Optional Federal Charter

What is it?  The insurance regulatory system is in need of reform and modernization to eliminate price controls and establish competitive prices, and to provide uniform consumer protections and regulatory efficiency.

One reform idea calls for the creation of an Optional Federal Charter (OFC). An OFC would allow insurance companies to choose whether to work within a federal regulatory structure or remain in the state regulatory system. In May 2007, Senators John Sununu (R-NH) and Tim Johnson (D-SD) introduced the “National Insurance Act of 2007” (S. 40), which would allow both property and casualty and life insurers the option of a federal charter. Companion legislation (HR 3200) was introduced in the House by Representatives Bean (D-IL) and Royce (R-CA) in July 2007.

In general terms, an OFC would establish a federal system of regulation and supervision for insurers. This system would be similar to the banking regulatory system under which companies can choose either a state or federal charter. Federally chartered companies would be primarily subject to federal law. They would continue to be subject to state laws related to taxation, participation in assigned risk plans, and other residual market mechanisms, as well as state requirements for compulsory coverage of workers compensation or motor vehicle insurance. These companies would not be subject to state regulation of pricing.

Insurance agents and brokers who wish to do business in more than one state could obtain one federal producer license, rather than separate producer licenses in each state where they maintain business operations.

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Why is it important?  The property and casualty insurance marketplace is sensitive to the regulatory environment in which it operates. Currently, insurance products are largely regulated by the states. While some states have recognized that competitive markets best serve the needs of consumers, most states restrict free-market competition, to the detriment of consumers. The insurance industry is ideally suited to rely on competitive market forces to determine the prices and terms of products it offers to the public.

What do others say?  Following the introduction of OFC legislation in the last Congress, the Financial Services Roundtable, the American Insurance Association, and the American Council of Life Insurers praised the legislation as creating a modernized insurance regulatory system that would benefit consumers, insurers, insurance agents and brokers.

The Council of Insurance Agents and Brokers said this proposal makes sense because with a federal license, a producer might sell, solicit and negotiate insurance in many states on behalf of its customers. Both the Bloomberg-Schumer report on financial services industry competitiveness released in 2007 and the Financial Services Roundtable’s Blue Ribbon Commission on Mega Catastrophes called on Congress to enact OFC legislation.

Groups such as the National Association of Insurance Commissioners (NAIC) oppose an OFC. The NAIC believes that regulation should be left up to the states and claims that the OFC legislation would result in policyholder confusion and market uncertainty. Robert Hunter of the Consumer Federation of America criticized the OFC proposal for allowing insurers to determine whether they want to be chartered at the state or federal level, as well as for its ban on state price controls.

The Independent Insurance Agents and Brokers Association issued a statement criticizing the legislation and arguing that a local insurance regulatory system works better for consumers. The National Association of Mutual Insurance Companies opposed the OFC bill on similar grounds, stating that property and casualty insurance is responsive to local conditions and as such, it does not make sense to regulate insurance at the federal level. Although the Property and Casualty Insurance Association of America (PCIA) generally supports state regulation and regulatory reform, it stated that it is open to a dialogue on an OFC as a reform measure. PCIA did not oppose OFC legislation during the last Congress.

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What is State Farm's Position?  State Farm advocates for rate freedom and similar competitive pricing reforms. We support the elimination of price controls, believing that competitive market forces – good old fashioned competition – should determine the prices and terms of products the insurance industry offers the public.

State Farm and others in the insurance industry have been working for decades with legislators to reform our nation’s state-based insurance regulatory system. State Farm, in cooperation with others in the insurance industry, works to address insurance marketplace problems in states where the regulatory environment negatively impacts insurance products, prices and services.

Consistent with these long-standing efforts, State Farm supports an OFC because it is an efficient means of achieving much needed modernization of our insurance regulatory system. An OFC – by definition – would be optional: It would not dismantle the state-based insurance regulatory system but would afford producers the option of being regulated under a federal system.

State Farm believes that an OFC would provide important consumer benefits across the U.S. by establishing a uniform, competition-based regulatory framework. This regulatory framework will bring consistency and efficiency to the regulatory process, stimulate new product development, and improve the speed to market of new products. An OFC will also give insurers the flexibility to serve all of their customers in an efficient, timely manner, regardless of geography.

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