During the past twenty years, we have witnessed numerous forays by the Federal Government into the regulation of insurance, and the resistance thereto by the states. In the past, it seems that the proposals have been more direct, e.g., repealing the McCarran-Ferguson Act or establishing a federal chartering alternative to state regulation.
However, during this Congress, the proposals have been more varied. They could be perceived as probes into a defense of state regulation that used to be uniform, but is now scattered or, in some quarters, non-existent.
There are really four sorts of proposals that would, if enacted, affect insurance regulation. As described in more detail below, they are based on different regulatory models or approaches: (1) federal chartering; (2) federally imposed self regulatory organizations (SRO) for licensing; (3) federal, i.e., Treasury oversight of the insurance business; and (4) federally imposed “lead state” regulation.
Because 2008 is an election year, the result in Congress is likely to be the same as in most prior Congresses; i.e., nothing. However, these bills may be laying the groundwork for some significant change in the future.
Optional Federal Charter
As in the prior Congress, Senators John Sununu and Tim Johnson introduced the National Insurance Act of 2007 (S. 40). If passed, S. 40 would create an Office of National Insurance within the Treasury and a Commissioner of National Insurance to be appointed by the President. It would create an entire alternative regulatory structure for those insurers and insurance agencies electing to become organized under federal law. A parallel system of regulation would continue to exist under the States. This is the most ambitious of all the insurance regulatory reform efforts, and it has attracted the most attention from both proponents and opponents. It is destined to languish, again, in this Congress.
Federal Oversight
The Chairman of the House Financial Services Committee, Representative Paul Kanjorski, introduced the Insurance Information Act of 2008 (H.R. 5840). This legislation would create within the Treasury an office with broad authority to investigate the business of insurance and to create a home for insurance expertise within a federal agency. The ability of the Federal government to preempt State law would be limited to matters affecting the ability of the United States government to enforce international agreements. Nonetheless, H.R. 5840 is perceived by many as the first step towards federal regulation. The fact that the bill is being sponsored by the Chair of the House Financial Services Committee will guarantee it some action, at least in the House, during this Congress.
Self Regulatory Organization for Licensing
The National Association of Registered Agents and Brokers Reform Act of 2008 (H.R. 5611 or “NARAB II”) is designed to facilitate multi-state licensing for insurance producers. It is a new iteration of the establishment of an association by the same name (“NARAB I”) in the Gramm-Leach-Bliley Act (“GLBA”), which would have only come into effect had a majority of States not created substantially similar licensing regimes. The problem is that not all the States have adopted identical regulatory processes, and other multi-state licensing problems remain.
NARAB II is an odd mix of structural and regulatory ingredients, including preemption of state law “while preserving the right of States to license, supervise, and discipline insurance producers,” federal court jurisdiction, deference to the state of domicile of the producer, and the creation of a federally chartered non-profit corporation in the District of Columbia under D.C. law. H.R. 5611 is being sponsored by the larger insurance trade associations, which would retain a majority of the seats on the NARAB II board of directors (the remaining seats would be occupied by state regulators). There would be ultimate oversight of NARAB II by the President.
The States have been attempting, through their compliance with NARAB I and the creation and operation of the National Insurance Producer Registration database (“NIPR”), to address the issue of the time and expense required to register in multiple states. NARAB II attempts to cut the Gordian Knot.
However, NARAB II is subject to a variety of legal challenges due to its highly unusual structure. The foremost challenge would be that legislative authority cannot be delegated to an agency or other body that is not “politically accountable”.Chevron v. Natural Resources Defense Council, 467 U.S. 837, 865-866 (1984). Although the “Non-delegation doctrine” is complicated by inconsistency in the cases interpreting it, it is likely that this bill will undergo a rewrite before being seriously considered by Congress.
“Lead State” Regulation
The House passed the Non-Admitted and Reinsurance Reform Act of 2007 (H.R. 1065) almost a year ago. It was essentially the same legislation the House passed in the 109th Congress. It would streamline the regulation of the surplus lines market by creating a uniform system of surplus lines premium tax allocation and remittance by the state of domicile of the insured. All other states would have to defer to that state’s decisions. Similarly, the home state regulator of a ceding insurer would be entrusted with the authority to make all credit for reinsurance determinations. Other states would be prohibited from applying their laws to credit for reinsurance.
This is the “lead state” model first introduced by the Congress into insurance regulation by the Product Liability Risk Retention Act of 1981 and then supplemented by the Liability Risk Retention Act of 1986. That Act is the subject of a recently introduced bill – the Increasing Insurance Coverage Options for Consumers Act of 2008 (H.R. 5792) – sponsored by Representative Dennis Moore (who was also a sponsor of the surplus lines legislation). H.R. 5792 would amend the Liability Risk Retention Act by expanding the Act to include commercial property coverages (in addition to the commercial liability coverages currently allowed). Importantly, it would mandate that corporate governance requirements created by the NAIC be implemented by the risk retention group’s (“RRG”) state of domicile. It would also allow participation in an insurance insolvency guaranty association consisting entirely of other RRGs (which is prohibited under the current legislation).
Both of these “lead state” bills need further work to placate opponents. No insurance legislation will pass this Congress in the political year if any significant opposition exists.
Robert “Skip” Myers is co-chairman of the firm’s insurance and reinsurance group and practices in the areas of insurance regulation, antitrust, and trade association law. Skip received his bachelor’s degree from Princeton University and his law degree from the University of Virginia.
