Push for federal insurance charter worries states

Jul 18, 2005 @ 12:01 am

By Sara Hansard

WASHINGTON - State insurance legislators are becoming increasingly concerned that the Senate might soon start looking at legislation that would allow insurers to be regulated by the federal government instead of states.

At the summer meeting of the National Conference of Insurance Legislators July 7-10 in Newport, R.I., legislators had a lively debate with insurance industry advocates of regulatory changes, according to participants at the meeting.

Members of the legislators group, which strongly opposes any sort of federal pre-emption of state regulation of the insurance industry, listened to insurance industry officials' attempts to persuade them that some form of federal regulation is inevitable as well as to a debate over which form of federal regulation would be less damaging to state powers.

State legislators increasingly are concerned that Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D., are interested in a bill drafted by proponents of the so-called optional federal charter. Such a charter would allow insurers who do business in more than one state to be regulated by a federal entity instead of coming primarily under the numerous state and territorial governments they now must follow.

A statement sent out by Mr. Johnson's press office quoted the senator as saying that, "While state regulation has historically [provided], and continues to provide, a solid foundation for regulation, it seems to me that the time has come for Congress to take a thorough look at whether insurance companies should have the option of being regulated at the federal level. We've modernized the regulatory scheme for the rest of the financial services industry; it's our responsibility to review the current insurance industry regulatory landscape to ensure it's adequate and to inquire as to whether the current fragmented regulatory approach unnecessarily restricts the marketing of new insurance products in smaller rural states.''

The life insurance industry has been a chief proponent of an optional federal charter, arguing that the current system of different state laws and regulations is inefficient and not well suited for products sold throughout the nation and in other countries, as well.

The formation in recent months of the Optional Federal Charter Coalition, a Washington group backed by more than 100 companies, has forced the legislators group to take a more active interest in following the federal charter issue, said Paul Donohue, director of state-federal affairs in Washington for NCOIL, the Troy, N.Y.-based legislators group. The coalition advocates draft legislation being considered by Mr. Sununu and Mr. Johnson.

"The idea of an optional federal charter has been around for a long time, but this brings it up on the radar," Mr. Donohue said. "I was shocked to hear it was so far along, that it was more than an idea."

Mr. Donohue described the optional-federal-charter idea as "worse than the SMART Act'' advocated by House Financial Services Committee Chairman Michael Oxley, R-Ohio, and Rep. Richard Baker, R-La., chairman of that panel's capital markets subcommittee. That draft legislation, which is strongly opposed by state interests and by the Washington-based Consumer Federation of America, has never been introduced. Under it, the federal government could take steps to push the states toward uniform regulations.

Mr. Donohue said that members of his organization now are drafting a letter expressing their opposition to both the SMART Act and the idea of an optional federal charter.

Kevin McKechnie, director of government relations for the American Bankers Insurance Association, a separately chartered affiliate of the American Bankers Association in Washington, spoke to members of the insurance legislators group at the Newport meeting. His organization, which backs the optional federal charter as well as the SMART bill, stressed that states would continue to collect premium taxes under an optional federal charter. That revenue is one of the largest revenue sources for the states, Mr. Donohue said.

"If we can create [an optional federal charter] in insurance regulation, there will be a very robust role for state legislators, who will be required to adjudicate all the insurance questions that come before them with respect to their state-chartered entities," Mr. McKechnie said.

He noted that although banks come under a dual federal-state chartering system, most remain state-chartered.

"It really doesn't matter whether it comes in the form of the SMART Act or the optional federal charter,'' Mr. McKechnie said. "Congress is going to act. The problems with the system are too profound to be solved by the states."


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