State vs. Fed?

H.R. 5840 - A Step Toward a Federal Insurance Regulatory Body?

October 22, 2008 Photo
Since the US v South-Eastern Underwriters Association (S.E.U.A.) 322 US 533 (1944) Supreme Court decision, insurance has been considered interstate commerce and subject to Congressional control. Congress deferred most insurance regulatory oversight to the states with the McCarran-Ferguson act of 1945, 15 U.S.C. 1011, albeit with the caveat that it could change its mind at any time. Since McCarran-Ferguson, the debate over state vs. federal regulation has been vociferous. There have been offerings of dual regulation that would permit larger insurers (presumably) to opt into a federal regulator, leaving smaller and more-local firms to state regulation.
On July 29, 2008 the Senate Banking Committee held a hearing on the concept of federal charters. This bifurcated approach has been seen by some as an ideal compromise and by others as the equivalent of separate but equal with all the inequalities that segregation brought to bear. At this hearing, testimony by various industry stakeholders on Federal insurance company charters suggests that there remains significant polarization on this subject.
John Pearson, representative of The American Council of Life Insurance, said in written testimony, “Despite the fact that the insurance industry has pressed state regulators and legislators for years to modernize the state regulatory system, the reality is that the state insurance regulatory system has failed to keep pace with marketplace developments.” (Statement of The American Council of Life Insurers before The United States Senate Committee on Banking, Housing & Urban Affairs on State of the Insurance Industry, John Pearson, Chairman, President & Chief Executive Officer, Baltimore Life Insurance Company.)
Chuck Chamness, president and CEO of the National Association of Mutual Insurance Companies, said in a written statement, “NAMIC supports targeted national uniformity efforts and opposes an optional federal charter at this time.” (Source Others have used banking regulation as a model of federal regulatory cost efficiencies wrung from the elimination of burdensome state regulation. This has led to proposals to replace state regulation with a federal authority, but the proposals have encountered fierce resistance from state regulators, state legislators, and many industry advocates. But there is a new idea in federal oversight.
On April 17, 2008 Reps. Kanjorski, Bean, Royce, Moore, and Pryce co-sponsored H.R. 5840, titled “To Establish an Office of Insurance Information in the Department of the Treasury.” On July 9, 2008. H.R. 5840, with amendments, was reported out of the Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee and sent to the full House Committee on Financial Services. This bill establishes within the Treasury Department an Office of Insurance Information to be headed by a Director. This Office of Insurance Information would do the following:
Sec. 312 (c) as amended:
  • (A) As originally stated, included only public data. As amended, the bill now states, “To receive and collect (directly from the States and from other sources), and to analyze and disseminate, data and information, and to issue reports, regarding all lines of insurance except health insurance…” While the release of non-public data is voluntary and subject to privacy restrictions in the amended bill, this is an expansion from the original authority to collect only public data.
  • (B) as amended, “To coordinate Federal efforts and establish Federal policy on international insurance matters, including working with the International Association of Insurance Supervisors.”
  • (2) as amended, “ADVISORY FUNCTIONS – To advise the Secretary on major domestic and international insurance policy issues, including matters that affect consumers and insurers, such as, and including, financial guarantee insurance, catastrophe insurance, and reinsurance requirements.”
Section 312 (e) (1) in the original bill preempted any state law that is inconsistent with federal policy on international insurance matters. The July 9 amendment expanded state preemption from just law or regulation to “measures” which could conceivably include administrative orders from commissioners whether directed at individual insurers or others. Section 312 (h) in the original bill retained existing state regulatory mechanisms on insurers.
However, the July 9 amendment removed Section 312 (h) by clarifying 312 (e) (2) “SCOPE-A state insurance measure shall be preempted under this subsection only to the extent that the measure treats a non-United States insurer domiciled in a jurisdiction that is subject to an agreement referred to in paragraph (1) more or less favorably than it treats a United States insurer domiciled in such state.” This bill as amended presumably does not intrude on state insurance regulatory authority over insurers or domestic market practices unless they interfere with international policy or treaties. However, the removal of specific language related to the retention of existing state regulatory mechanisms for insurers could open the door to additional amendments that would permanently alter the regulatory landscape.
Finally, in Section 312 (k) the amended bill establishes an advisory group of no more than 13 members to be appointed by the Secretary and to include representatives of the National Association of Insurance Commissioners (NAIC), state legislators, the Department of Commerce, The Federal Trade Commission, the Office of the United States Trade Representative, the life insurance industry, the property and casualty insurance industry, the reinsurance industry, the insurance producer industry, and others as the Secretary deems appropriate. The bill as written does not give this committee any authority other than to advise.
The bill provides a platform for the U.S. to address insurer, business, and government requests for a more consistent global regulation of insurers. Initiatives such as the International Accounting Standards Board’s (IASB) efforts to establish a fair value for insurance contracts, and the European Union’s (EU) Solvency II regulation designed to help insurers use capital more efficiently, are seen by many as positive steps toward addressing insurance confidence and compliance issues in an increasingly global economy.
The original H.R. 5840 received support from The American Insurance Association (AIA). Speaking on behalf of the AIA in a prepared statement to Congress on June 10, 2008, Neal S. Wolin (President and COO for Property Casualty Operations, The Hartford Financial Services Group) said “...AIA supports H.R. 5840. It fills a critical void of expertise and of insurance issue advocacy nationally and internationally without changing the current state-based insurance regulatory system.” Speaking on behalf of The National Association of Insurance Commissioners (NAIC) in a prepared statement to Congress on June 10, 2008, Michael T. McRaith (Illinois Director of Insurance) said “In concept, H.R. 5840 is a good bill that, with necessary refinements, can be improved to receive unrestricted support of State insurance regulators, all of whom are solely focused on consumer protections and fostering a competitive insurance market.”
The National Association of Mutual Insurance Companies (NAMIC), which has been a staunch supporter of state regulation of insurance, said in written testimony, “The establishment of an Office of Insurance Information within the Department of the Treasury, if accompanied by the strongest confidentiality and privilege protections, limited in scope, coordinated with the advice of a well-balanced advisory panel, with limited pre-emptive authority and overseen by Congress, could play a vital role in this modernization effort.” (NAMIC prepared statement to Congress, June 10, 2008).
This bill is limited in scope. However, the comments of NAMIC express the unease that many in the industry will have over the federal government’s propensity to increase its bureaucratic reach over time. Once a mechanism for insurance regulation is established in Washington, it becomes that much easier for Congress to add additional responsibilities and authority whenever controversial industry practices or economic conditions gain sufficient attention of its members.
On the other hand, the federal government is the appropriate authority to work with international regulators and trade personnel. Having an advocate and negotiator on the international stage can help preserve the competitive advantages of our domestic international insurers and provide robust opportunities for qualified foreign companies in U.S. markets. One topic that will be considered by this office is any disparity between the licensing or regulation of foreign insurers and domestic insurers. If federal policy dictates that they will be the same, then any state law that does not conform is preempted. For example, foreign reinsurers have complained for years that existing regulations regarding collateral penalize them when competing against domestic reinsurers.
However, as McRaith of the NAIC pointed out in his June 10 testimony, “Clarification may also be needed to identify exactly which entities have authority to negotiate such international agreements. States’ concerns about federally negotiated ‘agreements’ is not protectionist in any sense. Rather, state regulators believe that the relative merits of a regulatory practice in another country, or the international commercial needs of an industry participant, should not supersede—or be allowed to supersede—market or solvency protections the states have deemed essential.”
The gathering of data for all lines of insurance except health insurance is a key provision of this bill. The data component is not tied to the international elements of the legislation, so presumably the Secretary would aggregate domestic data for the Treasury Department and Congress. In its June 10 written testimony, NAMIC expressed concern over just what data would be collected and how this would affect existing data aggregators such as the NAIC. The NAIC also questioned the need and the expense of duplicating data that it already maintains.
What remains unanswered is from where this data will be gleaned—will the Department of the Treasury ask insurers for claims data in a different format than the NAIC? Such duplicity would add cost and time to insurer claims, underwriting, and data processing operations. The bill also specifically states that the Deputy Assistant Secretary will make reports to Congress as to the financial state of the insurance industry, trends in the industry, and actions taken to preempt state laws in accordance with the bill’s limitations. What will a highly partisan and political Congress do with these reports?
Modernization and simplification across international borders could include efforts to develop universal claims reporting procedures or the fashioning of common language and definitions. Such questions as, “Where must insurers defend?” or, “How do we extend claims reporting periods in places where communication infrastructure is inadequate?” are likely to be asked. Intrusive or overly costly treaty provisions will not go unnoticed by domestic industry constituents.
The bill as presented is likely to be amended again prior to any vote by the full committee. However, there does not appear to be formal industry opposition to the basic international tenets of the bill. The bill also is likely to receive support from the international business sector as a step in the right direction.
This legislation, whether passed or not, will not end the debate over state vs. federal regulation. What gives H.R. 5840 an edge over previous federalization efforts is that its international locus does not step directly into the state vs. federal debate. Instead, it establishes the colloquy in a domestic vs. international space which does not serve to directly engage the dialectic between domestic constituencies. This, however, could change if the bill is altered to intrude further into the domestic space.
About The Authors
Christopher Ketcham

Christopher Ketcham, CPCU, CFP, CIC, CRM, CISR is the senior director of knowledge resources at the American Institute for CPCU, Insurance Institute of America.

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