By Ted Besesparis
Vice President, Communications
PIA National     

What Treasury Is Proposing What is being proposed by Treasury is the eventual federalization of insurance regulation. Treasury’s report openly states this. It notes that the establishment of an Optional Federal Charter, a federal office of insurance oversight and a federal commissioner of insurance are merely the first steps toward this goal. Here is an outline of the insurance section of the Treasury Report: Key Issues in the Insurance Section: Congress creates an Office of Insurance Oversight (OIO) under the direct supervision of the Secretary of the Treasury. The OIO may “consult” with NAIC (at OIO’s choice). OIO is the federal oversight authority to begin implementation of an Optional Federal Charter (OFC). OFC entities are: --U.S. domestic insurers, reinsurers. --Any alien insurer doing business in U.S. --National Insurance Producer Operations. The OCC model will be used as guidance for this federal insurance structure. OIO to be rolled into ONI (Office of National Insurance Oversight). ONI headed by CNI (Commissioner of National Insurance Oversight). ONI/CNI will quickly become the federal insurance regulator/authority. ONI to be self-funded by fees assessed on OFC entities. CNI has direct authority for all national insurance operations. CNI directs insurance operations both domestically (including oversight of aliens in the U.S.) and globally. The final section of the Treasury report lays out in great detail how the oversight of the business of insurance will be “prepared” (under the direction of the Secretary of the Treasury) to be formally organized into an integrated system of federal financial oversight governed by federal financial services law.

When PIA first received the notice published in the Federal Register in October, 2007 seeking comment for a broad Treasury Department review of financial regulation, we knew there was more to it than met the eye.

Typically, when a federal agency seeks comment for a review or for proposals, great care is exercised in they way it is worded, to avoid prejudicing the input that is being solicited. To describe the wording of this particular Federal Register notice as astounding would not be an exaggeration. Far from trying to be impartial, its tenor and tone were like that of a political tract. It was also apparent that they were seeking comments supporting their point of view.

“No attempt had been made to disguise the clear bias of the questions,” noted PIA Executive Vice President & CEO Leonard Brevik. “For example, three questions that specifically related to insurance all attempted to elicit comments supportive of federal regulation of insurance or ‘principles-based’ regulation. The questions clearly lacked objectivity and were slanted.”

The bias appeared to be in favor of both federal regulation of insurance and also of making it easier for foreign insurance entities to access U.S. markets, to the detriment of domestic U.S. carriers. The questions were “loaded.”

PIA wrote a strong letter of objection to Treasury Secretary Henry Paulson regarding the Federal Register notice, then immediately launched a public campaign in the press to point out that the Treasury appeared to be biased. PIA also filed detailed comments in response to the request for comment. We were not optimistic, not only because of the nature of the request for comment but also because Paulson had already made it clear to Wall Street his thinking regarding open borders, “principles-based” regulation and what he saw as the need to bring U.S. regulations in line with those in Europe — with the U.S. adopting the European model.

PIA knew that what was about to happen didn’t sound favorable for the business interests of Main Street insurance agents in the United States, or their domestic carriers.

Storm Clouds

Aside from the biased notice, there were other indications that Treasury had already decided what regulatory changes it would recommend.

First, the comment period for responding to the Federal Register notice was very short, just 38 days. Then, less than two weeks after the closing of the period for comments, U.S. Treasury Assistant Secretary for Financial Institutions David Nason gave a speech to the City of London Corporation in London. His comments strengthened our suspicions that the Treasury Department may have already made up its mind, that the fix was in and this “study” was a sham.

Nason said “many political and parochial concerns” will lead to resistance to these changes, so the department would propose some concrete, “intermediate steps.” But he added the department wanted to propose “broad ideas for an optimal regulatory structure to match the globally integrated U.S. financial services industry.”

The comment period had just ended, but a senior Treasury official was over in London outlining what would be proposed, dismissing as “parochial” the objections that would be raised. At the same time, officials of the American Insurance Association (AIA), a prime supporter of OFC, were writing articles for European publications arguing that the United States needed to adopt European regulatory standards and bemoaning opposition to OFC.

As it turned out, PIA’s suspicions about what Treasury had in store were right on the mark.

Treasury Proposes a Federal Takeover

In its report released March 31, 2008, Treasury proposed a sweeping overhaul of the way the government regulates the nation’s financial services industry, from banks and securities firms to mortgage brokers and insurance companies.

The administration divided its recommendations into short-term goals that could be adopted quickly, intermediate recommendations and an “optimal” regulatory framework, which contains a radical restructuring of how the government supervises banks and other financial institutions.

For insurance, what is being proposed by Treasury is the eventual federalization of insurance regulation. Treasury’s report openly states this. It notes that the establishment of an Optional Federal Charter, a federal office of insurance oversight and a federal commissioner of insurance are merely the first steps toward this goal.

As an intermediate step, it proposed that Congress should create the Office of Insurance Oversight within Treasury to establish a federal presence in insurance for international and regulatory issues. Weeks later, the international aspects of the latter were embodied in a bill proposed by Rep. Paul Kanjorski (D-Penna.) that would grant the Treasury Secretary the authority to preempt state insurance law and regulations.

To appreciate the full meaning of Secretary Paulson’s stated goals for the future, we need only to refer to the last section of the report.

This section lays out in great detail how the oversight of the business of insurance will be “prepared” by federal authority (under the direction of the Secretary of the Treasury) to be formally organized into an integrated system of federal financial oversight governed by federal financial services law. The Treasury report spells out that these steps outlined in the report’s last section will be taken so that in the next stage, the substance of the business of insurance and insurance products can be fully integrated into a homogenized, singular financial services industry.

The scope of what the Treasury is proposing — in the short term and its ultimate goals — cannot be understated.

The long-term agenda, as articulated by Treasury, is folding all financial services including the insurance industry into one entity. Gone would be the three distinct financial services sectors set out under the 1999 Gramm-Leach-Bliley Act: banking, securities and insurance, each answering to its own regulatory regime (with insurance state-regulated). Everything would be mixed into one, with the ultimate oversight authority granted to the Federal Reserve and the power held by the Treasury Department.

In attempting to comprehend the radical nature of the Treasury’s proposal, it helps to remember that this is the same agency and Administration that proposed the privatization of Social Security. There is a previous history of broad, ideologically-driven overreaching at work here. Indeed, many Administration officials seem to have a laissez-faire philosophy when it comes to markets, believing that the marketplace can solve all problems. The problem is that strict adherence to such a purely libertarian approach does not guarantee that markets will organize themselves. Unfettered markets often descend into chaos — and chaos is bad for business.

“A State of Shock”

When Treasury Secretary Henry Paulson released the recommendations at a press conference, the National Association of Insurance Commissioners (NAIC) happened to be holding its annual meeting in Orlando. In addition to state insurance commissioners from around the country, officials of the National Conference of Insurance Legislators (NCOIL) led by their outspoken President Brian Kennedy (Rhode Island) were also attending.

Even though people knew the Treasury proposals were coming and that they would be favorable to an OFC, the reaction to the final set of recommendations among attendees can best be described as one of utter shock.

Paulson’s proposals unleashed a torrent of opposition.

The attendees at the NAIC meeting gathered minutes later to watch NAIC President Sandy Praeger participate in an interview on MSNBC focused on the insurance aspects of the proposals. Praeger spoke against the Treasury proposal. She noted that the subprime mortgage crisis occurred under federal regulation, while the insurance industry has remained sound under state regulation.

“Insurance is sold on Main Street and the people who buy insurance products depend on their state regulators to be there for them,” said Praeger. “When you look at the bank regulatory scheme at the federal level, the subprime mortgage crisis occurred on their watch. When you look at the financial stability of our insurance companies, they are experiencing record profits. We have a competitive marketplace. We believe our house is in order and we believe that our system of state-based regulation is working.”

In the week that followed, dozens of state regulators, legislators and even attorneys general made highly critical statements to the press. New York Insurance Superintendent Eric Dinello, who had been appointed by Eliot Spitzer (the former governor who resigned amid a sex scandal) quipped to a conference organized by the New York City Bar Association that the Treasury Department’s blueprint report “almost shocked me, and that is from someone who has had a lot of shocks in the last few weeks.”

Immediately after Paulson exploded his bombshell, a Treasury official was doing a little backpedaling in the press in a background briefing for reporters. The National Underwriter reports that the official said the Treasury Department’s support for an optional federal charter for insurance as part of a broad overhaul of financial services regulation does not embody an endorsement of any particular piece of legislation.

The Treasury official cautioned the document is “aspirational” — in other words, what the department hopes to see evolve in financial regulation over a period of time — and “doesn’t endorse a particular piece of legislation,” for example, insurance regulatory reform legislation now pending in Congress. “It will be a long, tortuous process,” the official said. He also noted that Treasury believes if an OFC is established, it will become a framework that will be most attractive to large, multinational insurance companies, whether based in the United States or outside it.

Under the ground rules established by the agency, the Treasury official could not be quoted by name.

We’re Not Alone

Any thought that professional insurance agents or even most of the insurance sector would be alone in opposition to the Treasury proposals evaporated in the days and weeks following their unveiling.

Banks, realtors and credit unions expressed reactions ranging from displeasure to dismay, along with their state regulatory authorities. The National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) quickly issued denunciations. Community banks and state banking regulators followed. And a host of state insurance commissioners, state attorneys general and state legislators added their voices to the opposition.

The Treasury report represents one point of view in the ongoing battle to decide who controls insurance oversight. PIA members are on the side of those who believe that the modernization reforms that are needed must be made in a way that preserves the state system rather than destroys it.

As this critical battle begins, it’s nice to know that the members of PIA are in such good company.

This article originally appeared in the April 2008 issue of PIA Connection.