August 4th, 2009

Modernizing the U.S. Insurance Regulatory Structure, Part II: Current Considerations

Posted at 8:00 AM ET

Financial Intelligence Team

When the White House released its proposal for sweeping financial regulatory reform on June 17, 2009, it set the direction of change for the insurance regulatory system. Along with several proposed bills in Congress, the White House proposal is pushing for seemingly inevitable reform by the end of this year. But before the plans become law, specific changes likely will evolve. So, what exactly is up for debate?

The White House proposal for financial regulatory reform, for now, has taken the spotlight. This “plan for rebuilding financial supervision and regulation” is a product of debate and compromise between opposing parties. As the report was being developed, the White House and Treasury Department listened to insurance companies, consumer groups, and others who looked to shape the new policy.

The key issue of state versus federal regulation, however, was sidestepped. Although the new policy would extend broad authority over insurance regulation policy and oversight of major financial services firms, including insurers, it does not recommend a single federal charter (for which some insurance companies had lobbied). Still, it leaves open the possibility that Congress could enact such a change, with White House support for any action to “modernize and improve” the existing system with increased national uniformity — whether that is through a federal charter or more effective state control.

The other major change for insurance regulation in the White House proposal is the creation of an Office of National Insurance within the Treasury Department. The new office would assume regulatory control of international agreements between governments that regulate the issuance of (re)insurance contracts and would be empowered to recommend which insurance companies should be supervised on the federal level as Tier I financial holding companies, according to their size, leverage, and interconnectedness. (This directive aims to curb the future possibility of a financial institution outside federal authority failing with serious systemic effects.) In addition, according to the proposal, the Consumer Financial Protection Agency would establish rules for products sold by insurers to consumers.

Many of the points made in the Treasury Department report are addressed in bills currently making their way through the system. Specifically, HR 2609 introduces the concept of an Office of Insurance Information (OII). Considered a modest reform by some, the bill proposes that the OII control international matters, ensure state regulators remain consistent with federal international policy, collect and analyze insurance industry data and report results to Congress, and advise on policy issues.

Another bill, the National Insurance Consumer Protection Act (HR 1880), calls for an optional federal charter though the Office of National Insurance. Although previous federal charter bills have failed and HR 1880 has been stalled in committee since April, the potential exists for certain of its provisions to be adopted in a more comprehensive financial services regulatory reform bill.

Amid the calls for change to national insurance company regulation in the United States, there is also debate on the regulation on non-admitted and reinsurance companies, addressed currently by HR 2571. This is a topic to review on its own, although some of its principles may yet be incorporated into the eventual regulatory reform bill.

Tomorrow, we will look at how potential changes to the U.S. insurance regulatory system could affect the way business is done in the insurance marketplace.

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Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. To the extent that you discuss such statements with your clients, be sure to advise your clients that all such matters should be reviewed with their own qualified advisors in these areas.

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