Federal charter offers insurance option

As a member of Congress from California, I have witnessed the insured and insurers in my state suffer from years of Sacramento’s overly intrusive regulatory regime. The problem is made worse only by the fact that California’s insurance commissioner is an elected official. Just think of how different our banking and securities industries would look if the chairmen of the Federal Reserve and the SEC had to stand for election every four years.

The lack of a defined federal insurance presence has allowed large states like California, New York, and Florida to operate as de facto federal regulators. This very concern led our Founding Fathers to abandon the Articles of Confederation, and at the same time create the Commerce Clause in the Constitution. Fortunately for the banking industry, the Supreme Court has upheld the Commerce Clause, allowing for a healthy and vibrant dual banking system. Unfortunately for insurance consumers, the state-based regulatory climate has resulted in higher costs and fewer choices. Insurers’ balkanized regulatory structure has led to excessive paperwork, bureaucratic delays, restricted product availability, and limited innovation in the industry.

In the coming weeks, I plan to reintroduce the National Insurance Act (NIA), which would create an optional federal charter (OFC) for life and property/casualty insurance providers. Designed to mirror the regulatory structure found in the dual banking system, the NIA would provide the industry with a more effective regulatory alternative. Insurance providers could choose to be regulated at the state level or by the new federal regulator. Those insurers opting for federal regulation would be better able to serve insurance consumers across the United States — eliminating the need to engage in the tangled web of bureaucracy and duplicative regulation in each and every state.

In addition to strengthening the safety and soundness of the insurance system, the Office of National Insurance would become an effective voice for insurers when major policy decisions are formulated. My experience on both the Financial Services and Foreign Affairs committees has taught me that the insurance community is underrepresented on issues of national and global scale. Whether in responding to a national crisis, formulating tax policy or negotiating a major free trade agreement, the Federal Reserve, the Office of the Comptroller of the Currency, and the SEC all have a seat at the table when policy is developed. With the establishment of the Office of National Insurance, the nation’s insurers and the insured will be able to play a meaningful part in the discussion as well.

Some have criticized the idea of an OFC under the guise of advocating for consumer protection. I submit, respectfully, that those critics could not be more off-base. In reality, the NIA would strengthen consumer protection. First, the legislation provides the regulator with as much authority and resources as needed to pursue the highest standards of consumer protection. Second, the sheer magnitude of information available to the regulator would enable better oversight of industry practices. Third, enhanced competition would mean more choices and price competition, which is the ultimate win for consumers. 

The momentum for the creation of an OFC has never been stronger. In the past year, both the National Chamber Foundation Report and the Bloomberg-Schumer Report, the two leading studies on U.S. capital markets and global competition, have called for the establishment of an OFC. Select members of the Bush administration have also offered very positive sentiments about the need to reform insurance regulation. In July of 2006, former Treasury Undersecretary Randal Quarles testified before the Senate Banking Committee on insurance reform. 

Mr. Quarles outlined many of the Treasury’s concerns with the current state-based regulatory system, including: the inefficiencies associated with form and price controls, the barriers to international investment in the domestic insurance market and the potential systemic “blind spots” in the area of financial regulation. Secretary Paulson also articulated his own positive view about an OFC when he testified before the Senate Banking Committee in January. Based on my conversations with many regulatory experts, I expect even more support for this policy in the coming year.

I believe the National Insurance Act addresses a problem that has long been overlooked. If the United States is to maintain its position as the global leader in the financial services industry, now is the time to answer the call for much-needed regulatory reform for the insurance industry.

Royce serves on the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises and the Subcommittee on Financial Institutions and Consumer Credit.

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