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OFC: The Bad Idea That Just Refuses to Go Away

The proposal for an Optional Federal Charter keeps coming back. The advocates of creating an optional federal charter for insurers and producers - ...
February 2, 2010

The proposal for an Optional Federal Charter keeps coming back. The advocates of creating an optional federal charter for insurers and producers - and with it, a new federal insurance bureaucracy - are at it again.

The darlings of the "big boys" of financial services, Reps. Melissa Bean (D-Ill.) and Ed Royce (R-Calif.), have started 2010 by circulating a letter to their House colleagues that attempts to cite AIG as a reason to create an OFC. They contend that the problems at AIG were caused by deficiencies in state regulation. This, of course, is nonsense. The fact of the matter is that the insurance units of AIG - supervised by the states - remained strong throughout the financial meltdown. The problems were caused by that company's high-flying, credit default swap-trading Financial Products unit - regulated poorly, or not at all, by the federal government.

The letter from Royce and Bean brought a sharp rebuttal from the National Association of Insurance Commissioners (NAIC).

"The AIG insurance companies continue to be solvent, pay claims, and represent the best chance for generating the value necessary to repay American taxpayers," said the letter signed by NAIC President Jane Cline and CEO Therese M. Vaughan. "There are necessary responses to the lessons learned from AIG about better regulatory cooperation, information sharing, and group supervision. Deregulating the insurance industry through H.R. 1880 is not one of them."

What It Means to Agents:  Here's what's really happening: big banks, securities firms and a handful of large carriers want to dismantle the state-based system of insurance regulation, and replace it with a federal system with little or no regulation. That way, they can grow their market share at the expense of their small and mid-size competitors. Also under this scenario, independent insurance agencies could be pushed out of the business, in favor of direct writers. This is why PIA adamantly opposes optional federal charters.

NAIC Letter Responding to Royce-Bean on OFC (January 29, 2010)