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:
- Legislation to create an OFC was introduced in the both the House and Senate in 2006 and modified versions were reintroduced in both chambers in 2007. The bills, S.40 and H.R.3200, are both known as the National Insurance Act of 2007.
- The National Insurance Act is a proposal to create a federal insurance regulator for an insurer or agent that chooses to be regulated by the federal government, rather than by one or many states.
- The National Insurance Act would include life and property/casualty insurance lines and not health insurance; however a federally licensed agent would be permitted to sell health insurance offered by state health insurers.
- Federal regulation would be optional and the state insurance regulatory system would retain full authority over insurers and agents who continue with the state system.
- The National Insurance Act does not preempt state law for state-licensed companies and agents, but offers an alternative to state law for those that opt for federal regulation.
- The National Insurance Act does preempt most state insurance laws and regulations for federally licensed companies and agents.
- The National Insurance Act 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 states, the District of Columbia and five U.S. territories).
- With a federal license, the agent may sell insurance in any state on behalf of federally licensed insurers and/or state licensed insurers.
- Nationally licensed agents would still be required to pay taxes in their home states.
- For agents who choose to remain state licensed, they may still sell insurance on behalf of state or federally licensed insurers doing business in their state.
- For agents who work primarily for a single carrier, the bill requires federally licensed insurers (National Insurers) to supervise the activities of their federally licensed agents. In addition, federally licensed insurance agencies (National Agencies) would be required to supervise their employees engaged in the sale of insurance.
- The National Insurance Act would create a federal regulator, the Office of National Insurance (ONI), that would be housed in the Department of Treasury and headed by a commissioner appointed by the president and subject to confirmation by the U.S. Senate.
- The ONI would have the authority to determine licensing fees and continuing education standards for nationally licensed agents -– the ONI would not have authority over agents that choose to remain state licensed.
- The ONI would be responsible for establishing the supervision standards of National Insurers and National Agencies and would oversee the sales and marketing practices of federally licensed producers who are not employed by a National Insurer or National Agency, and who do not work primarily for a federally licensed insurer.
- The Commissioner established supervision standards would not conflict with the rules adopted by any self-regulatory organization approved by the SEC (including, but no limited to, the NASD).
- The National Insurance Act allows for the establishment of insurance self-regulatory organizations (SROs) for National Insurers, National Agencies and federally licensed insurance producers.
- Federal Insurers would be required to participate in all state guaranty funds unless a state guaranty fund is not deemed “qualified” by the National Commissioner. In the case of a non-qualified state fund
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:
- Insurance carriers and producers would be given the choice to operate under one set of rules.
- A single point of filing for new insurance products would improve the speed to which the products could enter the marketplace. (Currently it can take up to 2 years to get a new life insurance product approved; whereas banks and securities firms can get new products to market in 30 days).
- The insurance industry is the only sector of the financial services sector that does not have a federal government entity in Washington, D.C. to weigh in when policies or regulations are introduced that will negatively impact the business of insurance, i.e. new tax policy.
- There is skepticism that the 50 states will be able to achieve true uniformity by enacting the NAIC's Interstate Compact and other model laws -- the establishment of a national regulator could be an incentive for the state regulators to operate more efficiently so as to prevent companies and producers from choosing the federal system.
- Although the House's draft SMART Act would establish some meaningful improvements, it does not go far enough and it does not establish an entity with any real enforcement authority. The OFC Coalition is concerned that the lack of an enforcement mechanism in SMART will result in constant legal battles to be resolved by the courts.
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:
- A federal regulator would not have the experience and expertise needed to properly regulate the insurance industry.
- A federal regulator would be too far removed from consumers.
- For the property/casualty industry, insurance needs vary from region to region and a one-size fits all approach will not work.
- An optional federal charter would not be truly "optional" for those who wish to stay competitive.
- For producers, an optional federal charter could result in additional and overlapping federal licensing requirements.
- An optional federal charter could direct current state premium tax dollars to the federal government.
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
- State Government Officials Oppose Optional Federal Charter (NAIFA GovTalk, March 3, 2008)
- Insurance Coalition Urges Congress to Take Up Optional Federal Charter (NAIFA GovTalk, February 15, 2008)
- January NAIFA GovPod Explores the OFC (NAIFA GovTalk, January 15, 2008)
- NAIFA Tells Treasury Department Views on Insurance Regulatory Reform (November 21, 2007)
- OFC Hearings Continue on Capitol Hill (NAIFA Frontline, November 15, 2007)
- NAIFA Submits Written Testimony to the House Financial Service Subcommittee (Press Release, October 30, 2007)
- House Insurance Subcommittee Takes on Optional Federal Charter Debate (NAIFA Frontline, October 15, 2007)
- Bipartisan Optional Federal Charter Legislation Introduced in House (NAIFA Frontline, August 1, 2007)
- Optional Federal Charter Legislation Reintroduced in Senate (NAIFA Frontline, June 1, 2007)
- Optional Federal Charter (November 2006 Advisor Today)
- Optional Federal Charter Legislation Introduced in House (NAIFA Frontline, October 3, 2006)
- House Introduces "National Insurance Act" (NAIFA Press Release, September 28, 2006)
- Insurance Regulation Hearings Continue in Senate (NAIFA Frontline, July 31, 2006)
- Senate Banking Committee Examines Insurance Regulatory Reform (NAIFA Frontline, July 17, 2006)
- Senate Committee Examines Insurers' Antitrust Exemption (NAIFA Frontline, July 5, 2006)
- Optional Federal Charter Legislation Introduced in Senate (NAIFA Frontline, April 17, 2006)
- Background, What's Behind the Optional Federal Charter Issue? (NAIFA Frontline, April 17, 2006)
- NAIFA Commends Senate for Taking Up Insurance Regulation (NAIFA Press Release, April 6, 2006)
- A Federal Role in Insurance Regulation? (NAIFA Frontline, February 15, 2006)
Back to Main Insurance Regulatory Reform Page
- Interstate Insurance Product Regulation Compact
- Optional Federal Charter
- NARAB II
- Other State Reform Efforts
Visit the Legislative Action Center to learn more about the Optional Federal Charter.
