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Under the Dome by Joel Wood We Have Options

The AIG debacle could change the way Congress views the Optional Federal Charter.

By  Joel Wood

In 1993, I joined The Council as its federal lobbyist (the organization was then called the National Association of Casualty and Surety Agents), and within a month our board embraced the most radical public policy reform ever proposed for the insurance industry by endorsing Rep. John Dingell’s, D-Mich., novel “Optional Federal Charter” idea. Among insurance trade associations, we were pretty lonely; only the American Insurance Association (representing large insurers) and the then-National Association of Insurance Brokers (which later merged with The Council) supported the controversial Dingell plan.

In the 15 ensuing years, I have chronicled the rituals of the industry’s circular firing squad on the Optional Federal Charter (OFC). The very presence of the pitched debate has altered state behavior, but the fact remains that the legislation hasn’t even come close to passing. I’ve always said that some game-changing crisis will have to occur for the OFC to get serious consideration.

The breathtaking, stunning, infamous, $85 billion federal takeover of AIG presents the requisite rationale to the incoming Congress and administration.

Much has already been written on the catalytic effect of the AIG meltdown on the regulatory debate. Recriminations and finger-pointing began the day after the federal deal was announced— does AIG’s failure underscore the solvency and effective regulation of the insurance subsidiaries, or does it prove the case for federal intervention? In the previous 15 years, Congress had assumed the Heisman-Trophy posture on the OFC; next year they’ll be tackling it.

Like everything in the public policy arena, where you stand depends on where you sit. While there are long lists of who’s against and who’s for the OFC, the realities (of what people are willing to live with) are more nuanced. In anticipation of the congressional examination of this issue, and just to torture the football analogy one more time, here is the starting lineup of industry players on the issue.

  • Unlike the property-casualty industry, life insurers and agents are more cohesively supportive of the OFC. They’re competing with securities firms that go to a single regulator for product approvals, and the 50-state insurance system makes them inherently less competitive. The p-c community has the same complaint but is fractured and has to battle the notion that p-c is inherently local and regional, whereas life products are not. Prior to the AIG fiasco, a consensus existed on Capitol Hill for a life-only charter. If that’s the way the pendulum continues to swing, I wouldn’t be surprised if the life crowd took what they could get, rather than going down in flames because they’re joined at the p-c hip.
  • Personal lines companies like Allstate and USAA, which want a federal charter, feel (for good political reasons) that the OFC coalition must stick together no matter what. Substantively, perhaps the most compelling argument in favor of a federal option is the USAA pitch: military personnel who move from state to state in service of their country but who don’t have portable insurance. Politically, though, this is the most difficult sell. House Financial Services Committee Chairman Barney Frank, D-Mass., seems emphatic that he doesn’t want Congress to be fielding consumer complaints. Auto insurance alone, he says, “is rich versus poor, black versus white, urban versus suburban.” Frank isn’t likely to be rolled on the issue (and hasn’t been rolled on any issue in the House, for that matter).
  • AFLAC and the Independent Insurance Agents & Brokers of America are leading opponents of the OFC. However, IIABA supports “targeted reforms,” such as surplus lines legislation, plus the “NARAB II” proposal that would afford producers an opportunity to get a national passport for interstate licensure in the absence of a 50-state uniform standard. They go to lengths to contrast “national” licensure from “federal” licensure, but that seems splitting hairs to me.
  • Proponents of an OFC also support incremental measures. That’s essentially where The Council has been. When the OFC was gasping for oxygen, we aggressively supported the now-extinct “SMART Act” package of targeted federal reforms being advanced by then-Chairman Mike Oxley, R-Ohio, of the Financial Services Committee. The surplus lines legislation and NARAB II are spinoffs of that effort that still have a chance of passage. True, we exasperated some of our colleagues who felt that “incremental” change necessarily comes at the expense of comprehensive. In the aftermath of AIG, that argument may be academic. Congress’s interest will go well beyond parochial issues that nip at the edges of insurance oversight. (The notable exception to this, however, is the surplus lines legislation, which has gathered the closest thing to consensus among stakeholders in the entire insurance community.)

OFC critics argue that a congressional inquisition could lead to California-style overlay of federal oversight on top of state regulation. Indeed, it is a hazard. I’ve often pointed to the reality that it’s always harder to pass something than to defeat something. Before AIG, the OFC was a stretch. There are no guarantees, but if a congressional response starts to go the way of an intrusive new regime that provides no relief from the protectionist barriers of state-by-state regulation, my bet is that the industry will at a minimum be able to modify, if not kill, it.

Wood is The Council’s senior vp of Government Affairs.

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