On March 17, 2009, the Senate Banking Committee received testimony on “Perspectives on Modernizing Insurance Regulation.” The Committee heard from a broad range of witnesses, including life insurance and property/casualty trade organizations, state insurance regulators, and consumer rights advocates. While much of the discussion focused on advocacy for and against the establishment of an optional federal insurance charter (“OFC”), the Committee also began to explore the more complex task of designing a regulatory structure that considers the OFC in connection with the creation of a systemic risk regulator, and holding company supervision and oversight generally.

Optional Federal Charter

The testimony on the desirability of the OFC followed a familiar trajectory. In general, those supporting the OFC focused on its ability, among other things, to: (1) streamline the ability to deliver products to consumers; (2) provide for a single point of contact for international regulators when dealing with multi-national insurance issues; and (3) provide for a federal voice, and corresponding taxpayer accountability, on insurance issues.1 Those arguing against the creation of the OFC discussed, among other things: (1) a fear of regulatory arbitrage; (2) the importance of a “local” regulator to handle customer complaints and other common enforcement-related issues; and (3) their perception regarding the strong history of state insurance regulation, particularly with respect to solvency.2 In particular, Michael McRaith, the Director of Insurance in Illinois appearing on behalf of the NAIC, indicated that the debate over an OFC was not “worthy” of the Committee’s time.

Sen. Larry Corker (R-Tenn.) had an interesting view of the issues related to the OFC; he referred to it as being akin to a family squabble and viewed it as “not a big issue for the country” given the broader, more sweeping issues facing the financial services industry. Notwithstanding those comments, most Committee members focused considerable attention on the viability of the OFC, and also on how it might interrelate with a systemic risk regulator or greater functional regulation of holding companies.

The Interplay of Holding Company Regulation/Systemic Risk and Federal Insurance Regulation

As the debate drills down more precisely on the concept of the OFC, there are continuing questions about the relationship between a federal functional insurance regulator and a systemic risk regulator, and how those regulators and supervisory structures might impact the regulation of holding companies. In particular, Frank Keating, President and CEO of the ACLI, was questioned on the role of systemic risk regulator, and how it would interact with functional regulators for insurance. Mr. Keating envisioned that a systemic risk regulator would focus on industry-wide issues and on holding company oversight, but would not be involved with functional regulation of operating companies. He noted, however, that the absence of a federal functional regulator for insurance gives rise to difficult structural questions regarding how systemic regulation could be effectively implemented. Without a federal insurance regulator and without direct jurisdiction over insurance companies, there would be “no way for Congress to compel insurers to subscribe to the same policies and practices,”3 given the “constitutional limitations on the ability of the federal government” to mandate actions by state insurance regulators under the current scheme.  

Mr. Keating referred to the privacy provisions of the Gramm-Leach-Bliley Act of 1999 (the “Act”) as an example of what could develop if the systemic risk regulator has no federal insurance regulatory counterpart. Under the Act, state insurance regulators were directed to develop consumer privacy regulations on a timely basis, or risk losing their ability to apply more restrictive standards to their own consumer protection provisions generally available to such regulators under the Act. As Mr. Keating described it, the legislation relied on the “hope” that state insurance regulators would enact such privacy regulations. Here, in Mr. Keating’s view, “hope” should not be the model for reform of U.S. financial regulation since the stakes are much too high.  

The Committee also briefly explored the area of holding company regulation and how it should be structured in light of a systemic risk regulator, and possibly a functional federal insurance regulator. Sen. Tim Johnson (D- SD) asked for information about how holding companies with insurance company subsidiaries should be regulated.4 The question did not yield particularly substantive responses, with most witnesses indicating that there should be “strong” regulation of holding companies. In addition, there was some support for the concept that, if the systemic risk regulator is effective, the need for holding company regulation should be obviated.5

The complex interplay of systemic risk regulators, holding company regulators, functional regulators and possibly even self-regulatory organizations will continue to shape the course of the debate on regulatory reform.

Office of Insurance Oversight

Sen. Christopher Dodd (D-Ct.), the Chairman of the Committee, asked the witnesses whether they would support the creation of an Office of Insurance Oversight within the Treasury Department to serve as a repository of information about, and expertise on, the insurance markets at the federal level. There was unanimity in support of the creation of such an office.6 It appears that this could be emerging as a universally accepted preliminary step in federal regulation and review of U.S. insurance markets.

Future Hearings

Both the House Financial Services Committee and the Senate Banking Committee have a crowded hearing schedule on regulatory reform-related initiatives over the rest of the month. We note, in particular, that the Secretary of the Treasury, Timothy Geithner, is scheduled to testify at the House Financial Services Committee hearing on March 26, 2009, titled “Addressing the Need for Comprehensive Regulatory Reform.” It will be interesting to see to what extent that testimony unveils some of the plans that the administration might be proposing at the April 2, 2009, Group of Twenty meetings in London.