Optional Federal Chartering FAQ

Optional Federal Charter for Insurers Frequently Asked Questions Version 2.0

June 23, 2008 – 6:20 pm
One of the greatest challenges facing America’s insurers is the balkanized nature of regulation for what should be a nationwide industry. The National Insurance Act (H.R. 3200 and S. 40) seeks to address this problem by creating a new federal insurance regulator, setting up a system known as an Optional Federal Charter (OFC), which would let insurers choose to organize under either federal or state law. (The Treasury Department’s Blueprint for a Modernized Financial Regulatory Structure endorses creating an OFC.) Currently, insurers operating in a given state must operate only under that state’s insurance laws. A federally chartered insurance company would have to obey all general state business regulations, but would work under a new federal regulator, which would enforce the same insurance-specific laws throughout the country. Federally chartered insurance companies would sell homeowners’, life, and auto insurance, but not health insurance. An OFC may not be an ...

Posted in Insurance Industry | No Comments »

RACICOT URGES NAIC PRESIDENT TO RECONSIDER OPPOSITION TO OFC

February 27, 2008 – 5:52 pm
The AIA issued this press release in response to NAIC President, Sandy Praeger's opinion piece : RACICOT URGES NAIC PRESIDENT TO RECONSIDER OPPOSITION TO OFC Washington, D.C., February 13, 2008 – Gov. Marc Racicot, president of the American Insurance Association (AIA), yesterday sent a letter to Kansas Insurance Commissioner and current National Association of Insurance Commissioners (NAIC) president Sandy Praeger urging its members to reconsider their opposition to federal legislation that would establish an optional federal charter (OFC). The text of the letter is below: Dear Commissioner Praeger, I read with interest the opinion piece you wrote entitled, “Federal Bill Unnecessary,” that was released to the media and posted on your web site. As a former governor, I have the utmost respect for the role of states in the nation’s political and economic landscape. Our association has worked diligently with individual insurance commissioners and the National Association of Insurance Commissioners (NAIC) in an ...

Posted in Bureaucracy, General | No Comments »

Regulatory Competition: A Primer by Jennifer Smith-Bozek

December 19, 2007 – 6:29 pm
In her new paper "Regulatory Competition: A Primer," Jennifer Smith-Bozek notes that "Over the course of many years regulations can easily grow beyond their original intent, to the point of creating real economic drag. A solution to this problem, surprisingly, may be more regulators. . . Regulatory competition can attract more businesses and jobs, yield regulations that are more efficient ...

Posted in Insurance Industry, Regulatory Competition, Uncategorized | No Comments »

Optional Federal Charter for Insurers: FAQ

November 1, 2007 – 10:53 am
    This website discusses the idea of optional federal insurance chartering. Two very similar National Insurance Act bills now before the House (H.R. 3200) and Senate (S. 40) would create a new national insurance regulator, setting up a system known as an Optional Federal Charter (OFC). (This paper does not endorse or oppose any specific bill.) An OFC would let insurers organize themselves under either federal or state law. Currently, insurers operating in a given state must operate under that state’s insurance laws. A federally chartered insurance company would have to obey all general state business regulations, but would work under a new federal bureau, which would enforce the same insurance-specific laws throughout the country. Federally chartered insurance companies would sell homeowners’, life, and auto insurance, but not health insurance.   Would optional federal chartering create a big new federal bureaucracy?   Would it increase compliance costs?   What is really ...

Posted in General | No Comments »

Does a “revolving door” between the industry and regulators prove that the insurance industry and the state regulatory systems are corrupt or that the insurance industry “owns” state regulators?

October 31, 2007 – 10:53 am
Not more so than any other heavily regulated industry. Insurance regulation is a complicated business that requires a high degree of specialized knowledge of the industry and state regulations. A revolving door is inevitable under any system that involves heavy regulation: the industry will provide a unique pool of people who can understand the intricacies of its own regulation and former regulators will make very appealing hires for any company in the industry. The only way to avoid a revolving door is to deregulate the industry. And an OFC would do just that.

Posted in Insurance Industry, Regulatory Competition | 1 Comment »

So would an OFC help the market incumbent companies make larger profits?

October 31, 2007 – 10:52 am
Probably not. By creating a national market in which insurance companies would compete, an OFC would likely result in rather vigorous intra-industry competition. Complacent companies with high rates, poor service, or faulty marketing will likely find themselves in serious trouble. Profits for the industry as a whole--which, incidentally, have as much to do with investment performance as “the business of insurance” as such—may go up or down under an OFC. But it’s highly likely that a large percentage of new profits (if any) will accrue to companies that are either startups or current niche players that see an opening on the national stage. Deregulation of banks, airlines, telephone service, and stock sales all resulted in a better deal for consumers coupled with many large, incumbent players being forced to close their doors, shrink their operations, or merge with better-run competitors. Every reason exists to believe something similar would happen within ...

Posted in Insurance Industry | 1 Comment »

“Is OFC an insurance industry “dream” as Robert Hunter of the Consumer Federation of America claims it is?”

October 31, 2007 – 10:51 am
No. The industry has deep divisions on the possibility of an OFC. Best as we can tell, the industry roughly equal numbers of companies and trade associations are on both sides of the issue. There’s no consensus as to whether it would help or hurt the industry.

Posted in Insurance Industry | 1 Comment »

Robert Hunter of the Consumer Federation of America has presented a range of data showing that publicly held insurance companies are relatively safe investments and have become safer in recent years. Doesn’t this prove that the insurance industry is reaping more profit than it deserves and shouldn’t get the reward of an Optional Federal Charter?

October 31, 2007 – 10:50 am
No. By the nature of what they do insurance companies should rank amongst the most conservatively managed businesses around. The fact that insurance companies have become more stable and offered a better return on investment shows that they are also more capable of paying policyholders claims. Anyway, for-profit insurance companies exist for the primary purpose of making profits. If they don’t, they’re failing their shareholders.

Posted in Current Problems, General, Insurance Industry | 1 Comment »

Does state regulation have any advantages over federal regulation?

October 31, 2007 – 10:49 am
It can, yes.. State regulation can often respond better to specific local circumstances. In geographically small states, it may be easier for individuals to meet face-to-face with regulators. If federal regulation were to exist, finally, some states might simply write regulations that worked better than federal regulations by providing more freedom, choice, opportunity or whatever else the market demanded. That’s why it’s important that federal chartering remain truly optional and not be an add-on to state regulation.

Posted in Regulatory Competition | 1 Comment »

Is an OFC the only way America could liberalize its insurance markets?

October 30, 2007 – 11:49 am
Definitely not. An optional federal charter is only a small first step towards a truly free market for insurance. Free market advocates should approach any new federal regulator with a healthy dose of skepticism The Competitive Enterprise Institute generally approves of an OFC in concept (although not the particular bills before Congress) not out of love for a new federal regulator, but because an OFC would create competition between regulators. A wealth of academic literature shows that competitive regulation produces better regulation for everyone. For example, since the United States liberalized banking laws in the 1990s, customers have gotten higher interest rates on deposits, paid less for loans, and seen banks add weekend hours. The creation of an Optional Federal Charter is the best option with serious support right now. Congress should also investigate measures to authorize private entities to regulate insurance companies, let insurance companies sell policies across state lines ...

Posted in Current Problems, Regulatory Competition | 1 Comment »