On April 16, 2008, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing on proposals on insurance regulatory reform. A third in a series of hearings on insurance regulatory reform, the Insurance Subcommittee heard from witnesses on the following legislation and proposal:
- H.R. 5792 (Increasing Insurance Coverage Options for Consumers Act);
- H.R. 3200 (National Insurance Act of 2007);
- H.R. 5611 (To reform the National Association of Registered Agents and Brokers, and for other purposes); and
- U.S. Treasury Department’s Blueprint for Financial Regulatory Reform, released on March 31, 2008.
The hearing opened with statements from Chairman Paul Kanjorski (D-PA) and Reps. Deborah Pryce (R-OH), Ed Royce (R-CA), Dennis Moore (D-KS), Geoff Davis (R-KY), David Scott (D-GA), Donald Manzullo (R-IL), and Melissa Bean (D-IL).
The witnesses were the Honorable David Nason, Assistant Secretary for Financial Institutions, Department of Treasury; Eric Dinallo, Superintendent, Department of Insurance of New York; Lawrence Mirel, Self Insurance Institute of America; Alastair Shore, American Council of Life Insurance and the American Insurance Association; Thomas Minkler, Independent Insurance Agents and Brokers of America; Francis Arricale, Interstate Insurance Product Regulation Commission; and, Donna Pile, National Association of Professional Insurance Agents. Click here to view the statements.
Optional Federal Charter
Underlying the hearing was the theme of state regulation of the insurance industry versus dual state-federal regulation, i.e., Optional Federal Charter (OFC).
The supporters of an OFC stressed the need for a U.S. national presence in terms of competing in the global market, specifically that state regulation of the insurance industry results in duplicative and divergent voices, causing the U.S. to be less competitive in the global market. Also, the need for uniformity in terms of speed to market of insurance products was discussed, with concerns that the Interstate Insurance Compact may be insufficient due to lack of all 50 states’ participation.
Detractors of an OFC noted possible loss of state revenue, questioned the responsiveness of a non-local regulatory body to regional trends and needs, and noted that the current system works well, at least in Georgia and South Carolina.
Office of Insurance Information
In an opening statement, Chairman Kanjorski announced that, on April 17, 2008, he will introduce legislation to establish the Office of Insurance Information within the Treasury Department, which would collect and analyze data on insurance.
Pointing to a need for a single governing presence, Chairman Kanjorski indicated that the Interstate Insurance Compact does not have national impact given only 31 states are members. He also noted that the Interstate Insurance Compact has been hampered in terms of implementation due to the resistance of big states from joining.
The Chairman stated the possibility of the Office of Insurance Information’s power to make the Interstate Insurance Compact members be Self Regulating Organizations (SROs) and issue rules on a federal level applicable to all 50 states.
In addition, Chairman Kanjorski stated the Office could provide the U.S. a national presence on a global level. Chairman Kanjorski concluded that he would like to see his legislation enacted soon.
In line with the Bush Administration’s support for federal regulation of insurance, Assistant Treasury Secretary Nason stated that, “We look forward to working with him on legislation.”
H.R. 5792 Increasing Insurance Coverage Options for Consumers Act
Rep. Moore’s Opening Statement
Rep. Moore’s opening statement focused entirely on H.R. 5792, the Increasing Insurance Coverage Options for Consumers Act, which would allow risk retention groups (RRGs) and risk purchasing groups (RPGs) to include commercial property coverage. He noted that recent catastrophic events, such as Hurricane Katrina and the 9/11 attacks, resulted in a crisis in the property insurance marketplace in terms of availability and affordability.
Analogizing commercial property coverage to the liability market, Rep. Moore pointed to the success of the Liability Risk Retention Act of 1986 (LRRA) which allows RRGs to provide all kinds of liability insurance, resulting in increased availability and affordability of commercial liability insurance. To address the shortcomings of the LRRA identified by the Government Accounting Office (GAO), specifically “widely divergent state standards” due to partial preemption of state insurance laws, Rep. Moore emphasized that H.R. 5792 codifies the National Association of Insurance Commissioner’s proposed corporate governance standards for risk retention into law.
Rep. Moore noted that H.R. 5792 enjoys bipartisan support, stressing that “the time is now, before we experience another hard market for commercial property insurance,” to enact this legislation.
Support of Self Insurance Institute of America
Endorsing H.R. 5792, Lawrence Mirel, Self Insurance Institute of America, testified on the insurance crisis in commercial property insurance coverage due to current providers reducing coverage in light of recent devastation caused by Hurricane Katrina and other storms of 2005.
Pointing out that the bill does not call for a government solution, Mr. Mirel stated that, “the bill would simply provide consumers with another competitive option to manage their risk exposure in a difficult environment where capacity is limited.” In the same way that RRGs have been providing liability coverage for the last 20 years, H.R. 5792 would “empower commercial property owners in the private sector to come together to form risk retention groups that would provide property insurance coverage to their members,” according to Mr. Mirel. He noted that RRGs write more than $2.5 billion a year in liability coverage, and that enactment of H.R. 5792 would more than double this figure in a few years, “providing much needed capacity to areas prone to catastrophic risk.”
As for governance, Mr. Mirel strongly supported the concept of a single regulator, pointing to the difficulty in the current liability insurance industry due to state governance, while expressly taking no position as to whether the single regulator ought to be federal or not.
Questions and Answers – Rep. Pryce and Rep. Moore
Only Rep. Pryce and Rep. Moore directed questions to Mr. Mirel regarding H.R. 5792.
Specifically, Rep. Pryce inquired about the impact of RRGs on the availability and affordability of catastrophic risk coverage for commercial properties. Mr. Mirel responded that the bill would provide an option to owners of commercial property in dangerous places to band together to provide coverage themselves, which is an important benefit to both businesses and consumers.
Rep. Pryce asked about the competitiveness aspect of the bill. Mr. Mirel replied that H.R. 5792 would increase competition, and noted that the current providers would not be greatly affected as they are already reducing coverage.
Rep. Moore focused on the corporate governance aspect of the bill. Mr. Mirel stressed that this issue is important to the success of the bill, and that the corporate governance provision of H.R. 5792 provides a fix to the possible abuses of self-management.
Emphasizing the timeliness of the bill, Rep. Moore asked about who would benefit from the bill and why the bill should be enacted now. Mr. Mirel stated that, because current providers of catastrophic property insurance are pulling back coverage, the time to enact H.R. 5792 is now. He further answered that those currently experiencing difficulty in finding property insurance coverage would benefit, from the Gulf Coast to the Atlantic Coast, all the way up to Massachusetts.
Regulation of the Insurance Industry, and Other Topics
Reps. Gregory Meeks (D-NY), Bean, and Royce appeared to favor dual state-federal regulation, i.e., OFC. Pointing out successes in their respective states in insurance regulation, Reps. J. Gresham Barrett (R-SC) and Scott seemed to favor the current system.
The hearing included further testimony, and questions and answers, regarding OFC, licensing and registration of agents and brokers, speed to market of insurance products, national presence of the U.S. in terms of competing in a global context, and possible loss of state revenue in the event of dual regulation.