WASHINGTON - The Senate Banking Committee last week held the first of a series of hearings this year on modernizing insurance regulation, looking particularly at whether insurers should be given the option of being federally regulated.
The committee scheduled another hearing for tomorrow on insurance regulation at which Randal Quarles, under secretary of Treasury for domestic finance, is expected to testify.
The committee last held hearings on insurance regulatory reform in 2004. "Very little progress has been made in this area on either the state or the federal level since that time," said Sen. Tim Johnson,
D-S.D., who co-sponsored with Sen. John Sununu, R-N.H., legislation that would allow insurance companies to choose federal, instead of state, regulation.
"The status quo is unacceptable," Mr. Johnson said at the hearing. All 50 states will never be able to come together on uniform standards for product approvals and agent licensing and training, he said.
Mr. Johnson called the current system "redundant, inefficient, burdensome, complicated, duplicative, costly, dysfunctional, anachronistic, balkanized, contradictory, deficient and counterproductive."
Congress called for state reform of insurance regulation in the Gramm-Leach-Bliley Act of 1999, which substantially deregulated the financial services industry, he noted.
"The message we're willing to send now is, if you can't do it, we'll do it for you," Mr. Johnson said.
But not all members of the committee are eager to move to federal regulation of the insurance industry, which traditionally has been regulated by the states.
"We need to move with extreme caution when talking about reversing the entire history of insurance regulation in this country," said Sen. Jim Bunning, R-Ky.
"There should be a high hurdle for expanding the federal bureaucracy and imposing new regulations," he said. Once involved in a new area of regulation, Congress has a tendency "to create monsters of bureaucracies that only grow and never go away," Mr. Bunning added.
Although there is a need for greater cooperation between the states for agent licensing and product approvals, the current system isn't "broken," he added.
One only has to look at the 27 states that joined the Interstate Compact for life insurance and other asset preservation products for an example of how the states work together, said Maine insurance superintendent Alessandro Iuppa, who is president of the National Association of Insurance Commissioners in Kansas City, Mo.
More than 10 states are expected to join next year, he said.
The compact, which is to start operating in early 2007, will allow insurers to get products approved once for sale in all the participating states, saving insurance companies the time and expense of applying to each state.
Regulation of the insurance industry is best left to state officials who are directly accountable to consumers and who are best positioned to respond quickly to local conditions, Mr. Iuppa said.
"A bifurcated regulatory regime with redundant and overlapping responsibilities will result in policyholder confusion, market uncertainty and other unintended consequences that will harm individuals, families and businesses that rely on insurance for financial protection against the risks of everyday life," he added.
Most life insurers are calling for an optional federal charter.
Some 150 companies that belong to the 377-member American Council of Life Insurers in Washington have assets of $2 billion or less, said Johnny Johns, chairman, president and chief executive of Protective Life Insurance Co. of Birmingham, Ala., who testified on behalf of the ACLI.
"Both large and small life insurance companies see regulatory modernization as something that must be accomplished in the near term if the life insurance industry is going to preserve its ability to provide consumers with the best products and services we can," he said.
Among the insurance groups testifying at the hearing against an optional federal charter was the National Alliance of Life Companies in Sarasota, Fla., which is made up of small and midsize regional life and health insurers. State insurance departments handled nearly 4 million consumer inquiries in 2004, said Robert Hardy, vice president and general counsel of Investors Heritage Life Insurance Co. in Frankfort, Ky., who testified on behalf of NALC.
A federal bureaucracy couldn't handle such inquiries, in addition to other duties that would be required, he said.
Policy conflicts inevitably would arise between a federal insurance regulator and the states.
"The federal regulator will ultimately force the states to resolve the conflict," Mr. Hardy said. "State-chartered producers and insurers will not have an option. It will become mandatory" if a federal regulator is set up.