The current state-based insurance regulatory system is being challenged by the National Insurance Act of 2006 (NIA), which, if passed, would create a uniform federal system of regulation for insurers and insurance producers. The NIA attempts to address the claims of some life insurers and some property and casualty insurers that the current state-based insurance regulatory framework is inefficient, stifles the development of new and creative products and imposes unnecessary compliance costs on state-licensed insurers and insurance producers.

The NIA would establish an "optional federal charter" so that insurers and insurance producers could choose to operate nationwide under a single federal regulator rather than under the current state-based system. The NIA would create a central Office of National Insurance within the Department of the Treasury. The Office of National Insurance would be headed by a National Commissioner, appointed by the President, who would be responsible for issuing regulations and for overseeing the operation of the newly created federal regulatory system.

The NIA would allow insurers and insurance agencies to be organized under federal law and would permit existing insurers and agencies to replace their state charters and licenses with federal charters. The NIA would regulate and license these insurers (National Insurers) and agencies (National Agencies) as well as other individual producers that qualify and elect to do business under federal law. (The NIA refers to National Agencies and the other qualifying producers collectively as National Producers.)

The Relationship Between Federal And State Regulation Under The NIA

The federal regulatory system proposed by the NIA would not replace the regulatory systems of the individual states. The states would continue to regulate insurers and insurance producers that retain state charters and licenses. Nonetheless, there is concern within the insurance industry and among state regulators of the industry that the NIA would undermine the state regulatory system by granting the National Commissioner broad rulemaking power, coupled with federal authority to preempt conflicting state law.

National Insurers and National Producers would be regulated exclusively under federal law. Critics of the NIA argue that, as a result of federal preemption, states may be prevented from regulating state-licensed producers in their dealings with National Insurers, as well as state-chartered insurers in their dealings with National Producers. An example commonly used to illustrate the issue is a state’s prohibition on the payment of contingent commissions by a state-licensed insurer. If the NIA were held to have broad preemptive effect, a state might be precluded from enforcing such a prohibition as it applies to business placed by National Producers with state-licensed insurers.

Some parts of the state regulatory system would continue to apply to National Insurers. For example, National Insurers would still have to pay state premium taxes. They also would have to participate in residual market plans and state insurance guaranty associations, subject to restrictions. Furthermore, the NIA does not provide for a surplus lines marketplace, and that marketplace would continue to be governed by state law.

The NIA Versus The SMART Act

The NIA differs substantially from the State Modernization and Regulatory Transparency Act (SMART Act). The SMART Act also would involve the federal government in insurance regulation, but on a more limited basis than the NIA. Representative Oxley (R-OH) and Representative Baker (R-LA) released a draft of the SMART Act in August 2004, but the draft has not yet been introduced as a bill.

The draft SMART ACT would require states to comply with uniform standards and resolve disputes, speed up the process of getting new products to the market and move toward a system of marketbased rates without creating a federal regulator to monitor compliance. The SMART Act would establish a seven-member panel consisting of insurance commissioners and appointees from several federal agencies, including the Securities and Exchange Commission. The panel would have no regulatory authority per se, but it would assess compliance with the statute and mediate and resolve conflicts over uniformity requirements.

The SMART Act would also require states to adopt flex rating, which allows insurers to raise rates as long as they are kept within a certain percentage range for the year. It would call for states to develop and implement procedures on market conduct and standards. With regard to licensing, the SMART Act would require states to adopt a "single point-of-entry" system, whereby an insurance company in good standing in one state could submit a uniform application to do business in other states.

The Battlefield: Who’s For The NIA And Who’s Against It

Those supporting adoption of the NIA include the American Council of Life Insurers (ACLI), the American Insurance Association (AIA), the Council of Insurance Agents and Brokers, the American Bankers Insurance Association (ABIA) and the Financial Services Roundtable. Supporters argue that the legislation will create a more efficient regulatory system and encourage new and creative products. They also argue that it will lower compliance costs for state-licensed insurers and insurance producers, who currently compete with banks and investment firms that now have lower compliance costs. For these reasons, the life insurance industry has been the strongest supporter of the NIA.

Major opposition to the NIA comes from state insurance regulators, state governments, and certain insurance industry trade groups. Those opposed include the National Governors’ Association, the National Association of Insurance Commissioners (NAIC), the National Conference of Insurance Legislators (NCOIL), the National Conference of State Legislators (NCSL), the Independent Insurance Agents and Brokers of America, the National Association of Mutual Insurance Companies (NAMIC), the National Association of Professional Insurance Agents (PIA), the National Association of Professional Surplus Lines Offices and the Property Casualty Insurers Association of America (PCI). Some opponents believe that passage of the NIA would eventually lead to federal insurance regulation to the exclusion of any meaningful role for the states.

Moreover, although the NIA establishes a Division of Consumer Protection within the Office of National Insurance, consumer groups have expressed concern that the NIA will weaken consumer protection by reducing regulatory limitations on insurance rates, forms, and market behavior, currently enforced by state regulatory systems. The consumer groups also argue that the dual regulatory system will lead to policyholder confusion, market uncertainty and unintended consequences that will hurt consumers and taxpayers.

Opponents of the NIA argue that state regulation is better tailored to the needs of many insurance consumers. They say that many insurance products, such as auto, farm and homeowners’ insurance, are tailored to specific state and regional needs that do not relate to interstate activities. These opponents believe that state regulators have a better understanding of the local insurance markets and, if regulatory changes are needed for these specific markets, state regulators are more likely to act quickly and produce better results in response to local insurance market needs.

Finally, opponents of the NIA have argued that the legislation would leave many of the details of the new federal regulatory scheme, such as procedures for policy approval by the National Commissioner, open to future regulation and rule-making by the National Commissioner. This broad delegation of regulatory power, vested in the new position of a National Commissioner, could leave the insurance industry susceptible to political shifts and create uncertainty in the industry.

Current Status Of The NIA

Senators John Sununu (R-NH) and Tim Johnson (D-SD) introduced the NIA into the US Congress on April 4, 2006. Adverse reactions, however, have slowed its passage. The legislation is currently in the Senate Committee on Banking, Housing, and Urban Affairs without a scheduled vote or hearing and without additional sponsorship in the Senate.

Our recent article, Proposed Federal Regulation: A Bird's Eye View of the Battle, reported that the Property Casualty Insurers Association of America ("PCI") was opposed to the adoption of the National Insurance Act (the "NIA"). We have since been informed by officials from PCI that it has no official position regarding adoption of the NIA. We regret any confusion that the article may have caused with this reference to the PCI's position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.