Following up on a report in our March 2007 Insurance and Reinsurance Update,1 on May 24, optional federal charter (OFC) legislation was reintroduced into the Senate as the National Insurance Act of 2007 (S. 40) (NIA), co-sponsored by Sens. John Sununu (R-NH) and Tim Johnson (D-SD). On July 24, a bipartisan companion House bill was proposed by Reps. Melissa Bean (D-IL) and Ed Royce (R-CA). The Senate bill closely resembles the original legislation filed last year. The major changes in the new bill are provisions concerning surplus lines/nonadmitted insurers and, as predicted in our March report, the insolvency/guaranty funds.

In the new bill, surplus lines is added as a type of business that a person with a federal producer’s license would be authorized to sell under the federal charter program. Moreover, the new bill prohibits/preempts the levying of state premium taxes on surplus lines policies, except in the state where the insured maintains its principal place of business.

Regarding insolvency, the new bill requires that the rules adopted pertaining to federal receiverships be “substantially similar” (rather than “based upon”) provisions of Uniform Receivership Law. As anticipated in our March report, there are also more detailed provisions concerning coverage afforded by the federal guaranty fund, which would preempt the state guaranty funds that do not become “qualified” to guaranty federally-chartered insurers. Moreover, this preemption would extend to state-chartered insurers doing business in states with non-qualified funds. To qualify, state funds would need to comply with the coverage standards afforded by the national fund. These coverage standards are now consistent with current National Association of Insurance Commissioners model legislation. Another new wrinkle to the 2007 version of the NIA is that state property/casualty and life guaranty associations may qualify separately.

The industry response to OFC legislation remains divided. Opponents insist that OFC legislation will simply create an added layer of bureaucracy and regulation for insurers and that more targeted reforms, such as the Nonadmitted and Reinsurance Reform Act of 2007 (which passed by voice vote in the House in June), more appropriately work to improve the existing regulatory system. Proponents of OFC legislation herald the concepts of a single point of filing for new products and a single regulatory body as a vast improvement to the existing 50-state system, and contend that streamlined filing and regulatory processes will allow products to come to market faster and foster competition, benefiting the consumer.