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Obama Plan Leaves OFC an Open Question

The government's financial services regulatory reform proposal treats insurance as an afterthought, but federally driven consumer financial protection could open the door to an optional federal charter.

Whether one welcomes or recoils from the prospect of an increased federal role in insurance regulation, President Obama's presentation of financial reform proposals in mid-June likely disappointed. The U.S. Treasury Department white paper unveiled by the President treated insurance more or less as an afterthought, focusing limited resources on objectives deemed more pressing. While the paper proposed the creation of an Office of National Insurance, the office's description was so nebulous that either side of the federal insurance regulation debate can claim victory for its position. In fact the non-insurance-specific proposal of a Consumer Financial Protection Agency ultimately may be a greater driver of federal influence on the insurance industry.

Treasury Secretary Timothy Geithner was careful to limit federal commitments in his own June 18 statement before the Senate Banking Committee. "Let me be clear: Our plan does not address every problem in our financial system. That is not our intent," he said. "It does not propose reforms that, while desirable, would not move us toward achieving those core objectives and creating a more stable system."

National media outlets similarly characterized the white paper's approach to the insurance industry as "peripheral" or an "afterthought." However, the Washington, D.C.-based American Council of Life Insurers (ACLI), through a statement by CEO Frank Keating issued June 17, said that the President's plan was a step toward "a modern, efficient and consumer-oriented regulatory system" that includes an optional federal charter (OFC).

Among the critics of an OFC, the National Association of Mutual Insurance Companies (NAMIC) offered an interpretation of the Treasury white paper more in line with the mainstream media's interpretation. "Since the paper does not propose assigning regulatory authority to the ONI [Office of National Insurance], we believe that 'any new insurance regulatory regime' refers to regulatory reforms that potentially could be undertaken within the existing state-based regulatory system, which the paper leaves undisturbed and fully intact," NAMIC president and CEO Charles M. Chamness said in late July.

The Big "I" -- Independent Insurance Agents & Brokers of America -- similarly chose to interpret the government's vague recommendations for insurance in a way that suits the interests of its independent distributor membership. "We are pleased that the Obama administration's proposal retains the current state regulatory system and does not directly call for the creation of a federal regulator," commented the organization's president and CEO, Robert Rusbuldt.

Openings for an OFC

NAMIC and the Big "I" were joined by the National Association of Insurance Commissioners (NAIC) in expressing pleasure at the feds' reticence to push an OFC. Nonetheless, the government's reform proposal may be construed as providing openings for an OFC. Although opponents of an OFC had argued that the Treasury would have no appetite for the "regulatory arbitrage" implied by insurers opting between state and federal regulators, the white paper declined to stop banks from choosing between regulators such as the FDIC and the NBS (National Banking Supervisor).

The proposed Consumer Financial Protection Agency could have even more ominous implications for opponents of OFC. "The creation of this broader consumer protection counsel is going to give the federal government, specifically with regard to insurance, a real entrée into getting more involved in state-based regulation," opines Howard Mills, director and chief advisor, insurance industry group, Deloitte. "If an insurance-related consumer issue comes up, there will have to be some interaction between this federal entity and the state jurisdiction in question."

While Rep. Barney Frank (D-Mass.) introduced a bill closely tracking the Treasury's recommendations immediately following the President's and Secretary Geithner's public comments, Mills emphasizes that the mechanism for interaction between the Consumer Financial Protection Agency and state regulators is yet to be specified.

Nevertheless, the ACLI has seen the government's reform proposal as an opportunity to reiterate the theme that an OFC will heighten consumer protection. "Under the system that ACLI advocates, consumer protections for customers of federally chartered insurers would meet or exceed the highest standards that currently exist among the states," asserted ACLI CEO Keating in a July 23 statement. "And consumers could count on these protections regardless of where they reside, now or in the future."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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