Baker & Daniels LLP and B&D Consulting were contributing sponsors of the 4th Annual Insurance Summit presented by Networks Financial Institute in Washington, D.C. on March 7, 2007. (The Summit occurred on the same day that the Senate Judiciary Committee held a hearing on legislation to repeal the insurance industry's antitrust exemption!) Dr. Lloyd Benjamin III, President of Indiana State University, and Liz Coit, Executive Director of NFI, made introductory remarks about NFI's education, outreach, and research initiatives since the last Summit. Major federal and state policymakers, as well as Professors Sharon Tennyson of Cornell University and Hal Scott of Harvard University, and industry representatives participated. Here are some of the highlights.
Walter A. Bell, Alabama Insurance Commissioner, and President of the National Association of Insurance Commissioners
- Commissioner Bell said state insurance regulators would be vastly more responsive to the needs of consumers and businesses than a new untested federal insurance regulator, including during natural disasters. "Just look at the federal reaction to Katrina," Bell asked rhetorically.
- He said that the NAIC has been retooling and streamlining state regulation for several years. Commissioner Bell said that it is ironic that some insurers who now favor an OFC were originally resistant to the NAIC's SERFF system for rate and form filing. Commissioner Bell also cited the Interstate Insurance Compact, which has been enacted by 29 states (containing about 50% of the national premium volume) and will serve as a central point of filing for life, annuity, disability, and long-term care insurance. The NAIC will begin its Compact product filing operations this June.
- Commissioner Bell said that while the state-based regulatory model must be kept and reformed, federal regulation is appropriate in some areas, such as the recently introduced reinsurance/surplus lines insurance bill (H.R. 1065), which the NAIC has endorsed.
Rep. Barney Frank (D-MA), Chairman, House Financial Services Committee
- Chairman Frank stated that he is open to considering some form of federal involvement in insurance regulation, but only if it will not diminish consumer protection.
- In addition to consumer protection, Frank said that the OFC debate would turn on the extent to which state law is preempted and what type of insurance should be federally regulated.
- Frank noted that preemption is an open question as the Supreme Court determines whether OCC and OTS broad preemption of state law is permissible.
- Frank said that these issues have become more complicated by the question of how to deal with catastrophes, such as Hurricane Katrina or the 9/11 terrorist attacks.
- Frank said the House intends to pass legislation next month to extend TRIA for more than five years and expand it to cover group life insurance and chemical, nuclear, and biological attacks.
- He also expressed hope of repeating last year's passage of legislation to overhaul the National Flood Insurance Program to discourage rebuilding in flood-prone areas and creating a higher premium for coverage of second homes.
Sen. John Sununu (R-NH), member of the Senate Banking Committee
- Senator Sununu stated that he and Senator Johnson plan to reintroduce a revised version of their optional federal charter bill in April. Sununu said he had not pursued another Senate co-sponsor (Sen. Johnson is still recovering from brain surgery from late last year), adding that he and Johnson had planned to educate Senate colleagues about their OFC proposal through hearings.
- Sununu cited the success that the banking industry has achieved with a dual-chartering structure, saying that it has ample regulation and consumer protection. An ombudsman position will be created in his legislation to provide consumer protection at the federal level.
- Sununu noted that rate regulation would not happen at the federal level under his bill because there is no interest in that policy from Republicans and some Democrats.
- The Senator added that the White House has not endorsed OFC but is expressing more interest in the issue.
- He added that repealing the insurance industry's exemption from federal antitrust law should be debated in the context of broader insurance reform.
Rep. Ed Royce (R-CA), member of the House Financial Services Committee
- Rep. Royce was critical of some aspects of the state-based regulatory system and said that he thought an optional federal charter was the way to go.
- Rep. Royce said that he wants Congress to legislate a "world-class federal regulator" so that insurance companies can compete nationally. Rep. Royce, who introduced an OFC bill (H.R. 6225) in September 2006, is expected to introduce his legislation later this spring.
- Royce said that the Bush Administration is "warming to the idea" of an OFC, based upon remarks from last year by Administration officials.
- He pointed to the failure of the "SMART" proposal to advance in the 109th Congress because it was too narrow in scope. He believes an OFC bill will only succeed if it has as many industry players in the debate and on the same team as possible.
Allan B. Hubbard, Assistant to the President for Economic Policy and Director of the National Economic Council
- Director Hubbard said insurers should be very careful about allowing the federal government to get involved in the business of insurance, which leads to insurance providers behaving not rationally but politically.
- "In every situation that I'm aware of," Hubbard said (he listed the Pension Benefit Guaranty Corporation, the Federal Crop Insurance Corporation, and the National Flood Insurance Program), the presence of a federal insurance backstop leads to premium levels or caps being set by Congress that are not actuarially sound, often creating a "moral hazard."
- Hubbard said he wanted to "punt" on the question of whether Congress should pass OFC legislation. He insisted that the Administration will work with Congress this year on reauthorizing TRIA, but policymakers need eventually to phase it out in order for the private market to provide terrorism insurance. He added that the creation of a national catastrophic insurance fund would be inappropriate and that negative episodes like coastal flooding are best handled at the state level.
Charlie Richardson of Baker & Daniels moderated a hard hitting panel of industry leaders. The panel discussed state v. federal regulation, Congress' appetite for dealing with insurance issues, consumer protection and national trends. The panelists were:
- William H. McCartney, Senior Vice President of Insurance Regulatory Policy, USAA
- Coalition Opposed to a Federal Insurance Regulator, Greg Wren, Executive Director,
- John H. Brown, Vice President Government Relations, Jackson National Life Insurance Company
- Optional Federal Charter Coalition, J. Stephen Zielezienski, Senior Vice President & General Counsel, American Insurance Association, and Wendy E. Cooper, Senior Vice President & Associate General Counsel, AXA Equitable Life Insurance Company
Prof. Sharon Tennyson, Cornell University
- A large body of academic research demonstrates that insurance markets function competitively in the absence of rate regulation. By contrast, a growing body of empirical evidence suggests that rate regulation leads to higher average insurance costs.
- Current proposals for an OFC, which would eliminate state (and federal) regulation of insurance rates, are one way to achieve rating reforms.
Prof. Hal Scott, Harvard University
- Prof. Scott tackled a wide range of issues surrounding the organizational structure of a possible federal role in insurance regulation.
- He compared and contrasted various models, including the current state-based insurance system, the bank model, the OFC proposal from last Congress, and others.