What Is the Federal Insurance Office Proposal Really All About?
By JULIE MCPEAK, of counsel in the insurance practice group of Burr & Forman and a former executive director of the Kentucky Office of Insurance
On October 5th, Rep. Paul Kanjorski (D-PA) released a revised discussion draft of HR 2609, the bill formally creating a federal Office of National Insurance. The bill was scheduled for debate by the Capital Markets Subcommittee of the House Financial Services Committee, which he chairs, and has received support from several Democratic and Republican lawmakers.
The discussion draft differs from the prior bill and the proposal drafted by the Treasury Department in several respects. Most notably, the discussion draft refocuses the federal insurance office from a position of gathering information to one of monitoring the insurance industry. Some may argue the amendment is pure semantics, but several other interested observers identify the language revision and change in the office's purpose as a precursor to a federal insurance regulator and/or optional federal charter. I cannot disagree.
Kanjorski's original bill created a compilation of insurance industry data and expertise for the federal government. Practically no one could criticize the endeavor, recognizing the influence of the insurance industry on the nation's economy. Industry participants and regulators, including the NAIC, readily endorsed the concept. Industry analysts specifically recognized the benefit of a governmental agency monitoring the insurance marketplace and collecting industry statistics for the benefit of the industry and the United States government. The expanded scope of information and its availability would nicely supplement the NAIC statistical offerings, which tend to be regulator-centric.
The proposal was not so easily embraced by industry participants and regulators. The Treasury Department proposal, while never reaching filed bill status, authorized certain state law preemption, the subpoena of information from insurers and delegated authority to the Federal Reserve Board to impose strict regulatory standards on designated Tier 1 insurers. The considerable degree of adjustment required in the marketplace and the resultant uncertainty for the industry caused many participants to be wary of the plan. Therefore, the adoption of several Treasury Department initiatives by Rep. Kanjorski and their inclusion in the most recent discussion draft surprised many observers.
The most noticeable addition to Kanjorski's discussion draft includes the authority granted to the Federal Reserve Board to identify systematically significant insurance holding companies for regulation pursuant to the Bank Holding Company Act of 1956. Several proposals are currently being debated to address systemic risk regulation across the financial services industries. Including a nod to the Federal Reserve Board is a compelling strategy in a previously uncontroversial bill. There can be little doubt as to Rep. Kanjorski's intention of creating a federal insurance office as a conduit to a federal insurance regulator.
Regardless of the motive, the revised FIO proposal may no longer be classified as simply a connector of the state insurance regulatory system. Perhaps Rep. Kanjorski fears a lack of action on wholesale financial services reform measures and seeks to create a level of oversight for the largest insurers at the federal level. Equally likely, perhaps Rep. Kanjorski and his colleagues continue to blame the insurance operations and state regulatory system for the failure of AIG. For those continuing to operate under that misconception, the new oversight appears to address the increased economic risk involved with large insurance companies; at least to the general public.
Many industry observers support the federal government's informed involvement in the insurance marketplace, specifically in areas of international representation and negotiations. However, in most cases, such support was justifiably predicated on the federal insurance office serving a non-regulatory role. Should the federal government enter the insurance regulatory arena, it most certainly would involve additional, supplementary oversight of companies, not a pre-emption of the existing state system. The financial services regulatory environment and the Congressional oversight of the economic crisis of 2008 creates an atmosphere wherein an optional federal charter, and the associated perception of lessening regulation is unlikely.
The federal government's foray into insurance regulation would be an addendum to the existing structure. The result of a secondary system would be additional administrative and compliance obligations for the industry, and ultimately, increased costs for insurance consumers. Expressed frustrations with the disparate state regulatory system will most certainly not be erased by the creation of a federal authority. A federal regulator will likely supplement, not supplant the state system. A federal regulator cannot be envisioned to arbitrate inconsistent rulings among the states, particularly at the early stages of implementation. Eventually, a regulator at the federal level could pursue a national standard in specific areas through preemption of state statutes, but preemption battles are sure to engage the resources of state regulators and legislators. Accordingly, supporters of a federal insurance regulator should consider the ultimate scope and authority of such a regulator and the resultant consequences to the industry and consumers when supporting the concept.
Despite the necessity of a federal regulator remaining unproven, a role for the federal government in the insurance industry certainly exists. Whether considered informational or monitoring, a federal insurance office could serve as a consistent voice for the United States in international insurance organizations, a much-needed role. The NAIC has appropriately staffed this function in the past but the ever-changing committee appointments and league of commissioners, coupled with a lack of the U.S. Government imprimatur, diminishes the participation of even the most competent state regulator in international associations. A consistent representative from the federal government will only benefit the United States' standing in these organizations. As a result, the U.S. domestic industry will reap the benefits.
Additionally, the federal office could be positioned to coordinate the interpretation and enforcement of existing and future federal insurance statutes. Regardless of the outcome of the healthcare reform debate, which may include an independent health care overseer, a federal insurance office may assist states with interpretation and enforcement of federal statutes such as the Liability Risk Retention Act of 1981, Medicare Part D, the Employee Retirement Income Security Act of 1974 and pending initiatives regarding surplus lines and reinsurance. State insurance departments frequently maintain contrasting positions and interpretations of these federal statutes. Some of these policy positions arguably violate the explicit language of the statutes themselves. Currently, when such a situation occurs, a representative of the federal government with the authority and enthusiasm to intervene on behalf of the industry is difficult to locate. Accordingly, seeking a judicial determination in federal court is the sole recourse for the company or broker. The federal insurance office could unquestionably serve as an ombudsman, expert and mediator in these circumstances.
Moreover, insurance consumers frequently have difficulty identifying the proper federal agency and agency employee to assist with their insurance questions, concerns or complaints, particularly concerning Medicare and employer-sponsored health plans. An office of federal insurance could be a responsive referral system for these consumers. In the event pending measures relating to surplus lines and reinsurance become law, the federal insurance office is the obvious agency to implement these provisions and ensure compliance with issues such as tax allocation. The role for the federal government in the insurance marketplace is significant. Much may be accomplished by the United States government participating in the industry, both internationally and domestically. However, a superfluous regulator that adds cost to the system, without providing an associated benefit beyond that of an informational office, is premature and unjustified.
December 1, 2009
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