determine whether that threat will become a reality.
Copyright Rough Notes Co., Inc. Jul 2000
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