Citing the nation’s financial meltdown and the U.S. government’s heavy involvement with insurance giant American International Group (AIG), U.S. Reps. Melissa Bean (D-Ill.) and Ed Royce (R-Ca.) introduced a bill on April 2, 2009, which, if passed, would bring widespread, fundamental change to the U.S. insurance regulatory scheme. The National Insurance Consumer Protection Act (NICPA) creates optional federal regulation and supervision for insurers, insurance agencies, and insurance producers that mirrors that of the current dual banking system. With a new slate of proposed financial regulatory reforms being debated on Capitol Hill, Mr. Royce called leaving insurance regulation out of the reform picture and solely to the various state insurance commissioners, while the federal government provides taxpayer-funded assistance to insurers, “simply irresponsible.” Ms. Bean promoted the proposed reform as providing “consumer protection and choice while eliminating barriers to industry competitiveness in the global market.” The two lawmakers see their bill as going a long way toward filling gaps they perceive to have been created by the “fragmented state-based system overseeing insurance” today.
Regulatory Oversight — State v. National
The bill, which applies only to life, property and casualty, and reinsurance companies and insurance producers, creates the Office of National Insurance (ONI) within the U.S. Department of the Treasury (Treasury) to oversee the national regulatory scheme and monitor the health of the industry as a whole. Insurance companies, agencies, and producers can opt to apply for a federal charter from the ONI’s National Insurance Commissioner (NIC) or remain under the current state regulatory system. Thus, states would maintain responsibility for regulating state-licensed insurers, agencies, and producers. Key provisions under the NICPA include:
The bill also seeks to counter one of the lead arguments against it by outlining a system for adequate and stiff consumer protection. NICPA establishes a Division of Consumer Affairs (DCA) within the ONI. The DCA is tasked with establishing a regional DCA office in each state with a direct phone number and creating a national toll-free number and Web site to accept consumer questions and complaints. The NIC will issue market-conduct regulations to prevent unfair methods of competition and unfair and deceptive acts and practices by all covered entities. The NICPA notes that these regulations should implement the NAIC model laws regarding consumer protection. The bill also empowers the NIC to investigate fraudulent insurance acts, which are defined as federal crimes punishable by up to 10 years in prison.
NICPA attempts to further protect consumers by establishing a National Insurance Guaranty Corporation (NIGC) that will act like state guaranty funds and assume obligations to policyholders up to certain established NAIC limits when a national insurer is placed into receivership. NIGC will be funded by assessments on national insurers, who also will be required to participate in state guaranty associations for each line of insurance sold in any state in which that national insurer is conducting business. State-chartered insurers would still only be required to pay into state guaranty funds. While there does not appear to be any interplay between the two funds, NICPA establishes the NIGC as an “as needed” fund. That is, the NIC cannot levy assessments on national insurers until faced with a situation where such funds are needed to pay claims to policyholders of a national insurer in receivership. If an event triggering the NIGC occurs, only national insurers “in the business of providing the same type of insurance as the national insurer that is placed into receivership” would be required to pay into the fund. NICPA further provides that the NIGC shall pay claims consistent with the limits set by the NAIC life, health, property, and liability insurance guaranty fund model acts.
Oversight and Stability of the Financial Market
Finally, the NICPA attempts to guard against future economic crises stemming from the failure of an insurer or a weakening in the insurance market by establishing several oversight provisions that monitor industry stability. Under NICPA, all insurance commissions (state and national) would be required to share information with a Systemic Risk Regulator (SRS). This SRS is to make corrective action recommendations to the NIC or to the requisite state insurance commissioner to take action to mitigate or avoid conduct by insurers or affiliates (to the extent they are subject to state oversight) that would have serious adverse effects on economic conditions and financial stability. If any commissioner fails to take action, the SRS (with approval from the Council for Financial Regulators (Council), discussed below) will be able to circumvent the insurance regulator in emergency circumstances. The SRS, in conjunction with the NIC, also will have the power to force an insurer to be federally chartered if they deem that insurer to be “systemically important.”
The aforementioned Council will be created under NICPA based on an expanded version of the President’s Working Group for Capital Markets. Chaired by the Secretary of the Treasury, the Council will include the NIC and the heads of the Federal Reserve System, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Office of Thrift Supervision, Federal Deposit Insurance Corporation, and the Comptroller of the Currency. The Council also will include a slate of three rotating state regulators who are appointed by the president. The Council will serve as a forum for financial regulators to collectively identify, monitor, and consider issues related to the health and competitiveness of the financial services industry.
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Kevin G. Fitzgerald
Sarah E. Molenkamp