Earlier this week, hearings were held before the senate on the proposal to create an optional Federal Insurance Charter system. Insurance Journal has several articles on the subject, including an article on the hearing itself, an article on how NAMIC (the trade association which includes State Farm) would prefer harmonization of state regs rather than federalizing insurance, an opinion that is largely shared by the Big I (an agents’ group). Meanwhile, AI A (another trade association, which includes the Travelers, the Hartford, and Fireman’s Fund among its members) is pro-federal charter, and surplus lines brokers are unsurprisingly interested in surplus lines regulatory reform.
For those of you wondering what the Federal Insurance Charter proposal is, you might check out this press release on Senator Sununu’s website, which contains a summary of the major provisions. Oversimplifying the proposal, it essentially would create a scheme where insurers could choose to be regulated by a single, federal regulatory agency rather than by the state insurance departments of the individual states they do business in.
Given the differences in regulation that can be found just by crossing a state line, and how, um, “entertaining” it can be to get regulatory approval for a challenging product or rate change through multiple states, particularly certain “difficult” ones, it’s easy to see the attraction for such an idea.
Critics of the idea point to the potential for a federal regulator being insufficiently responsive to local insurance concerns (c.f., post-Katrina emergency regs, the territorial rating issues in California and Massachusetts, and the property insurance availability crunch in Florida), that a federal regulatory agency could evolve into something resembling the most regulatorily cumbersome state DOI’s, and that state and regional agents/carriers would face increased/challenging competition from national entities.
As to my own thoughts - well, I should point out that I am a “pricing guy”. A lot of my time and skills are focused on figuring out how to structure the prices of insurance products to achieve appropriate returns.and the activities associated with that task (e.g., rate filings). If the federal insurance regulator created an environment like Wyoming, Illinois, or the U.K. (places where pricing is un- or lightly-regulated), I’d be very excited about that prospect. Yes, it’d mean less work in the realm of rate-filings, but I’d love to be in the vanguard of taking advantage of new rating freedom (and the resultant changes in the competitive market). The idea of insurers being able to get away with the sorts of stuff the Comptroller of the Treasury permits banks to do. it’s very exciting (as an insider, not as a consumer) indeed.
On the other hand, I’d also be leery of the possibility that a federal insurance regulator being heavy-handed. The idea that the whole country could be considered governed by like [insert your favorite tough regulatory state here], as well as the potential that the style of regulation could (and probably would) shift as political winds change in Washington.those are troubling thoughts from my industry-centric point of view.
If Federal Insurance Charters become reality, I can easily imagine that insurers will seek the best of both federal- and state-regulated worlds. Today, some carriers expend a significant amount of energy in optimizing their legal structure. (Insurers generally operate through multiple legal entities, organized in potentially multiple states, for various reasons.) I could easily imagine a large insurer seeking to retain some state-regulated companies, as well as moving at least one of their entities to a federal charter. The insurer could then operate under the federal charter in states/markets where it is advantageous to do so, and retain the state-regulated entities for use when state regulation is friendlier.
Fun times ahead, if this comes to pass, I think.