1120 Connecticut Avenue, NW
Washington, DC 20036
Fax: 202-828-4546
J. Kevin A. McKechnie
Associate Director
November 15, 2002
The Honorable William J. Larkin, Jr.
Senator, 39th District, State of New York
National Conference of Insurance Legislators
139 Lancaster Street
Albany, NY 12210
Dear Senator Larkin:
With the November elections behind us and a new Congress waiting to convene, I
thought it appropriate to contact you and provide a summary of the American
Bankers Insurance Association’s (ABIA)1 approach to the subject of insurance
regulatory modernization. We hope you and your colleagues will review our
comments prior to considering NCOIL’s insurance streamlining resolution.
As you are aware, ABIA is working with the American Council of Life Insurers,
(ACLI), the American Insurance Association (AIA) and the Council of Insurance
Agents and Brokers (CIAB) to draft a consensus legislative proposal for an
Optional Federal Charter for insurance companies and insurance agencies. The
principles upon which our proposal is based are included for your consideration in
the enclosed statement by the Financial Services Coordinating Council2. After
careful consideration, our groups have determined that a federal alternative to the
state regulatory structure will benefit all interested parties – consumers,
underwriters and agents as well as the system of state regulation in general. The
optional federal charter proposal is patterned after the successful dual-banking
system, the benefits of which are discussed in the enclosure entitled The Benefits
of Charter Choice.
We are aware that NCOIL members may not share this view but we request that
some of the points made during congressional hearings on the subject be
examined for their individual merits. The most recent forum examining the state
insurance regulatory system was held September 17 before the House Financial
The American Bankers Insurance Association (ABIA) is a separately chartered trade association
and non-profit affiliate of the American Bankers Association representing more than 250
companies including many of the nation’s largest banks and insurers. ABIA’s mission is to
develop positions and strategies on bank-insurance related matters, represent those positions
before state and federal governments and in the courts, and support bank-insurance related
programs and activities through research, education and peer group information sharing.
The American Bankers Association (ABA), The American Council of Life Insurers (ACLI), the
American Insurance Association (AIA) and the Securities industry Association (SIA) are members
of the Financial Services Coordinating Council.
Services Committee’s Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises, chaired by Rep. Richard Baker (R-LA).
Everyone, including state insurance regulators, agreed that there are significant
problems with the current system in terms of lack of uniformity, administrative
and compliance burdens and widespread inefficiency. Most also agreed that if
these deficiencies continue, insurers will be less competitive than other financial
services organizations and consumers will suffer from lack of both innovation and
availability of insurance products.
For all types of insurers, the current regulatory system imposes significant direct
and indirect costs arising from four principle sources:
1. higher compliance costs associated with non-uniform regulations and
multiple enforcement requirements;
2. complex corporate structures required to accommodate unique regulatory
3. delayed implementation of new products and pricing changes, due to
multi-state regulatory delays; and,
4. less competition due to entry, exit, price, and product approval barriers
that have been erected in numerous states.
Moreover, in the case of property/casualty insurance, because excessive
regulatory controls often take the place of market forces, the current system can
be counter-productive. Consumers would have more provider and product choices
if insurers had the flexibility to offer products, and charge prices, that reflect their
underlying cost structures and the demands of the market.
The current system also effects international trade. As more U.S. insurers seek to
do business abroad, they are encountering increasing resistance to license
applications from foreign insurance regulators based solely on the state of the
insurance regulatory system in the U.S. The number one item on the European
Union’s annual list of global trade barriers is the U.S. state insurance regulatory
system. There are also reports that some countries may shortly file an action with
the World Trade Organization, asserting that the U.S. insurance regulatory system
amounts to a non-tariff trade barrier.
Whether or not such an action would be successful, it points out the increasingly
international aspect of the insurance business and the need to address our
regulatory framework.
To address these problems, the state system has responded with a variety of
legislative and regulatory solutions. Respectfully, none of these solutions is going
to prove adequate. Instead, a comprehensive change in the regulatory alternatives
available to insurers and insurance producers is required.
Please let me assure you that the alternative we seek is designed to preserve, not
replace, state regulation of insurance. We do not seek the repeal of the McCarranFerguson Act. Instead we propose an optional federal charter for insurance
companies. By establishing charter choice, institutions whose business model
would benefit from the advantages a single federal regulatory scheme could
provide – uniformity and efficiency of regulation, and the opportunity to bring a
more diverse group of products to market faster – would be free to elect national
Alternatively, those institutions that believe the state system offers superior local
control and more generous consumer benefits not found at the federal level would
be free to remain a state supervised entity. Our goal is not to dictate which charter
institutions must choose but to make the choice available in the first place. Such a
complementary system of state and federal regulation will provide the dynamic
tension indispensable to the modernization of insurance regulation. Our proposal
for an optional federal charter would serve as a compliment to, rather than a
substitute for, state insurance regulation. Such a distinction should be vitally
important given the competing schemes for federal insurance regulation.
One competing scheme is the creation of federal standards to be applied by the
individual states. This concept could take two forms, neither of which is
preferable to optional federal chartering.
On the one hand, federal standards could serve as minimum standards for the
states, permitting states to layer further regulation on top of those mandated by the
federal government. Under this scenario, federal standards would fail to achieve
the uniformity and efficiency of regulation sought by ABIA and other advocates
of optional federal chartering. In fact, minimum federal standards would only
exacerbate the current patchwork of differing laws with which insurers and
producers have to deal by adding another layer of regulation.
On the other hand, federal standards could be mandatory and exclusive. As such,
the federal standards would not be an alternative to state regulation; they would
replace state regulation. This alternative would intrude on the states to a much
greater degree than an optional federal regulator, which would leave state
regulation untouched and the state system to its own devices. Instead of creating
regulatory alternatives brought about by an optional federal charter and the
healthy dynamic such alternatives engender, mandatory federal standards would
spell the demise of state regulation, a result the critics of optional federal
chartering are trying to avoid.
When the 108th Congress convenes in January, ABIA and other supporters of
optional federal chartering will be asking the Financial Services Committee in the
House of Representatives to consider an optional federal charter bill. We believe
the interests of the state system are better served if optional federal chartering, not
some aggregation of preemptive federal standards, garners congressional support.
As always we remain at your service and would be happy to answer any further
questions you may have. I look forward to seeing you in San Francisco.
The Honorable Chris Liese, Vice President, NCOIL
The Honorable Neil Breslin, Chairman, State/Federal Relations
Members of the State/Federal Relations Committee
Robert Mackin, Executive Director