Yesterday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Regulatory Modernization: Perspectives on Insurance.” Testifying before the Committee were:

  • Travis B. Plunkett, Legislative Director, Consumer Federation of America
  • Hal Scott, Normura Professor of International Financial Systems, Harvard Law School
  • Martin Grace, James S. Kemper Professor of Risk Management, Department of Risk Management and Insurance, Georgia State University
  • Baird Webel, Specialist in Financial Economics, Congressional Research Service

Committee Chairman Christopher Dodd (D-CT) began the hearing by noting that in recent years, “insurance companies have become more global and more complex.” “Even though the insurance industry did not create the economic crisis, it has been hit hard,” said Dodd. “As a result many are calling on us to modernize regulations.”

Ranking Member Richard Shelby (R-AL) criticized the Obama administration’s plan for an Office of National Insurance,” stating that “it is not comprehensive and leaves unanswered the difficult question of whether and how insurance regulation should be modernized.” Shelby urged Committee members to seek “a comprehensive solution to financial regulation that includes insurance.”

Testifying on behalf of the Consumer Federation of America, Mr. Plunkett called for a federal role in ensuring solvency and prudential risk management among all insurers. Plunkett favored the Obama administration’s proposal for an Office of National Insurance, as well as the creation of a Consumer Financial Protection Agency, which would have jurisdiction over credit-related insurance products. He endorsed the Insurance Industry Competition Act of 2009, stating that “collusion in the pricing of property/casualty insurance should not be allowed in the 21st century.” Plunkett cautioned lawmakers about creating regulation without a knowledge base, arguing that “the federal government needs to know how insurance works, what the systemic risks are, how consumers are treated,” and the national macro trends in the area. He supported using an Office of National Insurance as a means of data-gathering. Though he favored an expanded regulatory role for the federal government, Plunkett supported a role for states as well, conceding that “a federal complaint handling system would not be as consumer friendly as the present state system.” Plunkett did not indicate his recommendation on how the federal/state roles would be shared.

Prof. Scott supported the establishment of an optional federal charter, which would then preempt any state level regulation. He noted that “the net result of congressional abstention has been that more than 50 regulators currently regulate insurance” in the United States. Scott argued that the current system is “inefficient, stifles uniformity, innovation and speed to market, and puts the insurance industry at a competitive disadvantage with other firms offering the same products.” He conceded that “there are costs arising from maintaining regulation at two levels of government,” but suggested that these costs “should be more than offset by the efficiencies of the emerging federal system.” He recommended the establishment of a federal guaranty fund, and tying federal regulation to a federal guaranty. Scott also supported a mandatory federal charter for large, systemically important institutions.

Prof. Grace criticized an optional federal charter, arguing that it “is based on a view of the world that has changed significantly in the last two years.” “Today’s problem is not based on regulation of solvency, market conduct, or insurance pricing,” said Grace. “It is, instead, the problem of systemic risk which, for the most part, has not been an issue in the insurance industry.” Grace did, however, support federal regulation as a means of “removing the costs of conflicting state laws” and “reducing the effect of systemic risk.” He also favored the creation of an Office of Insurance Information as a means of “more systematic review of the proper role” of state and federal regulatory powers.

Mr. Webel outlined seven options before Congress for insurance regulatory reform:

  1. Inaction;
  2. Creation of a federal Office of Insurance Information;
  3. Harmonization of state laws via federal preemption;
  4. Creation of a federal systemic risk regulator;
  5. Creation of a federal solvency regulator;
  6. Establishment of a federal insurance charter; and
  7. A complete overhaul of the financial services regulatory system.

Webel also presented the committee with a list of bills regarding insurance regulation currently pending before Congress, including:

  • H.R. 1880, which would create a federal charter for the insurance industry, establish an independent entity under the Department of Treasury as a regulatory apparatus, establish a separate entity for systemic risk regulation, and preempt most state insurance laws for nationally regulated entities;
  • H.R. 2554, which would establish a private and non-profit National Association of Registered Agents and Brokers, allowing registered companies to operate nationwide once licensed in a single state;
  • H.R. 2571/S. 1363, which would allow the home state of an insured to regulate and collect taxes on surplus lines transactions, or non-admitted insurance; and
  • H.R. 2609, which would create an Office of Insurance Information within the Department of the Treasury tasked with collecting and analyzing domestic and international insurance information.