Insurance Center

There is a congressional subcommittee that has been holding back a long-awaited regulatory reform bill that would greatly affecting the insurance industry as we know it. The bill as it stands, would establish a Federal Insurance Office. This office would be empowered to supersede states and state insurance departments and to identify companies that might pose a systemic risk to the national insurance system.

This office which would be established under the Department of the Treasury, in addition to advising the federal government, would also:

•Keep tabs on each and every aspect of the insurance industry, and this would include identifying issues in relation to or breaches in regulations that might possibly contribute to a systemic crisis for the insurance industry as a whole. This would exclude health insurance however. It would be the function of the office to recommend to the Federal Reserve System as required, that it designate an insurer, as well as its affiliates, as a body needing to be subject to regulation as a Tier 1 financial holding company.

•Manage federal efforts and institute federal policy as regards prudential aspects of matters relating to international insurance. As necessary it would function to determine whether or not state insurance measures should be preempted by international insurance agreements.

•Help and be involved in the administration of the Terrorism Insurance Program.

In addition, according to a number of lawyers who commented although requesting anonymity, there are preemption provisions in the state insurance law included in the Treasury legislation that are seen as being tighter than legislation introduced in April by Rep. Paul Kanjorski, D-Pa regarding the Office of Insurance Information. The provisions are in the Federal Insurance Office bill within a package of regulatory reform bills proposed by Paul Kanjorski, who is the chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government.

Kanjorski has supported the optional federal charter (OFC) for a long time. The charter provides insurers and producers the option of being regulated on the federal level. During the past few years this idea has been bogged down, but some see the federal office as being a step in the direction of an OFC.
Insurance companies tend to support a federal office or the OFC since it gives insurance a seat at the national table along with the remainder of the financial industry. It is also seen as increasing efficiency through the establishment of national standards.

The proposed office could bring a company under the federal umbrella by means of the systemic risk provision. By means of this provision the office is able to identify companies to be considered Tier 1 financial holding companies. This is basically a response to the AIG crisis.

Those who support federal regulation point to AIG as an example of the state regulatory failure. The states however, are saying that the AIG entities covered by their purview were still strong when the company suffered its financial trouble, but that those under the federal auspices are the ones that failed.

However, due to the strong preemption authority included in the legislation, industry reaction has been split.

Current president of the American Insurance Association Leigh Ann Pusey says that they are all in agreement that the government needs to establish regulations and consumer protections to safeguard and prevent future economic crises.