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Brevik Blasts Optional Federal Charter Bill During NCOIL Panel

BOSTON - There is no evidence that the state-based system of insurance regulation is broken or in need of a Congressional fix. To...
August 1, 2006

Declares Proposal is Special Interest Legislation, Says State System Not Broken

BOSTON - There is no evidence that the state-based system of insurance regulation is broken or in need of a Congressional fix. To the contrary the current system, while needing additional modernization, is functioning well.

That was one of the messages delivered by PIA during a panel discussion, Optional Federal Charter: Serving Consumers or Gratifying Industry?, held July 22 during the summer meeting of the National Conference of Insurance Legislators (NCOIL) in Boston.

PIA Executive Vice President & CEO Len Brevik represented PIA on the panel.

The National Insurance Act of 2006 "would undermine key insurance consumer protections, constrict the availability of insurance, create market instability and prompt a flood of litigation," Brevik said, noting that PIA has made opposition to S. 2509 by Sens. John Sununu (R-N.H.) and Tim Johnson (D-S.D.) one of its top legislative priorities. S. 2509 provides for the creation of an optional federal charter for insurers and the appointment of a federal insurance regulator.

"This legislation is an example of a solution that won't work being proposed for a problem that doesn't exist," said Brevik. "This proposal to establish a duplicative federal insurance regulatory regime is being advanced by a handful of big banks, large securities firms and a few insurance carriers solely as a means for them to expand their market share at the expense of the other participants in our industry. The National Insurance Act of 2006 is special interest legislation of the worst kind."

"It is our firm belief that a federal insurance charter will allow large financial services entities with insurance operations to move in and out of markets - anything from several territories to entire regions of the country - solely at their whim, thereby disrupting markets and diminishing, not enhancing, options for consumers," Brevik noted in written remarks for the forum.

"The Sununu-Johnson bill is a prescription for instability and chaos in the insurance marketplace," he added  "Our nation's public policy response to disasters such as Hurricane Katrina must include efforts to encourage market stability and the expansion of access to affordable coverages. A federalized system of regulation would have the opposite effect, supporting instability in markets and constrictions in availability."

State System Is Not Broken

Brevik dismissed arguments put forth by some of the advocates of optional federal charters that the current system of state-based insurance regulation is broken.

"There is no evidence that the system is broken," he said. "Any assertion that state-based regulation is not working is just not true. It needs further improvement and modernization. As I speak, modernization of the state system is occurring, and with increasing speed. But the premise that the current system is not working is wrong. This distortion is purposely being repeated, again and again, in order to induce people, especially key Members of Congress, into thinking it is unquestionably true. It is not true."

Brevik said the National Association of Insurance Commissioners (NAIC), aided by the state insurance legislators of NCOIL, is doing an admirable job of bringing about modernization of the state system of insurance regulation, adding that the reform process is producing tangible results and gaining momentum. He cited the recent implementation of the NAIC Interstate Insurance Product Regulation Compact; the NAIC Financial Regulation and Accreditation Standards Program; and the NAIC Producer Licensing Model Act (PLMA) as examples.

Brevik noted that less than 24 hours after OFC was introduced, PIA had 200 agents on Capitol Hill, lobbying against it. State Rep. Don Flanders (R-N.H.), a Board member of both PIA and NCOIL, set up an eyeball-to-eyeball meeting with Sen. Sununu the day after he introduced S. 2509, to impress upon him PIA's and NCOIL's strong opposition.

"This bill would nullify critical state-initiated consumer safeguards, deny important consumer access and recourse in problem times, undermine ongoing state modernization efforts and ultimately impose the costs of a needless federal bureaucracy upon the public," Brevik said. "It would also allow insurers to opt out of important policyholder protections."

'A Flood of Litigation'

Brevik pointed out that legislation can have unintended consequences. "The result [of OFC] will be years of market and regulatory confusion that will throw open the floodgates of litigation, benefiting the legal community rather than insurance providers and consumers - a nightmare litigation scenario that federal courts are in no way prepared to handle," he said.

Proponents of optional federal charters have pointed to their use in banking as evidence that such a system works well. Brevik countered that in fact, the opposite is the case.

"Those who point to the banking industry as an example of optional federal charters working well are suffering from a major case of convenient amnesia," Brevik said. "They're forgetting the savings and loan fiasco."

"Let's look at the real record of optional federal charters," he continued. "In the 1980's, over 1,000 savings and loans failed, and American taxpayers were stuck with a $150 billion bill. Why? Deregulation had allowed banks to opt for either a state or federal charter. State-chartered institutions, not wishing to be outdone, scrambled to be federally-chartered and a competition ensued between the federal government and the states over investment capital.  This led to a prospective dismantling of regulatory standards as a regulatory 'race to the bottom' developed that left consumers without the protections they needed."

Brevik said the financial chaos that ensued as a result of optional federal charters in banking led directly to the most serious financial crisis in our nation's history. "Why would anyone want us to repeat this in the insurance industry?" he asked.

Panelists were asked whether a federal regulatory regime could match the states' responsiveness and market expertise.

"No," Brevik said. "State insurance departments handle 3.6 million inquiries from consumers each year. Attempting to replicate that on a federal level is impossible."

"The primary purpose of insurance regulation is to protect consumers and assure that companies remain solvent," he added. "State regulators must have oversight and authority over all insurers in the marketplace and have them subject to the same rules."

He pointed out that consumers use insurance to meet state financial liability laws - tort, contract, business obligations, property, and health. All of this happens in the state of the insurance consumer, and consumers need a state insurance marketplace that meets their state needs.  "It does not help an insurance consumer in Rhode Island if federal insurers are offering coverage they need everywhere but in Rhode Island."

A good compromise between federal and state oversight are interstate compacts. PIA supports multi-state compacts as the preferred platform to accomplish state modernization. Complementary, coordinated oversight is better than a disconnected, duplicative federal oversight.

Costs of an OFC

Another question to the panel focused on the cost of optional federal charters.

"What is the cost of optional federal charters? How deep is the ocean?" Brevik said. "It will cost plenty and federal tax dollars will pay. Advocates of OFC say costs will be borne by carriers opting for federal charters. They assert that premium tax revenue paid to the states will not be touched. I have a question: how long will this continue?"

He noted that the Insurance Information Institute reports that in 2004, companies paid $13.8 billion in premium taxes to the states.

During a question-and-answer period, J. Kevin McKechnie, Chairman of the Optional Federal Charter Coalition & Associate Director of the American Bankers Insurance Association said that the things people are pointing out as being potentially wrong with the federal system are already wrong with the state system and that "smart people in Washington can work to fix the system."

This brought a sharp rejoinder from Brevik.

"That's just great. We're supposed to turn everything over to 'the smart people in Washington' who can fix things for us?  Would that be the same smart people who brought us the Postal Service, the IRS, the OCC, ERISA and FEMA?"

"Make no mistake about it: those who want a federal regulatory regime set up for their exclusive benefit are not attempting to junk state regulation just to save a few pennies by not having to make extra photocopies of documents for state regulators," Brevik continued. "Their goal is to free themselves from meaningful supervision, allow them to abandon entire sections of the country at their will for profit, eliminate effective consumer protections and essentially let them decide what insurance regulation, if any, they will permit."

The PIA CEO said that the only practical way to achieve necessary changes quickly in a manner that preserves state consumer protections expected by the public is for States to specifically advise Congress what assistance they may need in reaching their modernization goals, not for Congress to "experiment" by creating its own federal charter "insurance lab of privilege" for some insurance persons, and in doing so throw the remaining current system and its participants into chaos.

"The insurance sector of the American economy is the envy of the world," Brevik said. "In 2006, after weathering the claims resulting from two years of unprecedented natural catastrophes, our nation's insurance sector remains one of the strongest and most profitable pillars of the American economy - as it has been for more than a century.  To tamper with the structural underpinnings of that success to benefit the competitive ambitions of a few firms would be irresponsible public policy of the highest order."

Other panel participants included Superintendent Alessandro Iuppa, Maine Bureau of Insurance & President of the National Association of Insurance Commissioners (NAIC); Neil Alldredge, Senior Director for State Advocacy, National Association of Mutual Insurance Companies (NAMIC); Wes Bissett, Senior Vice President of Government Affairs and State Relations, Independent Insurance Agents & Brokers of America.

Also on the panel: Gary Hughes, Executive Vice President & General Counsel, American Council of Life Insurers (ACLI);  J. Robert Hunter, Director of Insurance, Consumer Federation of America; J. Kevin McKechnie, Chairman, Optional Federal Charter Coalition & Associate Director, American Bankers Insurance Association; and Gregory D. Wren, Wren and Associates, representing a coalition opposed to a federal regulator.

PIA Connection

This article originally appeared in the July/August 2006 PIA Connection.