WASHINGTON —Legislation creating an Office of National Insurance could lead to a dual system of insurance oversight, one critic of the proposed federal measure said today.

“Creating an optional federal charter for insurance would lead to dual regulation for the property-casualty insurance industry,” Jimi Grande, vice president, federal and political Affairs for the National Association of Mutual Insurance Companies said today.

He was responding to the announcement by Rep. Melissa Bean, D-Ill., and Ed Royce, R-Calif., yesterday that they would introduce legislation creating an Office of National Insurance after the President’s Day recess Feb. 23.

The two legislators said they believe their legislation “can provide a more effective regulatory regime over insurance that will enhance consumer protections, ensure our capital markets are protected from systemic threats within the insurance sector, and address many of the problems that have resulted from the fragmented state-based system.”

Their bill would establish a national system of regulation and supervision for nationally registered insurers, agencies, and producers. Under the legislation, states would still maintain responsibility for regulating state licensed insurers, agencies and producers.

David Sampson, president and CEO of the Property Casualty Insurers Association of America, charged that the proposed legislation would “muddy” the need for prompt action on legislation creating a systemic risk regulator.

At the same time, Charles Symington, senior vice president, government affairs, for the Independent Insurance Agents and Brokers of America, said that, “Based on what we have seen and heard so far, the Bean-Royce legislation is the same old tired idea, optional federal insurance regulation that has garnered little support in past Congresses.”

He said that, an OFC is bad for consumers and the insurance market, particularly in this time of economic uncertainty; and a little bit of window dressing is not going to change that fact.”

Mr. Symington added that, “The IIABA and our 300,000 agents nationwide will continue our strong opposition to this ill-conceived bill.”

In his comments, Mr. Grande said that, “It appears the direction Rep. Royce and Rep. Bean are heading in will still create an unlevel playing field and possibly lead to a dual regulatory environment of the property-casualty insurance industry."

Mr. Sampson explained that OFC legislation “raises important issues but fails to address the critical regulatory vulnerabilities that caused the current global financial crisis.”

“Systemic risk is clearly the crucial issue that Congress should tackle first,” Mr. Sampson explained.

“Before overhauling the entire financial services regulatory system, it is important to first determine what sectors of the marketplace actually create systemic risk and fix the dangerous gaps in federal oversight,” he said.

“The critical need right now, which is crucial to the future of our economy, is to establish a viable system for systemic risk regulation before refocusing on a decades-old debate over federal insurance regulation,” he added.

Meanwhile analysts at Competitive Enterprise Institute, a conservative think tank in Washington called the proposal a “step in the right direction, but one with some dangers.”

CEI analysts say that the federal government would “gain vast new powers to oversee the solvency and stability of insurers.”

They analyze the bill as allowing small insurers to remain regulated at the state level but larger insurers judged to pose potential “systemic risk” would face a mandate to submit to federal regulation.

They cautioned that under their analysis, nationally regulated insurers would still have to participate in state residual market mechanisms and pay state taxes.

The legislation would also allow insurers to charge actuarially indicated rates “throughout the country without burdensome, stability enhancing regulation by state authorities,” according to the CEI analysis.

CEI senior fellow Eli Lehrer said the bill is not the same thing as the optional federal insurance charter that he has long supported. “It’s not optional, it’s not really federal, and there’s no clear charter,” he said, “I wish the proposal went further but, mostly, it still moves things in the right direction,” he said.

CEI policy analyst Michelle Minton said the bill raises “significant questions” about the scope of federal regulation the new bill will mandate.

“While it is likely that all of the largest financial entities would already choose federal oversight under any system, the language in this law creates a dangerous ambiguity,” she said.

She added that this “ambiguity could potentially harm regulatory competition by superseding financial institutions' ability to choose which option they want.”

Ms. Minton also raised questions about a provision in the bill that would place consumer protection offices under the so-called Office of National Insurance in all 50 states.

This provision eliminates “some of the greatest benefits that the Optional Federal Charter theoretically would have provided, namely, regulatory efficiency and cost savings,” she said.

Copyright © 2009 by National Underwriter Property & Casualty Magazine