National Insurance Consumer Protection Act
Issue Discussed: National Insurance
Submitted by Sylvia Kaminsky
Date Promulgated: April 2, 2009
Issue Addressed: Recent legislation has been introduced which provides for federal licensing and oversight of the insurance industry. Below is a brief summary of the key components of H.R. 1880.
On April 2, 2009, Representatives Melissa Bean (D-Ill) and Ed Royce (R-Cal) introduced legislation entitled the National Insurance Consumer Protection Act (H.R. 1880) (referred to herein as the “NICPA”) that would create an optional federal charter for any insurer, agent or producer that chooses to be regulated by one federal government entity rather than by the current state-based regulatory structure.
In announcing the legislation, the Representatives said, “The meltdown of insurance giant AIG and the broad crisis in the nation’s financial system serve as proof of the vital need for regulatory reform of the insurance sector. Numerous bipartisan reports on the nation’s capital markets have noted that insurance remains the only major segment of the capital markets not subject to federal regulation and reform is needed…The complexity of the modern financial system of insurance conglomerates and holding companies cannot be adequately overseen by the state-based system, as shown by recent events.
Insurance reg reform that protects consumers and investors must be included as Congress moves ahead on a comprehensive reg reform of the financial services sector…The Act would create a federal charter for insurance regulation and would create a streamlined and uniform regulatory process that enhances competition and reduces the multi-state regulatory barriers. Beyond the inefficiencies created by the fragmented state-based system overseeing insurance, systemic gaps have revealed themselves in recent months. Until these gaps are filled, the threat of another AIG remains.”
Highlights of the Legislation include:
- Establishment of a national system of regulation and supervision for nationally registered insurers, agents and producers
- Establishment of a new systemic risk regulator to monitor insurers, gather financial data and have access to financial records of insurers and other affiliates in a holding company structure
- Establishment of a national guaranty corporation for national insurersOverview of Key Provisions of the NICPAThe NICPA, if enacted, proposes to create an Office of National Insurance (ONI) to be headed by a National Insurance Commissioner appointed by the President for a five year term subject to Senate approval. The ONI would be an independent bureau within the Department of Treasury whose purpose would be to implement a national system for regulating and supervising federally licensed life and property and casualty insurance entities; reinsurance companies; and insurance agencies and producers. The Commissioner would be authorized to issue charters for these entities which would be permitted to write business nationally1. Insurance agencies would receive a federal producer license enabling them to sell insurance nationally to both federally-licensed and state-licensed insurers. Such producers would be permitted to sell surplus lines and non-admitted insurance for a non-admitted carrier. U.S. branches of foreign insurers would be permitted to be federally licensed as well as non-corporate insurers such as mutual, reciprocal and fraternal entities. The ONI would have no authority over state licensed companies which would continue to be regulated by the states. State regulation would continue to be coordinated by the National Association of Insurance Commissioners (“NAIC”). The ONI Commissioner would have the authority to suspend or revoke a license issued by it and levy fines against entities it regulates. It could further remove or suspend officers, directors or controlling shareholders. The ONI would be financed through assessments, examination fees, other fees and penalties paid by insurers.The NICPA provides for the conversion of state-regulated entities to a national charter as well as the ability to convert federally regulated entities to a state charter. Viewed as one of the most significant provisions of the NICPA is the provision directing the President to designate a Systemic Risk Regulator (“SRR”) for insurers, whether federally or state chartered. The SRR’s objective would be to monitor the insurance sector for “systemic threats” to the economy to ensure the financial health and stability of the insurance industry. All state and national insurance commissioners would be required to share information with the SRR. The SRR would participate in regulatory examinations of companies to take place at least once every two years. The SRR would recommend corrective actions and be empowered to take action against an insurer or affiliate if it is determined that the actions of these entities would have a serious, adverse effect on economic conditions and stability. This would include the ability to suspend or revoke licenses, investigate and penalize insurance fraud and to promulgate regulations on prompt corrective action. The SRR would further be empowered to force major insurers to become federally chartered to the extent they are identified as “systemically important” insurance entities. Accordingly they would not have the choice of state licensing. (This raises the question of the voluntariness of federal licensing for large insurance groups.)
The legislation also provides that the President establish a Coordinating Council for Financial Regulation which would serve as a forum for financial regulators to identify and consider industry related issues.
The legislation further provides for consumer protection and includes the establishment of a Division of Consumer Affairs (“DCA”) within the ONI. The DCA would respond to questions or complaints of the public and the Commissioner would be authorized to investigate fraudulent insurance acts which are defined as federal crimes punishable by up to 10 years in prison. Local consumer affair offices would be created in each state. In addition, the ONI Commissioner would be empowered to issue market conduct regulations to prevent unfair methods of competition and unfair and deceptive trade practices. These regulations would implement the model laws of the National Association of Insurance Commissioners in respect to consumer protection.
The ONI would have authority to act as a receiver of a federal charted insurer for the purpose of rehabilitation or liquidation on certain grounds including insolvency, substantial dissipation, hazardous condition, and inability to meet obligations.
The NICPA establishes a National Insurance Guaranty Corporation (“NIGC”) that would be authorized to make assessments on national insurers to pay the claims for those companies placed into receivership. Such insurers would still be required to participate in state guaranty associations in every state in which they do business and therefore impose a double assessment on federally charted insurers. State-based insurers would not have to contribute to the NIGC. The NIGC would step in when a national insurer is placed in receivership and assume the obligations of that insurer to its policyholders in a manner consistent with the terms and limits of the guaranty association model acts developed by the NAIC.
There is no specific Reinsurance subtitle and no provision in H.R. 1880 regarding federal registration of reinsurers that do not obtain a national license. Further, while the bill does permit US reinsurers to obtain a national charter, there is no express provision requiring states to give credit for reinsurance ceded to federally recognized reinsurers.
The Future for The NICPA
The bill is presently pending before the House Committee on Financial Services. Commentators suggest that the bill and/or some of its concepts will be considered for a broader regulatory reform package and that the NICPA will not pass as a stand alone piece of legislation. To the extent that legislation on financial reform includes insurance regulation, the scope and parameters of insurance oversight by the federal government will obviously be dependent upon the views of the Obama Administration and the ultimate direction taken by the House and Senate leaders. It seems clear that there is a general view of the need for national coordination of insurance data and information such that any reform will most likely include a Systemic Regulator to monitor those insurance companies deemed as “systemically important.”
Industry support varies for federal licensing. While there is indication that the Act is supported by the life insurers and reinsurers as well as certain segments of the property and casualty sector, commentators suggest that overall most property and casualty insurers as well as state commissioners, the NAIC and certain consumer protection groups support continued state regulation of the industry.
Reps. Bean and Royce remain the only sponsors at this time of the bill. No companion legislation has been introduced in the Senate.
1 Whether health insurance is subject the NICPA is open for discussion. The bill’s definition of property and casualty insurance includes reference to insurance against “loss of health.” This could be interpreted to allow property and casualty insurers to write comprehensive health insurance as opposed to insurance incidental to property and casualty insurance such as workers’ compensation. It has been suggested that health insurance was omitted from the bill in deference to the Obama Administration’s anticipated health insurance proposal. Questions regarding the bill’s applicability to health insurance will undoubtedly be addressed and clarified as the legislation proceeds through the House committees. Title insurance is exempt from the act.
*Sylvia Kaminsky is currently an ARIAS certified umpire and arbitrator as well as a consultant to the insurance/reinsurance industry. She is a lawyer licensed in New York. She was formerly General Counsel, Sr. V.P. and Corporate Secretary of Constitution Reinsurance Corporation; Deputy General Counsel of Gerling Global and Sr. V. P. of Claims; and was in private legal practice for 15 years serving the industry.