The Debate Over Federal Insurance Regulation

This post is based on a client memorandum by Richard J. Sandler, Ethan T. James, and Reena Agrawal Sahni of Davis Polk & Wardwell.

In March 2008, the Paulson Treasury issued its Blueprint for a Modernized Financial Regulatory Structure, in which Treasury recommended the establishment of a federal insurance regulatory structure to provide for the creation of an optional federal charter. The Financial Services Roundtable has endorsed the concept of a national insurance regulator, noting that “just as the state/federal banking system works well for the industry and the economy—so too can a similar insurance system.” In recent Congressional testimony, Treasury Secretary Timothy Geithner has said that “there is a good case for introducing an optional federal charter for insurance companies.”

Recently, Representatives Ed Royce (R-CA) and Melissa Bean (D-IL) introduced the National Insurance Consumer Protection Act (“NICPA”), the third attempt in less than three years to create federal insurance regulation. Not everyone thinks federal insurance regulation is an idea whose time has come, however. The CEO of the National Association of Insurance Commissioners (the “NAIC”), Therese Vaughan, recently testified in Congress that “[t]he state-based insurance regulatory system is one of critical checks and balances, where the perils of a single point of failure and omnipotent decision making are eliminated.” The Illinois Director of Insurance, Michael McRaith, in his Congressional testimony characterized the optional federal charter as “a solution in search of a problem.”

Our memorandum entitled “The Debate Over Federal Insurance Regulation” uses NICPA as a filter through which to examine the likely features of any federal insurance regulatory regime; the regulation of insurance holding companies under a federal system and how that compares to state insurance regulation, and to banking regulation, on which it is largely patterned; and how such a regime may fit into the current regulatory reform framework.

The memorandum is available here.

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