Sandy Praeger, President of the National Association of Insurance Commissioners (NAIC) and Kansas Insurance Commissioner, in a letter dated February 15, reiterated the strengths of state-based regulation and reasserted opposition to federal legislation that would establish an optional federal charter (OFC). The letter was sent to American Insurance Association (AIA) president, Gov. Marc Racicot.

In a letter to Praeger, Racicot had argued that states would continue to receive premium tax revenue with an OFC and pointed out the charter was optional. He noted, moreover, that even with an OFC, consumers could still decide whether to buy insurance from a state or federally regulated insurer, much the way that they do with banks. Racicot said states would retain authority over insurers that opted out of the charter, and because the agency’s regulator would be appointed within the Department of Treasury, there would not be a new layer of bureaucracy, he maintained. He argued that start-up costs for an Office of National Insurance would be paid through assessments on insurers.

Praeger said that it would take “quite an imagination to assume the Treasury Department could assume even a partial role in regulating insurance without creating a huge bureaucracy.” She claimed, too, that an OFC would allow insurance companies to opt out of comprehensive consumer protections afforded by state oversight.

“Current proposals would gut consumer protection, while outsourcing most critical regulatory functions to an industry-run self-regulatory organization,” she said. Allowing insurers to pick their regulator would create a “race to the bottom” for the industry, she added. “The push for an OFC is, in reality, nothing more than a call for little or no regulation,” she stated.

Regarding the AIA’s contention that the states would continue to receive premium taxes under an OFC, Praeger said she didn’t believe it. “We believe that the ink would barely be dry on the National Insurance Act before national insurers would be calling for an amendment to the provision allowing the states to collect premium taxes,” she said.

Praeger, in her letter, also pointed to previous failures of federal regulation. “I would ask you to consider the failures of federal regulation, which caused the current problems in the financial markets, as another warning for restructuring the current insurance regulatory framework.”

“Lax federal oversight caused the current disruption in the bond market. The Office of the Comptroller of the Currency allowed banks to offer unaffordable subprime loans to homeowners over the objection of state regulators, who sought to protect consumers from these unsafe products. The Federal Reserve allowed banks to hold risky derivative investments based on these subprime loans, which resulted in billions of dollars in write-downs. The Securities and Exchange Commission not only authorized these derivatives, it failed to supervise how credit agencies rated them.”

“Everyone on the federal level who contributed the kindling, logs and matches that caused this fire should not now take away authority from state regulators who have been keeping the flames in check,” Praeger said.

Phantom S. 40 Provision Would Have Siphoned Off State Premium Tax to Pay for OFC

PIA Fact Check: Praeger is correct.

Last May, as Sen. John Sununu (R-N.H.) prepared to introduce his OFC bill again, a “phantom provision” briefly appeared in a draft of the bill. The widely circulated draft of S. 40 contained a provision for funding a proposed federal insurance regulator by siphoning off taxes currently collected to fund the existing state regulatory system. The provision declared states would be prohibited from assessing not just premium taxes, but any state taxes on federally chartered insurers unless they credited the companies’ state tax liability with amounts equal to the sum of all fees paid to the federal regulator.

When asked by reporters where the new subsection language came from, a staffer for Sununu said it was “sent to us by some folks.” The staffer added that the provision was stripped out of the final bill that was introduced.

The mere existence of this legislative language and the fact that it appeared in a draft of S. 40 makes us suspicious. And just who are “some folks?” Could they be the same folks who are saying state premium taxes would not be affected by an “optional” federal charter?

It is disappointing but not surprising that this draft language that contradicted everything advocates had been saying – and are still saying – about not tapping state revenues had suddenly appeared in S. 40 last May. This should lead states to heighten their scrutiny of any statements made by this bill’s advocates.

NAIC President Praeger is correct in her statement predicting “the ink would barely be dry” before OFC advocates would call for an amendment. In fact, the amendment has already been written and the ink is already dry!  The link below contains this “phantom provision” for siphoning off the premium tax.

Deleted S. 40 Provision Absolving Federally-Chartered Companies from Paying State Taxes   See page page 220, 1251(f), “Tax Credit for Regulatory Fees.”

NAIC Questions Motives of OFC Supporters (NAIC Statement 2/15/08)

NAIC Responds to AIA Call for OFC (National Underwriter 2/15/08) 

February 21, 2008