Citing the nation's financial meltdown and the U.S. government's heavy involvement with insurance giant American International Group (AIG), U.S. Reps. Melissa Bean (D-Ill.) and Ed Royce (R-Ca.) introduced a bill on April 2, 2009, which, if passed, would bring widespread, fundamental change to the U.S. insurance regulatory scheme. The National Insurance Consumer Protection Act (NICPA) creates optional federal regulation and supervision for insurers, insurance agencies, and insurance producers that mirrors that of the current dual banking system. With a new slate of proposed financial regulatory reforms being debated on Capitol Hill, Mr. Royce called leaving insurance regulation out of the reform picture and solely to the various state insurance commissioners, while the federal government provides taxpayer-funded assistance to insurers, "simply irresponsible." Ms. Bean promoted the proposed reform as providing "consumer protection and choice while eliminating barriers to industry competitiveness in the global market." The two lawmakers see their bill as going a long way toward filling gaps they perceive to have been created by the "fragmented state-based system overseeing insurance" today.
Regulatory Oversight — State v. National
The bill, which applies only to life, property and casualty, and reinsurance companies and insurance producers, creates the Office of National Insurance (ONI) within the U.S. Department of the Treasury (Treasury) to oversee the national regulatory scheme and monitor the health of the industry as a whole. Insurance companies, agencies, and producers can opt to apply for a federal charter from the ONI's National Insurance Commissioner (NIC) or remain under the current state regulatory system. Thus, states would maintain responsibility for regulating state-licensed insurers, agencies, and producers. Key provisions under the NICPA include:
- ONI: The ONI would be created as a subset of the Treasury, similar to the Office of the Comptroller of the Currency. The NIC would be appointed by the president for a five-year term, subject to the advice and consent of the Senate.
- National life insurers and national property and casualty insurers: NICPA authorizes the NIC to issue charters for national insurers for life insurance, property and casualty, and reinsurance. A holding company would be permitted to own both a national life insurer and a national property and casualty insurer.
- National agencies and national insurance producers: NICPA authorizes the chartering and licensing of national insurance agencies and the licensing of individual national insurance producers (agents and brokers). A national agency would be authorized to sell insurance for any nationally chartered or state-licensed insurer. A nationally licensed insurance producer could sell insurance, including surplus lines insurance, in any state on behalf of any national insurer or state insurer. NICPA also provides for a producer who chooses to remain state-licensed to sell insurance on behalf of a national insurer, provided that sales are only within states in which that producer is licensed.
- Conversions between state and national status: State-licensed insurers would be free to convert to a national charter. Likewise, national insurers would be free to convert to a state charter, subject to approval by the NIC.
- NIC's regulatory and supervisory powers: The NICPA provides the NIC with a comprehensive set of supervisory and regulatory powers. National insurers would be subject to examinations every two years, and national insurance agencies and national insurance producers would be subject to examination in response to a complaint or evidence of violation of the law or regulations. National insurers, their holding companies, and other subsidiaries of the holding companies would be subject to national risk-based capital standards, investment standards, and asset and liability valuation requirements. The bill tasks the NIC with developing these financial, policy, and market conduct regulations and provides that in doing so, the NIC should "take into consideration" model laws, regulations, standards, and instructions that have been developed by the National Association of Insurance Commissioners (NAIC). National insurers also will be subject to an independent audit committee requirement, limitations on dividends, and limitations on transactions with affiliates.
- Enforcement powers: NICPA gives the NIC enforcement powers patterned after those available to the federal banking agencies, permitting the NIC to: (1) revoke or suspend a charter or license; (2) issue a cease-and-desist order, including an order that mandates affirmative actions such as the sale of assets or the hiring of new management; (3) remove or suspend individual officers, directors, controlling shareholders, agents, and consultants; and (4) impose civil fines of up to $1 million per day for violations of law or regulations or for improper conduct.
- Applicable state laws: Though largely subject to federal laws and regulations, the activities and operations of nationally chartered insurers would be subject to certain categories of state law. These categories include: (1) tax laws; (2) unclaimed property and escheat laws; (3) laws related to participation in assigned-risk plans or other mandatory residual-market mechanisms that are designed to make insurance available to those unable to obtain insurance in the voluntary market; (4) laws that provide for compulsory coverage of workers' compensation or motor vehicle insurance; and (5) laws related to participation in state guaranty funds.
- Receiverships for rehabilitation or liquidation: The NIC may place a national insurer into receivership for rehabilitation or liquidation for a number of reasons, including the insolvency of a national insurer. NICPA is silent, however, on whether a national insurer's rehabilitation or liquidation will proceed under federal bankruptcy laws or a federal insolvency scheme to be promulgated by the ONI after the bill's adoption.
The bill also seeks to counter one of the lead arguments against it by outlining a system for adequate and stiff consumer protection. NICPA establishes a Division of Consumer Affairs (DCA) within the ONI. The DCA is tasked with establishing a regional DCA office in each state with a direct phone number and creating a national toll-free number and Web site to accept consumer questions and complaints. The NIC will issue market-conduct regulations to prevent unfair methods of competition and unfair and deceptive acts and practices by all covered entities. The NICPA notes that these regulations should implement the NAIC model laws regarding consumer protection. The bill also empowers the NIC to investigate fraudulent insurance acts, which are defined as federal crimes punishable by up to 10 years in prison.
NICPA attempts to further protect consumers by establishing a National Insurance Guaranty Corporation (NIGC) that will act like state guaranty funds and assume obligations to policyholders up to certain established NAIC limits when a national insurer is placed into receivership. NIGC will be funded by assessments on national insurers, who also will be required to participate in state guaranty associations for each line of insurance sold in any state in which that national insurer is conducting business. State-chartered insurers would still only be required to pay into state guaranty funds. While there does not appear to be any interplay between the two funds, NICPA establishes the NIGC as an "as needed" fund. That is, the NIC cannot levy assessments on national insurers until faced with a situation where such funds are needed to pay claims to policyholders of a national insurer in receivership. If an event triggering the NIGC occurs, only national insurers "in the business of providing the same type of insurance as the national insurer that is placed into receivership" would be required to pay into the fund. NICPA further provides that the NIGC shall pay claims consistent with the limits set by the NAIC life, health, property, and liability insurance guaranty fund model acts.
Oversight and Stability of the Financial Market
Finally, the NICPA attempts to guard against future economic crises stemming from the failure of an insurer or a weakening in the insurance market by establishing several oversight provisions that monitor industry stability. Under NICPA, all insurance commissions (state and national) would be required to share information with a Systemic Risk Regulator (SRS). This SRS is to make corrective action recommendations to the NIC or to the requisite state insurance commissioner to take action to mitigate or avoid conduct by insurers or affiliates (to the extent they are subject to state oversight) that would have serious adverse effects on economic conditions and financial stability. If any commissioner fails to take action, the SRS (with approval from the Council for Financial Regulators (Council), discussed below) will be able to circumvent the insurance regulator in emergency circumstances. The SRS, in conjunction with the NIC, also will have the power to force an insurer to be federally chartered if they deem that insurer to be "systemically important."
The aforementioned Council will be created under NICPA based on an expanded version of the President's Working Group for Capital Markets. Chaired by the Secretary of the Treasury, the Council will include the NIC and the heads of the Federal Reserve System, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Office of Thrift Supervision, Federal Deposit Insurance Corporation, and the Comptroller of the Currency. The Council also will include a slate of three rotating state regulators who are appointed by the president. The Council will serve as a forum for financial regulators to collectively identify, monitor, and consider issues related to the health and competitiveness of the financial services industry.
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