Modernizing Insurance Regulation: Optional Federal Charter Legislation
Prepared for Members and Committees of Congress
Insurance is one of three primary pillars of the financial services industry. Unlike the other two,
banks and securities, insurance is primarily regulated at the state, rather than federal, level. The
primacy of state regulation dates back to 1868 when the Supreme Court found in Paul v. Virginia
(75 U.S. (8 Wall.) 168 (1868)) that insurance did not constitute interstate commerce, and thus did
not fall under the powers granted the federal government in the Constitution. 1n 1944, however,
the Court cast doubt on this finding in United States v. South-Eastern Underwriters Association
(322 U.S. 533 (1944)). Preferring to leave the state regulatory system intact in the aftermath of
this decision, Congress enacted the McCarran-Ferguson Act of 1945 (P.L. 79-15, 59 Stat. 33),
which reaffirmed the states as principal regulators of insurance. Over the years since 1945,
congressional interest in the possibility of repealing McCarran-Ferguson and reclaiming authority
over insurance regulation has waxed and waned.
In recent years, particularly since the Gramm-Leach Bliley Act of 1999 (GLBA, P.L. 106-102,
banks, insurers, and securities firms and on the global scale. Complaints that the 50 state
regulatory system puts insurers at a competitive disadvantage in the marketplace have been rising.
Whereas the insurance industry had previously been united in preferring the state regulatory
system, it has now splintered, with larger insurers tending to argue for a federal system and
smaller insurers tending to favor the state system.
Some Members of Congress have responded since the 107th Congress with different proposals
ranging from a complete federalization of the interstate insurance industry, to leaving the state
system intact with limited federal standards and preemptions. The most common proposal has
been for an Optional Federal Charter (OFC) for the insurance industry. This idea borrows the idea
of a dual regulatory system from the banking system. Both the states and the federal government
would offer a chartering system for insurers, with the insurers having the choice between the two.
The proposed National Insurance Act of 2007 (S. 40 and H.R. 3200) is currently the only OFC th
legislation offered in the first session of the 110 Congress.
Proponents of OFC legislation typically cite the efficiencies that could be gained from a uniform
system, along with the ability of a federal regulator to better address the complexities of the
current insurance market and the need for a single federal voice for the insurance industry in
international negotiations. Opponents of OFC legislation are typically concerned with the
inability of a federal regulator to take into account local conditions, the lack of consumer service
that would result from a faraway bureaucracy in Washington, DC, and the overall deregulation
contained in some of the OFC proposals. This report offers a brief analysis of the forces
prompting OFC legislation, followed by a discussion of the arguments for and against an OFC,
and summaries of various OFC legislation that has been proposed. It will be updated as legislative
Backgr ound ..................................................................................................................................... 1
Arguments for a Dual Regulatory System................................................................................2
Arguments Against a Dual System and for State Regulation....................................................3
Optional Federal Chartering Legislation.........................................................................................3
The National Insurance Act of 2007...................................................................................3 th
The National Insurance Act of 2006...................................................................................5 th
The Insurance Industry Modernization and Consumer Protection Act...............................6
The National Insurance Chartering and Supervision Act....................................................6
Appendix. Summary of S. 40 and H.R. 3200..................................................................................8
Author Contact Information..........................................................................................................13
Insurance is one of three pillars of the financial services industry. Unlike the other two, banks and
securities, insurance is primarily regulated at the state, rather than federal, level. The primacy of
state regulation dates back to 1868 when the Supreme Court found that insurance did not
constitute interstate commerce, and thus did not fall under the powers granted the federal 12
government in the Constitution. In 1944, however, the Court cast doubt on this finding.
Preferring to leave the state regulatory system intact in the aftermath of this decision, Congress 3
enacted the McCarran-Ferguson Act of 1945, which reaffirmed the states as principal regulators
of insurance. Over the years since 1945, congressional interest in the possibility of repealing
McCarran-Ferguson and reclaiming authority over insurance regulation has waxed and waned.
In 1974, Congress enacted the the Employee Retirement Income Security Act4 (ERISA)
preempting state laws governing many health benefit plans offered by employers, thus essentially
federalizing much of the regulation of health insurance. In 1980, the Congress curtailed the
authority of the Federal Trade Commission (FTC) to investigate the insurance industry, reducing 56
a small avenue of federal oversight on insurance. In the early 1990s, a bill to repeal the limited
antitrust exemption granted insurers in McCarran-Ferguson, and thus expand federal oversight of
insurance, was reported out of committee in the House, but never reached the House floor. In 7
1999, Congress enacted the Gramm-Leach-Bliley Act (GLBA), which specifically reaffirmed the
states as the functional regulators of insurance.
GLBA may have statutorily reaffirmed the primacy of state regulation of insurance, but it also
unleashed market forces that were already encouraging a greater federal role. GLBA removed
legal barriers between securities, banks, and insurers, which, along with improved technology,
has been an important factor in creating more direct competition among the three groups. Many
financial products have converged, so that products with similar economic outcomes may be
available from different financial services firms with dramatically different regulators. Insurers
face 50 different state regulators and state laws, many of which differ on some particulars of
insurance regulation. This has lead to industry complaints of overlapping, and sometimes
contradictory, regulatory edicts driving up the cost of compliance and increasing the time
necessary to bring new products to market. These complaints existed prior to GLBA, but the
insurance industry generally resisted federalization of insurance regulation at the time. Facing a
new world of competition, however, the industry split, with larger insurers tending to favor some
form of federal regulation, and smaller insurers tending to favor a continuation of the state
regulatory system. Life insurers tend to more directly compete with banks and securities firms, so
they tend to favor some form of federal charter more than property/casualty insurers.
Some Members of Congress have responded to the changing environment in the financial th
services industry with a variety of legislation. In the 108 Congress, Senator Ernest Hollings
1 Paul v. Virginia (75 U.S. (8 Wall.) 168 (1868)).
2 United States v. South-Eastern Underwriters Association (322 U.S. 533 (1944)).
3 P.L. 79-15, 59 Stat. 33,15 U.S.C. Sec. 1011 et seq.
4 P.L. 93-406, 88 Stat. 829.
5 The Federal Trade Commission Improvement Act of 1980, P.L. 96-252, 94 Stat. 374.
6 H.R. 9, The Insurance Competitive Pricing Act of 1994, by Representative Jack Brooks.
7 P.L. 106-102, 113 Stat. 1338.
introduced S. 1373 to create a mandatory federal charter for insurance. In the 108th and 109th 8
Congresses, Representative Richard Baker drafted, but never introduced, the SMART Act that
would have left the states the primary regulators, but harmonized the system through various
federal preemptions. The most consistent response has been the introduction of legislation calling
for an Optional Federal Charter (OFC) for insurance.
OFC legislation was first introduced in the 107th Congress, with bills being introduced in the 109th th
and 110 Congresses as well. Specifics of OFC legislation can vary widely, but the common
thread is the creation of a dual regulatory system, inspired by the current banking regulatory
system. OFC bills generally would create a federal insurance regulator that would operate
concurrently with the present state system. Insurers would be able to choose whether to take out a
federal charter, which would exempt them from most state insurance regulations, or to continue
under a state charter and the 50 state system of insurance regulation. Given the greater uniformity
of life insurance products and the greater competition faced by life insurers, some have suggested
the possibility of OFC legislation that would apply only to life insurers, but no such bills have
In addition to the principal argument that the regulation of insurance companies needs to be
modernized at the federal level to make insurers more competitive with other federally regulated
financial institutions in the post-GLBA environment, other arguments advanced for dual
chartering include the following:
• The need to have a federal insurance regulator who could have a knowledgeable
voice and be an insurance advocate in Washington, DC.
• The success of the Comptroller of the Currency (OCC) in expanding bank
products through preemption of state laws.
• The need for “speed to market” for product approval so insurers will not be at a
distinct disadvantage in product creation and delivery.
• The creation of a more accommodating regulatory environment as a result of
competition between federal and state regulators, as in the case of banks.
• The ability to achieve national treatment, so that a single charter would allow
insurers to do business in all states and avoid higher costs of state regulation due
to the need to comply with 50 state regulators.
• The difficulty insurers have in expanding abroad without a regulator at the
• Greater supply of insurance and lower cost to consumers as insurance companies
are forced to compete on a national scale.
8 This act was the subject of a June 16, 2005, hearing in the House Financial Services Subcommittee on Capital
Markets, Insurance, and Government Sponsored Enterprises entitled “SMART Insurance Reform.”
The arguments of those who oppose any federal regulation of insurance companies, but prefer
that the state insurance regulatory system be maintained, include the following:
• State insurance regulators’ unique knowledge of local markets and conditions.
• The flexibility and adaptability of state regulation to local conditions.
• The diversity of state regulation, which reduces the impact of bad regulation and
promotes innovation and good regulation.
• The reduced risk that a regulator who pursues bad policies will be able to affect
large numbers of insurers.
• The existence of strong incentives, such as direct election, for state regulators to
do the job effectively at the state level.
• The danger of a costly overlay of a new federal bureaucracy.
• Fiscal damage to the states should state premium taxes be reduced by the federal 9
• The fragmentation of the overall insurance regulatory system that could result
from dual chartering and state/federal oversight.
• The possibility of a “race to the bottom” as state and federal regulators compete
to give insurers more favorable treatment and thus secure greater oversight
authority and budget.
In the abstract, the OFC question could be simply about the “who” of regulation. Should it be the
federal government, the states, or some combination of the two? In practice, however, OFC
legislation has had much to say about the “how” of regulation. Should the government continue
the same fine degree of industry oversight that it has practiced in the past? The OFC bills that
have been introduced to this point have tended to answer the latter question negatively—the
federal regulator that they would create would exercise less regulatory oversight than most state
regulators. This deregulatory aspect of past and present OFC bills can be as great a source of
controversy as the introduction of federal regulation itself.
Senators John Sununu and Tim Johnson introduced S. 40 on May 24, 2007, while Representatives
Melissa Bean and Edward Royce introduced H.R. 3200 on July 26, 2007. The bills have been
9 Premium taxes on insurance are a significant source of revenue for states’ general funds. In total, states collected
approximately $15.4 billion in premium taxes, approximately 2.2% of state tax revenues. “State Government Tax
Collections” U.S. Census website http://www.census.gov/govs/statetax/0600usstax.htm, visited on Dec. 10, 2007.
referred to the relevant committees (Senate Banking, Housing, and Urban Affairs, House
Financial Services, and House Judiciary), and neither has been the specific subject of hearings or
markups. Two general hearings on insurance regulatory reform, however, were held by the House
Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises in October 2007, and the possibility of an optional federal charter was a major topic
of discussion in the subcommittee. Chairman Paul Kanjorski indicated in his opening statement of 10
the October 3 hearing that there would be a series of hearings on insurance reform, but further
hearings have not been scheduled at this point.
S. 40 and H.R. 3200 are very similar, but not identical bills. Both would create the option of a
federal charter for the insurance industry, including insurers, insurance agencies, and independent
insurance producers. The bills would create a federal regulatory and supervisory apparatus,
including an Office of National Insurance and a National Insurance Commissioner. This federal
regulator would generally be overseen by the Secretary of the Treasury, but the secretary would
be forbidden from interfering in specific matters before the commissioner. The budget for the
office would be paid for by fees and assessments on insurers. The commissioner would be
appointed by the President, and confirmed by the Senate for a five-year term. Holders of a
national license would be exempt from most state insurance laws. Thus, nationally licensed
insurers, agencies, and producers would be able to operate in the entire United States without
fulfilling the requirements of the 50 states’ insurance laws. Some significant aspects of the bills 11
include the following:
• The federal system would apply to property/casualty and life insurance, except 12
for title insurance and including surplus lines insurance.
• Rate regulation would not be applicable to national insurers.
• Form regulation, the ability of the regulator to control what will and will not be
included in an insurance policy, would be reduced substantially compared to
• Fees covering the cost of the system would be assessed on those operating under
the federal system.
• National insurers would continue to pay state premium taxes, so there should be
no loss of premium tax revenue to the states.
• National insurers would continue to be subject to state laws requiring
participation in residual market entities, but only if rates charged by the residual
market entity covers all costs incurred, and only if there are no rate and form
requirements concurrent with participation.
• Reform of the state regulation of surplus lines insurance—only the state in which
the insured resides or does business would be allowed to tax surplus lines
10 See http://www.house.gov/apps/list/hearing/financialsvcs_dem/oskanjorski100307.pdf, visited on December 13,
11 A complete summary can be found in Appendix.
12 Surplus lines insurance is insurance sold by insurers who are not admitted in particular state. See CRS Report
RS22506, Surplus Lines Insurance: Background and Current Legislation, by Baird Webel, for more information on
• National insurance producers would be allowed to sell surplus lines insurance.
• Would apply federal antitrust laws to national insurers, except to the extent that
state laws continue to apply to them.
Differences between S. 40 and H.R. 3200 are relatively minor, including the following:
• H.R. 3200 would specifically allow non-U.S. reinsurers to file financial data in
accordance with International Financial Reporting Standards.
• H.R. 3200 would limit jurisdiction over non-U.S. reinsurers to federal courts,
rather than including state and local courts.
• H.R. 3200 would broaden slightly and clarify anti-fraud language.
Beyond the general aspects inherent in the OFC concept, such as the dual, competing regulatory
structures and uniform regulation across the country, the most striking specific aspect of S. 40 and
H.R. 3200 is the lessening of the rate and form regulation under these bills as compared to the 13
current system. Currently every state has some measure of rate and form regulation. In some
states, insurers must get specific prior approval for changes to rates and forms, while in others
insurers may have some freedom to change rates and forms with the possibility that the state
insurance commissioner could disallow the change after the fact. S. 40 and H.R. 3200 specifically
disallow rate and form regulation for national property/casualty insurers. Such insurers are only
required to maintain copies of the policy forms that they use. National life insurers are subject to
general standards and must file forms with the commissioner before these forms are to be used.
Senators John Sununu and Tim Johnson introduced S. 2509 on April 5, 2006. The House
companion, H.R. 6225 was introduced on October 18, 2006. Neither bill saw direct committee
action, although S. 2509 was repeatedly discussed at a hearing on “Perspectives in Insurance
Regulation,” held by the Senate Banking, Housing, and Urban Affairs Committee on July 18, th
2006. These bills were very similar to the bills of the same name introduced in the 110 Congress
and discussed above. Differences between the bills in the two Congresses included the following:
• The 2006 bills did not address surplus lines insurance.
• The 2007 bills added language requiring national insurer compliance with anti-
money laundering laws.
• The 2007 bills specifically exclude national insurers from offering title insurance.
• The 2007 bills included new guaranty fund language, changing the focus from a
qualified state, to a qualified association or fund. If a state’s guaranty fund is not
qualified, then the national insurers operating in that state must join the national
guaranty fund to be established by the National Insurance Commissioner.
13 A chart of various state regulations can be found at the website of the Insurance Information Institute, a
property/casualty insurer organization. http://www.iii.org/media/hottopics/insurance/ratereg/?table_sort_575580=3,
visited on Dec. 10, 2007.
H.R. 3766 was introduced on February 14, 2002, by Representative John LaFalce. It would also
have created an optional federal charter for “national insurers,” but not for insurance agencies,
brokers, or agents. It would have created a new federal agency within the Treasury Department,
known as the Office of National Insurers and headed by a director, rather than a commissioner.
Other significant aspects of H.R. 3766 included the following:
• The federal charter could provide for a national insurer to underwrite both life
insurance and property/casualty insurance.
• The director would have had general regulatory authority over national insurers,
including solvency oversight and policy forms, but rate regulation would have
been left with state insurance regulators.
• Even though the legislation had no provision for the licensing of insurance
producers, the director would have had the authority to enforce unfair and
deceptive practices rules against state-licensed producers with respect to the sale
of insurance products issued by national insurers, and all states would have been
subject to federal minimum standards.
• National insurers would have been encouraged to invest in the communities in
which they sell policies.
• National insurers would have been required to file reports containing community
sales data for use by federal regulators in combating insurance redlining. Further,
national insurers would have been prohibited from refusing to insure, or limiting
coverage on a property, based solely on its geographic location.
This proposal was reportedly introduced late in 2001 by Senator Charles Schumer, but was never
assigned a number, nor referred to either the Senate Commerce Committee or the Senate 1415
Banking, Housing, and Urban Affairs Committee. A draft of this proposal provided that the
chartering, supervision, and regulation of National Insurance Companies and National Insurance
Agencies be administered by the federal government in a newly created federal agency within the
Treasury Department. The proposed agency, the Office of the National Insurance Commissioner,
would have been headed by the National Insurance Commissioner, appointed for a five-year term
by the President and subject to Senate confirmation. National insurers and agents would have
been exempt from most state insurance law. Significant aspects of the bill included
• application to all lines of insurance, including life, health, and property/casualty;
14 See, for example, “Chartering Bill Introduced; Industry Divided on Federal Proposal,” Business Insurance, Jan. 7,
2002, p. 1 and “Schumer working on Federal Regulation and Terrorism Backstop Bills in the Senate,” BestWire, Mar.
15 Draft Language can be found under “Testimony” at http://www.aba.com/ABIA/ABIA_Reg_Mod_Page.htm, visited
Dec. 14, 2007.
• imposition of fees as necessary to cover the expenses of the federal apparatus;
• requirement that NICs participate in “qualified” state insurance guaranty
associations and establishment of a federal backup guaranty association to cover
The broad powers granted to the National Insurance Commissioner were not to include the
authority to regulate rates or policy forms. Nor would the Schumer proposal have exempted
federally chartered NICs from anti-trust laws, except for purposes of preparing policy forms and
participating in state residual market programs such as assigned risk pools in automobile
insurance. The federal license would have specified the line or lines of insurance a NIC could
underwrite, and no single NIC could be licensed to underwrite both life/health insurance and
property/casualty insurance, although an affiliated group of insurance companies (state and/or
federally chartered) could have included separate companies writing those different lines of
The Office of National Insurance would be headed by the Commissioner of National Insurance
who is to be appointed by the President and confirmed by the Senate for a term of five years. The
office is to be within the Department of the Treasury, but the Secretary of the Treasury is limited
to general oversight and may not intervene in specific matters before the commissioner. It is to be
funded by fees and assessments on the entities that the commissioner is empowered to license and
supervise—insurers, insurance agencies, and insurance producers who seek a national license.
Within the office, there would also be established a Division of Insurance Fraud, a Division of
Consumer Affairs, and an Office of the Ombudsman.
The commissioner may, but is not required to, consult with state insurance regulators and may,
but is not required to, engage in international cooperation with regard to insurance regulation in
global markets. This international cooperation may include development of mutual recognition
agreements. Any international efforts, however, require consultation and cooperation with the
Executive Office of the President and the United States Trade Representative. The subtitle grants
general rule-making authority to the commissioner, and specifically forbids delegation of this
authority to a self-regulatory organization (SRO). SROs that are registered and overseen by the
commissioner can, however, enforce compliance by their members with the act and federal
regulations under the act.
The commissioner would be required to examine on-site each National Insurer not less than once
every three years and may do so whenever necessary. A National Agency, in contrast, may be
examined only in response to a complaint or any other evidence of a specific violation or
impending violation. [H.R. 3200 removes the “only,” broadening when a National Agency might
be examined.] The examination powers are to be broad, including the possibility of court orders
and subpoenas if prompt and reasonable access is not given by the examinee, and extend to the
activities of affiliates. The costs of examinations are to be assessed against the national insurers,
agencies, and producers with the initial start up period funded by borrowing from the Treasury.
The monies from the assessments and other fees are not to be treated as appropriated funds.
State laws with regard to the sale and underwriting of insurance, as well as other insurance
operations, would be generally preempted with regard to National Insurers, agencies, and
producers. The specific exceptions to this preemption include state unclaimed property laws,
premium tax laws, and laws requiring: (1) participation in residual market mechanisms; (2)
compulsory coverage of auto or workers compensation insurance; (3) participation in a statistical
organization; and (4) participation in a workers compensation administration mechanism.
The enforcement powers of the commissioner are to include the suspension, restriction, or
revocation of a federal license of an insurer, agency, or producer. Taking such action would
require various due process steps including notice to the accused, hearings, and judicial review.
16 Differences between S. 40 and H.R. 3200 appear in italics and brackets.
Remedies open to the commissioner would include cease-and-desist orders, license suspension or
revocation, civil monetary penalties and criminal charges. The commissioner would in most
circumstances publicly disclose enforcement actions and national insurers and agencies must
disclose any impending enforcement actions. The commissioner may request assistance from
foreign governments in investigations and may also take action against non-U.S. insurers for
conduct that occurs within the United States.
The commissioner would be empowered to investigate insurance fraud and reporting of such
fraud by any person engaged in the business of insurance would be mandatory. Anyone reporting
fraud would be given immunity from prosecution for that act. (A later section, 1713, makes
insurance fraud a federal crime.) [H.R. 3200 clarifies some anti-fraud language, including
broadening the immunity for those reporting fraud.]
The organization, incorporation, operation, and regulation of National Insurers and National
Agencies would occur under regulations to be prescribed by and charters to be issued by the
commissioner. This authority could not be delegated to any self-regulatory organization. The
corporate names of National Insurers would be required to end with either those words or the
initials “N.I.” while National Agencies’ names would be required to end with “National Insurance
Agency” or the initials “N.I.A.”
National Insurers would be allowed to organize as stock, mutual, reciprocal, or fraternal
companies, while National Agencies would be required to be organized as stock companies. In
order to grant a charter, the commissioner would be required to consider the character and
competence of the applicants as well as their financial resources. If an application is denied, the
commissioner would be required to issue a written explanation of the denial. A licensed National
Insurer could offer life insurance or property/casualty insurance but not both. A license for a
particular line also would entitle the National Insurer to offer reinsurance for that line. The
commissioner would be forbidden from imposing additional conditions on non-U.S. insurers
unless these conditions were necessary for the protection of policyholders and justified in a
written finding. A National Agency would be expressly permitted to sell surplus lines insurance.
National Insurers and Agencies’ corporate governance rules would be required to be consistent
with the act and any state laws, except where the commissioner determines that a state law is
discriminatory towards National Insurers or Agencies. In this case, the state law would be
preempted. National Insurers and Agencies would be required to establish an independent audit
National Insurers and Agencies would be permitted, under rules to be prescribed by the
commissioner to convert to state insurers or agencies, and vice versa. A state insurer converting to
a national insurer would also be permitted to change its corporate form, e.g. a state mutual insurer
converting to a stock National Insurer.
A National Insurer would be permitted to establish subsidiaries but must obtain written approval
from the commissioner to invest more than 20% of its assets in a single subsidiary or 40% of its
assets in two or more subsidiaries. This approval would not be necessary if the subsidiaries are
engaged in insurance activity which the National Insurer is authorized to undertake. A National
Life Insurer may establish separate accounts and a National Insurer may establish protected cells.
These separate accounts and protected cells are to be isolated from the rest of the insurer’s assets
and income. (Separate accounts are often used in conjunction with annuities, while protected cells
are often used in conjunction with catastrophe bonds or other securitizations.)
The commissioner would be required to establish initial financial regulations consistent with
various National Association of Insurance Commissioners (NAIC) models as the models existed
at the introduction of the bill. These regulations are to be adopted within two years and would be
in effect for at least five years. After this five-year period, the commissioner could, but is not
required to, modify the regulations. The commissioner would also be authorized to promulgate
other regulations on these topics as is determined necessary.
National Life Insurers would be allowed to underwrite risks and set rates according to sound
actuarial principles or experience. The commissioner would be authorized to set standards for life
policies and life insurers would be required to file their policy forms with the commissioner
before using these forms, unless the commissioner exempts particular categories from the filing
requirement. There is no requirement for form approval. The commissioner would be given
specific authority to define “insurable interest.”
Property/casualty National Insurers would be required to maintain copies of all policy forms and
provide a list of these forms to the commissioner every year. The commissioner would
specifically not be authorized to require the use of any particular form or rate for
For all National Insurers, Agencies, and producers, the commissioner would be required to
promulgate regulations preventing unfair competition, and unfair and deceptive acts in the
marketing and sales of insurance policies and products.
The commissioner would be authorized to issue a license for reinsurance to an insurer who is not
a National Insurer in order to promote the public interest in sufficient reinsurance capacity and
the need for competition. Such licenses could not be issued until after the commissioner has
fulfilled all requirements to charter and to issue licenses to National Insurers. In order for a non-
U.S. reinsurer to obtain a license, it would be required to report its financials in a similar form as
National Insurers [H.R. 3200 specifically allows statements in conformance with International
Financial Reporting Standards], to submit to all U.S. jurisdictions [H.R. 3200 limits this to
federal courts], and to demonstrate that all U.S. court judgments would be enforceable [H.R.
3200 has slightly broader standards for this]. All reinsurers would be required to submit annual
reports of their financial condition. Any national insurer may take credit for reinsurance
purchased from a federally licensed reinsurer and any state insurer may take similar credit
notwithstanding any state law or regulation to the contrary.
No person would be allowed to obtain a controlling interest in a National Insurer or Agency
without approval by the commissioner. Such approval would be automatic unless the
commissioner specifically finds the transfer of control would: (1) cause the insurer or agency to
be unable to satisfy the requirements for a federal insurance license; (2) jeopardize the financial
stability of the insurer or agency; (3) be unfair and unreasonable to the policyholders; (4) place
the control of the insurer or agency in the hands of those lacking competence, experience or
integrity; or (5) be hazardous to the insurance-buying public. Mergers of National Insurers would
be permitted, but would also require the approval of the commissioner, who would be directed to
establish regulations and procedures for these mergers. Mergers of National Agencies would also
be permitted subject to rules that the commissioner may establish. A merged National Agency
would be required to give up any state licenses that the predecessor agencies might have held and
obtain national licenses for any lines of insurance that it did not already hold.
Bulk transfers, the transfer of existing insurance policies that constitute all or substantially all of
one insurer’s business in a particular line or under a particular policy form, would be expressly
permitted with prior approval of the commissioner. Approval by policyholders would not be
required and state laws requiring policyholder approval would be preempted. A state would not be
permitted to treat bulk transfers by national insurers differently than by state insurers.
A non-U.S. insurer with a branch in the United States would be permitted to domesticate its U.S.
branch if approved by the commissioner.
In general, both life and property/casualty companies would be permitted to convert from a
mutual insurer to a stock insurer, but only life insurers would be permitted to convert from a stock
insurer to a mutual insurer. Conversions would be subject to the act’s requirements and
regulations as promulgated by the commissioner. The commissioner would have approval
authority over conversions, but must approve conversions if the conversion is fair and equitable
to policyholders, does not violate the law, and results in a company that would satisfy the
requirements for national licensure. In addition, conversions would require approval by a
policyholder vote. After a stock to mutual conversion, all membership rights to the insurer’s
surplus would be extinguished. In the five years following a mutual to stock conversion, the
Commissioner’s approval would be required for any person to acquire more than 5% of the
company’s stock. The states would be specifically prevented from interfering with a conversion
into a National Insurer.
National Agencies and Insurers would be subject to the same state and local taxation as state
agencies and insurers. A National Insurer would be able to choose a specific state of domicile for
the purposes of taxation. National Agencies would be considered to be domiciled in the state in
which their principal place of business is located. States are specifically prohibited from imposing
any additional taxes on National Agencies or Insurers. Surplus lines insurance may be taxed only
by the state in which the insured maintains its principal place of business or residence.
The commissioner would have the authority to issue federal licenses to insurance producers; such
a license would be automatically issued to a National Agency and could also be sought by
independent insurance producers. The lines of insurance covered by the federal license would be
defined by regulation, and would include surplus lines insurance. A federal licensee would be
authorized to sell, solicit, or negotiate insurance in any state for any line that is specified in the
license. The commissioner may examine federal licensees only in response to a complaint or
other evidence of wrongdoing, but would have the authority to prescribe the filing of reports. An
electronic database of federal producers is to be developed by the commissioner and to be linked
to state insurance regulators and insurers. National Insurers and Agencies would have a duty to
supervise the sales and marketing practices of federal producers who are their employees or
agents. States are generally preempted from interfering with the actions of federally licensed
producers, including when those producers are acting on behalf of a state insurer. The
commissioner is to put in place federal regulations for producer licensing within two years and no
licenses may be issued before these are in place.
All National Insurers and Agencies who are members of a holding company would be required to
register as such with the commissioner. Transactions within the insurance holding company
would be required to be fair, reasonable, and at least as favorable to the National Insurer or
National Agency as those that would be offered to, or would apply to, a nonaffiliate. The
commissioner may specify certain transactions that would require prior notice and approval.
These requirements would not apply if the commissioner exempts a National Insurer or Agency
from them either in whole or in part. An agency or insurer may also file a disclaimer of affiliation
to be relieved of the requirements. The commissioner would be required to allow this disclaimer
unless specifically disallowed after an open hearing. Any extraordinary dividends (defined as the
greater of 10% of the policyholder surplus or the insurer’s net income for the previous 12 months)
to be paid by member of an insurance holding company would be subject to the commissioner’s
approval. If the commissioner does not specifically disapprove such dividends within 30 days,
they would be deemed to be approved.
The commissioner would be authorized to establish a receivership for a National Insurer,
providing for either liquidation or rehabilitation, on a number of grounds including insolvency,
violation of cease and desist orders or other laws, and money laundering. Receivership
proceedings would follow regulations and standards to be issued by the commissioner and based
on the Uniform Receivership Law adopted by the Interstate Insurance Receivership Compact
Commission in September 1998. A National Insurer who is the subject of a receivership
appointment may bring an action in U.S. District Court to review this appointment.
All National Insurers would be required to join the state guaranty association, either for
life/health or property/casualty insurance, providing the association is “qualified.” The
commissioner would determine whether a state association was “qualified” based on it admitting
on a non-discriminatory basis both state and National Insurers, and it providing benefits for
policyholders in the event an insurer is placed into receivership. The benefits must be equivalent
to those offered by the National Insurance Guaranty Corporation (NIGC) as contained in the bill.
Should any state’s primary guaranty association be determined not to be qualified, the NIGC
would be created. Both national and state insurers would be required to join this corporation if
they do business in a state with a non-qualified association. The NIGC would be a non-profit
corporation subject to the oversight of the commissioner but would not be an agency of the
federal government and would not be backed by the full faith and credit of the United States. Its
regulations for lines of insurance covered and the scope of the coverage would be issued by the
commissioner and would be based on the NAIC’s Life and Health Insurance Guaranty
Association Model Act and Property/Casualty Guaranty Association Model Act currently in place.
The commissioner would have the authority to change federal regulations as the NAIC models
change, but would not be required to do so.
The NIGC would establish six separate accounts for different lines of insurance. Its funding
would come from assessments on member insurers, with life/health insurers responsible for the
life, annuity, and health accounts and property/casualty insurers responsible for the workers
compensation, automobile, and “all other lines” accounts. Outside of the assessments for
administrative and general expenses, an insurer’s payments would be based on its size and on the
NIGC’s obligations from failed insurers. The NIGC would not build up money to pre-fund future
liabilities. States would be required to provide NIGC assessments with the same deductions or
offsets against state taxes that they do for state guaranty fund assessments or they would be
stripped of the authority to tax National Insurers.
National Insurers, Agencies and federally licensed producers would now be subject to federal
antitrust laws except with regard to the development and use of standard insurance policy forms.
The McCarran-Ferguson Act’s exemption to federal antitrust laws would still apply to the extent
that national insurers, agencies, and producers are subject to state law.
Analyst in Financial Economics and Risk