House Bill Embroiled In Controversy Over Insurance Regulation

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The House of Representatives is embroiled in a fight over a bill that would give the federal government a new role in developing and upholding insurance laws and regulations now under the jurisdiction of U.S. states, including whether they violate U.S. fair treatment commitments under trade or regulatory agreements.

The measure was initially scheduled for a vote under the suspension of House rules on Sept. 16, but is now scheduled for a vote on Sept. 22 after undergoing several significant changes since its approval by a House Financial Services subcommittee in July. The bill never was considered by the full committee.

The bill, H.R. 5840, the Insurance Information Act of 2008, aims to create a U.S. voice on major domestic and international insurance issues, which would help U.S. insurance companies compete in overseas markets, particularly the European Union, according to supporters.

Opponents charge that the bill takes the first step toward federal regulation of non-medical insurance and would give the Treasury the unprecedented power to preempt state laws if they discriminated against foreign insurance companies. They also charge that the bill would lessen consumer protections now required by state regulation.

There is currently no companion bill in the U.S. Senate, but several informed sources said that Sen. Christopher Dodd (D-CT), the chairman of the Senate Committee on Banking, Housing and Urban Affairs, could consider the measure once passed by the House.

Supporters of the bill point out that the EU will put in place a new directive effective 2012 to guide member states in their assessment of insurance companies’ solvency. The directive is now pending before the EU Council of Ministers and the European Parliament, and has to be implemented into the national laws of each member state after it is approved in Brussels.

In order to do business on equal terms with EU companies and foreign companies with EU subsidiaries, foreign insurance companies would have to come from a home country that offered equivalent prudential regulation to that established in the directive known as Solvency II, sources said.

Under Solvency II, member states would not consider the insurance regulation of U.S. states to provide such equivalent prudential oversight, they said. But with a more uniform U.S. insurance policy created through the new bill, the U.S. and EU could negotiate a mutual recognition agreement that would remove any obstacles to U.S. companies doing business in the EU, one supporter of the bill said.

In absence of such a mutual recognition agreement, the new EU directive could pose problems for reinsurance companies, which would be helped by the passage of H.R. 5840. Reinsurance is commonly known as the insurance for insurance companies against catastrophic exposures, such as damages from Hurricane Katrina and terrorist attacks, private-sector sources said.

The reinsurance industry in the U.S. is dominated by foreign companies and, under current state laws, a foreign reinsurance company that wants to do business in a state must be licensed within that state or must provide 100 percent collateral of the claims they plan to cover, sources said.

Opponents charge that if the law goes into effect, states may no longer be able to demand that collateral since their law or regulations could be ruled as discriminatory to a foreign company.

The bill sets up an Office of Insurance Information (OII) in the Treasury Department and it would be headed by a career director who would be appointed by the Secretary of the Treasury. The OII is similar to the Office of Insurance Oversight that was recommended in the Treasury Department’s "Blueprint for a Modernized Financial Regulatory Structure," a proposal released in March focused on restructuring the way financial institutions are regulated.

Under the bill, the OII director would be required to determine if state insurance regulations and laws are consistent with the newly created federal policy in regards to agreements under negotiation, including trade and mutual recognition agreements. The bill specifies that the law only applies to covered agreements negotiated after the insurance bill is signed into law.

The bill would give the Department of the Treasury the power to preempt state insurance laws and regulations that would run afoul of international agreements negotiated after the bill is signed into law. The language in the bill as it is now pending before the House is general enough to cover both trade and regulatory agreements, including mutual recognition, sources on both sides of the debate said.

Under the legislation, the federal government would be able to preempt state insurance laws if those laws discriminate against a foreign insurance company and only to the extent that they do.

The bill also states that the federal government cannot "preempt any State insurance measure that relates to an insurer’s rates, premiums, underwriting practices, or coverage requirements for insurance within the State." This provision was added at the insistence of Rep. Jackie Speier (D-CA) who claimed the original bill language could give the Treasury Secretary the ability to preempt much of Proposition 103, the foundation of California’s insurance laws and regulations, sources said.

In a Sept. 16 statement, Speier said the bill "represents the first step in a long-standing insurance industry fantasy to nationalize insurance regulations," and took issue with the bill’s provision to allow the federal government to preempt state law when regulations are determined to discriminate against foreign companies.

"Since laws and regulations are, by definition, discriminatory — legislating who can and cannot write policies, and under what circumstances — this proposed law could have broad and far-reaching consequences," Speier said.

In a dear colleague letter sent out on Sept. 17, Speier and Rep. Dennis J. Kucinich (D-OH) wrote that the bill would "cede policy-making authority to an executive branch entity," and would make "state insurance regulation subordinate to all future trade agreements signed by the federal government."

In the pending version, the bill would allow Congress to prevent a state insurance law preemption and states that the secretary of the treasury can temporarily suspend any federal preemption of state insurance law if the measure is "necessary for prudential reasons." These provisions were not part of the original version of the bill.

Under the bill, the director of OII would advise the president and congress on insurance issues, report once every two years to congress on the state of all types of insurance except health insurance based on data collected from the states and establish a federal policy on international insurance.

Several sources supporting the bill stressed that the office would create a federal government insurance authority that could guide U.S. trade officials in negotiating financial services agreements with foreign countries, similar to the U.S. Securities and Exchange Commission or the Federal Reserve.

The bill was originally introduced in April 2008 by Rep. Paul Kanjorski (D-PA), the chairman of the House Financial Services Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee.

According to June 10 testimony of Tracey Laws, the senior vice president and general counsel of the Reinsurance Association of America (RAA), to the Kanjorski subcommittee, 60 percent of the losses related to the Sept. 11 terrorist attacks were absorbed by the reinsurance industry and the reinsurance industry absorbed 61 percent of the losses from the 2005 hurricane season.

Members of the U.S. insurance industry have weighed in on both sides of the debate on the bill, with the RAA and the National Association of Insurance Commissioners (NAIC) offering their support.

In a Sept. 11 letter to Kanjorski, NAIC noted that it supported the bill in light of several "important changes" that had been made at its request. These include the stipulation that the federal government cannot preempt state insurance laws or regulations in total, but only to the extent of the inconsistency and to the extent that they discriminate against or in favor of a foreign company.

The NAIC also pointed to other changes in the redrafted bill, including coordination with state insurance regulators before a recognition agreement is done, a more stringent review process that now makes preemption decisions subject to judicial review and the Administrative Procedures Act, and consultation with an Advisory Board which includes state regulators.

NAIC’s letter, however, emphasizes that its support should not be construed as "implicit acceptance" of federal intervention. "To be clear, we view the preemptive aspects of this legislation, however narrow, with extreme caution and skepticism," the letter said.

Informed sources said the vote to endorse the bill was made by the NAIC’s 15 member Government Relations Leadership Council, with one member voting against the endorsement, an informed source said.

Opposing the measure is the National Conference of Insurance Legislators (NCOIL), which charged in a Sept. 12 letter to Pelosi that the bill "will lead to a dangerous optional federal charter (OFC) for insurance regulation and that will unravel the strong consumer protections embedded in state-based insurance regulation."

The NCOIL letter said that the bill "may prove detrimental to what is now a thriving insurance marketplace."

On Sept. 17, Consumer Watchdog, a California-based consumer advocacy group, sent a letter to Kanjorski asking him to withdraw the bill in light of the federal government’s $85 billion bailout of AIG, the nation’s largest insurer.

"AIG’s stunning collapse and unprecedented bailout was driven largely by the massive failure of financial industry deregulation and the policy of weak federal oversight of the banking system," Consumer Watchdog wrote. H.R. 5840 would begin the process of allowing the policies that "’screwed up’ the financial markets and destroyed AIG (as well as Lehman, Bear Stearns, etc) to undermine our system of state-based insurance oversight," the letter charges.

On Sept. 15, Kanjorski released a statement pointing to the turmoil on Wall Street and AIG’s efforts to raise capital as an argument for passage of his bill. "At this time, we have a blind spot within the federal government with respect to insurance information, and my bill would help to correct this problem and protect against systemic risk," Kanjorski said in the statement.

Maine, Vermont, Nevada, Ohio and Wisconsin are the states that have weighed in against the bill. Maine Gov. John Baldacci, a Democrat, said in a Sept. 12 letter to Maine’s two House members, Reps. Tom Allen (D-ME) and Mike Michaud (D-ME) that the bill "could significantly hamper state insurance regulators’ ability to continue to protect insurance consumers and private markets."

In another letter sent to Maine’s congressional delegation, Pelosi and Senate Majority Leader Harry Reid (D-NV), Maine’s Superintendent of Insurance Mila Kofman and Attorney General G. Steven Rowe wrote that the bill would encourage "U.S. based insurers to avoid strong state-based regulation by setting up offshore affiliates in a foreign country whose insurers are granted exemption from U.S. state insurance laws by OII."

"This could inadvertently encourage the entire market, both foreign and domestic, to join in a race to the bottom," Kofman and Rowe wrote.

Consumer Watchdog
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