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Advocacy Insurance Regulatory Reform

Optional Federal Charter (OFC)

New: NAIFA Board Recommends Conditional Support for Optional Federal Charter

During the 109th Congress, members of the U.S. Senate and the U.S. House of Representatives introduced legislation called the National Insurance Act of 2006. The bill would allow life and property/casualty insurers and their agents to choose to be regulated by the federal government or remain in the state system -- a concept known as "optional federal charter." Now in the 110th Congress, on May 24, 2007 Senators John Sununu (R-NH) and Tim Johnson (D-SD) once again introduced legislation to create an OFC. In addition, on July 25 Represenatives Ed Royce (R-CA) and Melissa Bean (D-IL) introduced similar legislation. The new House and Senate bills, the National Insurance Act of 2007 or S.40 and H.R.3200, are similar but not identical to the National Insurance Act of 2006. One of the major changes to the bills is the clarification of the inclusion of health insurance. Unlike the previous version which was unclear on the inclusion of health insurance, the new versions specifically state that health insurance is not a covered product line under the new Office of National Insurance (ONI). However, a federally licensed agent is permitted to sell health insurance offered by state health insurers.

NAIFA’s policy makers are currently studying the potential impact an optional federal regulator could have on NAIFA members and therefore have not yet taken a position with regard to the optional federal charter proposal in Congress.

Listen to the NAIFA GovPod on Optional Federal Charter.

Quick facts about the National Insurance Act:

How the National Insurance Act Affects Agents

The National Insurance Act (NIA) would give insurance agents the choice to remain licensed in the state regulatory system or "opt" for a national, federal license that would be valid in all 56 U.S. insurance jurisdictions (including the new federal jurisdiction, the states, the District of Columbia and five U.S. territories). With a federal license, the agent may sell, solicit and negotiate insurance in any state on behalf of federally licensed insurers and/or state licensed insurers. With regard to taxes, national producers will still be required to pay taxes in their home states. For producers who choose to remain state licensed, they may still sell, solicit or negotiate insurance on behalf of federally licensed insurers doing business in their state. While NAIFA has not endorsed the bill, NAIFA is pleased that it contributed to the drafting of the provisions allowing agents to represent a company whether that company chooses to be state or federally regulated -- should the NIA be enacted.

For agents who work primarily for a single carrier, the bill requires federally licensed insurers (or National Insurers as the bill calls them) to supervise the activities of their federally licensed agents. In addition, federally licensed insurance agencies (or National Agencies as the bill calls them) would be required to supervise their employees engaged in the sale, solicitation and negotiation of insurance. A federal insurance commissioner created by the bill would be responsible for establishing the supervision standards of both National Insurers and National Agencies. The federal insurance commissioner would directly oversee the sales and marketing practices of federally licensed producers that are not employed by a National Insurer or National Agency, and who do not work primarily for a federally licensed insurer.

Background: What's behind the Optional Federal Charter Issue?

The question of whether the insurance business should be regulated at the state level or by the federal government has been around for literally decades but has picked up steam since the 1999 passage of landmark financial services legislation known as the Gramm-Leach-Bliley Act. Before that, a landmark Supreme Court decision in 1945 removed any delusion that insurance could only be state regulated. Since that time, Congress twice considered the Optional Federal Charter issue -- first in the mid-1970's and then as a variation of that theme in the 1980s.

Like it or not, Gramm-Leach-Bliley changed the landscape. Since its adoption in 1999, many insurance carriers argue that they are at a competitive disadvantage to the banks and securities firms with which they now compete. As a result, several insurance industry trade groups (including the American Council of Life Insurers and the Council of Insurance Agents and Brokers) and insurance companies have been supporting the creation of legislation that would not supplant state insurance regulation, but instead offer an alternative to it. These groups and carriers collectively make up the Optional Federal Charter Coalition.

The Optional Federal Charter Coalition asserts that creating a system of insurance regulation similar to the dual-banking system is the best option for reform of insurance regulation. The Coalition lists the following positives:

In June 2005, the members of the Optional Federal Charter Coalition sent a letter to the members of the Senate Banking Committee urging the committee to take up the issue of insurance regulation and specifically consider their optional federal charter as a viable solution to improve the regulation of the insurance industry. Click here for a copy of that letter that includes a list of trade groups and companies that support the OFC. See if your company is listed.

OFC Opposition

Groups opposed to the optional federal charter do not believe that creating a new federal bureaucracy in Washington will best serve the needs of the insurance industry. Opponents argue:

Opponents of optional federal charter disagree over what approach should be taken to reform insurance regulation. Some support the federal standards approach reflected in the draft of a House bill called the "SMART Act." Others oppose any efforts to preempt the state regulation of insurance with federal law and instead support efforts by the states to enact the Interstate Compact and other model laws intended to streamline the regulation of insurance across state lines. NAIFA has strongly supported enactment of the Interstate Compact in every state and has publicly praised the concepts in SMART. However it must be noted for the record that SMART has not been introduced as a bill, and there is no real expectation that it will in the foreseeable future. Only the National Insurance Act has been reduced to legislative language.

What is the Likelihood That Optional Federal Charter Will Be Enacted?

Given the various viewpoints on this issue, it is widely understood that any comprehensive insurance regulatory reform that would involve the federal government will take many years to come to pass. Some believe that enacting an optional federal charter for life insurance only has a better chance of enactment than a bill that would include property/casualty insurance. This is because life insurance products do not vary from region to region and therefore one-size fits all approach would work for life products. However, at present the only insurance regulatory reform bill that has been introduced is the National Insurer Act – a bill for both life and property/casualty insurers.

Staff Contact:

Jill Edwards
Director, Federal Relations
jilledwards@naifa.org

More Information

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Visit the Legislative Action Center to learn more about the Optional Federal Charter.