Reform necessary for America to be competitive in the insurance market

Today, the financial services sector is facing many challenges. Confidence, transparency, capital availability and liquidity are chief among marketplace concerns. Congress, the financial institutions and their regulators are struggling to maintain confidence in the economy and in their ability to mitigate the harm of the subprime mortgage meltdown.  As a result, there have been increasing calls to reexamine the regulatory structure governing financial services.

I cannot stress enough the importance of good supervision and appropriate risk management by the regulators, as well as the significance of sound underwriting standards and transparency by financial institutions those agencies regulate.

There remains, however, one sector of the financial services industry that is not equipped to deal with the ever-changing marketplace challenges. Insurance is still regulated at the state level, while all other financial services have the option to be regulated federally, with an increasing focus on harmonization of regulations at the international level.

In 2006, Sen. John Sununu (R-N.H.) and I began a bipartisan discussion about the need to modernize the insurance regulatory structure. We introduced the National Insurance Act to create an optional federal charter structure. Since then, Reps. Ed Royce (R-Calif.) and Melissa Bean (D-Ill.) have joined our efforts. Additional consumers, agents, companies, federal agencies, and international entities have reached a similar conclusion: the United States needs a federal voice and regulator for insurance.

For years, I have been discussing the benefits of an optional federal charter with my colleagues, as well as consumers, industry and agents — benefits that include choice, stability, consumer protection, efficiency and expertise

There are three particular areas that highlight some of the problems with our current system and benefits of an optional federal charter.

Military families face major inconveniences with the current state-by-state regulation of insurance. It is estimated that a military member changes his or her state of residence once every 18 months (40 percent of military members move once a year). Each time our nation’s servicemen and -women move, they are required to change their auto, renters and other insurance products. While banking products require nothing more than an address change, each insurance product must be re-underwritten, re-priced and re-issued. This is particularly burdensome for active duty service members, who have better things to do than devote themselves to changing their insurance products each time they move. One can only imagine the difficulty when they are deployed.

Second, as baby boomers reach retirement, life insurance, annuity and long-term care products are increasingly important retirement security tools. For example, one of the biggest challenges people face in retirement is outliving their assets, and the annuity can offer consumers an income stream for the rest of their lives. Unnecessary state regulatory delays can prevent consumers in many states from buying highly valued retirement security products. In addition, regulations — such as those governing disclosure — vary state by state, offering different levels of protections to consumers.

The lack of uniformity also means that a product that is available in one state may not be available right across the state border. It is unacceptable to me that consumers who have similar needs are unable to purchase similar products, simply because of where they happen to live.

Finally, like banking and securities products, insurance is increasingly a global financial service. We are all frustrated about American businesses, including insurers, moving operations offshore or developing overseas subsidiaries to enjoy a more advantageous regulatory environment.

Our regulatory structure governing insurance companies is very different from that of other countries. While countries throughout Europe, Asia and the Caribbean have a federal insurance regulator, the United States operates with 56 distinct insurance regulatory jurisdictions.

Europe is moving forward with Solvency II, legislation in the European Parliament that will modernize insurance supervision in the European Economic Area (EEA). Solvency II may require well-diversified EEA insurers to hold less capital than current U.S. insurance regulation requires of U.S. insurers. If that happens, U.S.-based insurers’ products will be more expensive in other markets. If the U.S. fails to move in a similar direction, our market will be left behind.

All of these factors put U.S. insurance companies and American jobs at a distinct disadvantage. If the U.S. doesn’t update its insurance regulatory system, we are going to continue falling behind. As of September 2007, the United States suffered a $24 trillion trade deficit in insurance services; in the broader financial services sector, however, we enjoyed a $28 trillion surplus.

Remaining competitive internationally is important to our nation’s economic and national security. In order for the United States’ insurance regulatory system to remain viable and serve the needs of the American public effectively, our system of regulation must become more responsive to the realities of our modern global economy.

Johnson is a member of the Senate Appropriations Committee and the Banking Committee.