Introduction:

Insurance regulation is once again on the radar screen of the White House and U.S. Congress.

On June 17, President Obama introduced the administration’s proposal for Financial Regulatory Reform: A New Foundation (“White Paper”) that provides a framework to reform the regulation of the U.S. financial system.

On May 21, Congressman Paul Kanjorski, D-Pa, reintroduced the Insurance Information Act of 2009 (“IIA”).

Both proposals establish an insurance division within the Department of the Treasury to enable the monitoring of the insurance industry by the executive branch.

The Department of the Treasury’s White Paper:

The Treasury’s proposal may ultimately change the nature of insurance regulation.  The

White Paper calls for the creation of the Office of National Insurance (“ONI”) within the

Treasury Department. The White Paper proposes that the ONI monitor all aspects of the insurance industry to: (i) identify the emergence of problems or gaps in regulation to avoid a future insurance related crisis; (ii) manage the government’s responsibilities under the Terrorism Risk Insurance Act; (iii) function as the federal insurance regulatory authority on international insurance matters with the authorization to enter into international agreements; and (iv) increase international cooperation on global insurance regulation. Treasury has further recommended that ONI identify insurers “whose failure could pose a threat to financial stability” for referral to the Federal Reserve for supervision.

Treasury has listed six principles to modernize and improve insurance regulation:

1. Effective systemic risk regulation with respect to insurance.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies.

3. Meaningful and consistent consumer protection for insurance products and practices.

4. Increased national uniformity through either a federal charter or effective action by the states.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside traditional insurance businesses.

6. International coordination of insurance regulation.

The Insurance Information Act:

Establishes the Office of Insurance Information (“OII”) within the Department of the Treasury, and authorizes OII to:

1.      Receive, collect, analyze, and disseminate, data and information, and issue reports regarding all lines of insurance, except health insurance.

2.      Coordinate federal efforts and establish federal policy on international insurance matters.

3.      Determine whether state insurance measures are inconsistent with federal policy.

4.      Serve as a liaison between the federal government and individual or several states regarding insurance matters of national and international importance.

5.      Serve as a primary advisor on the export promotion of United States’ insurance products and services for the Treasury’s representative to the Trade Promotion Coordinating Committee.

The IIA does not grant the Treasury “general supervisory or regulatory authority” for insurance in the United States. If passed by Congress, IIA would additionally create an advisory group of regulators and consumer groups to inform the OII, which would be required to report to the U.S. Congress every two years.

The Beginning of the End or the End of the Beginning?:

Does IIA mark the beginning of the end of state regulation of insurance? Will a Treasury pronouncement that a state’s regulations are inconsistent with federal policy fast track the federal charter of insurers? Will the Treasury’s desire to improve and broaden the regulation of insurance companies and affiliates on a consolidated basis preempt state supervision? As conventional wisdom puts it: “Once the camel’s nose is in the tent, the rest is sure to follow.”

Alternatively, does the limited scope of IIA signal the end of the beginning of federal regulation of insurance? Advocates of IIA contend: “the bill has clearly defined and limited preemptive powers applicable only if state laws conflict with United States international trade agreements.” Does the absence of insurance supervision and regulatory authority for the Treasury in IIA reveal a political retreat from an optional federal charter? Or is battle for the regulation of insurance merely postponed for another day?

Washington D.C. insiders note that Congress will be consumed with the regulatory overhaul of the U.S. financial system, an exhaustive and complex endeavor. As reasoned by Charles Symington of the IIABA: “There’s only so much oxygen. When they’re trying to stabilize the financial markets, it does leave less time than people would like.”

 (This blog is excerpted from a longer essay published in ReSource ReSearch, a journal published by ReSource Intermediaries, a reinsurance brokerage based in San Francisco.  ReSource Intermediaries is a member company of the Insurance Educational Association and its CEO, Bob Kennedy, is a former Chairman of IEA.)