Momentum is growing for establishment of an optional federal insurance charter, and the banking industry is the surprising head cheerleader.
Banks and insurance companies normally are bitter foes, but their emerging alliance behind a new federal charter demonstrates how the convergence of financial services is outpacing the regulatory system and redrawing traditional political battle lines.
"A single, federal insurance regulator would simplify regulatory compliance requirements and stimulate the development of uniform products," Larry LaRocco, managing director of the ABA Insurance Association, said at an American Enterprise Institute conference in Washington late last week. "We hope to push, promote, and work with others to get it enacted."
Both sides know that because banks are expanding their insurance activities and acquiring agencies, they share a mutual interest in an alternative to the 50-state maze that is insurance supervision. Besides the remarkable progress of financial reform legislation this year that would eliminate barriers to cross-industry mergers, the rise of electronic commerce has revitalized the case for a nationwide charter.
Unveiling a plan in the works since last year, Mr. LaRocco proposed a carbon copy of the dual banking system: letting insurance companies choose between existing state charters or a new federal charter.
The proposed Office of the Federal Insurance Commissioner would be housed in the Treasury Department and structured almost identically to the Office of the Comptroller of the Currency and the Office of Thrift Supervision. However, Mr. LaRocco emphasized that the group does not rule out creation of a separate agency instead.
The federal government would grant a charter for underwriters of insurance and annuities, and a separate agency charter for companies that would merely sell these products. Any corporation could apply for these charters, whose powers would override state restrictions. They would be subject to capital and liquidity requirements and investment limits.
Mimicking federal deposit insurance, the plan would create a Federal Insurance Guaranty Corp. that would run one fund to bail out insolvent life and health companies, and another to rescue troubled property and casualty companies.
Insurance company officials, which are regulated in every state in which they operate, responded cautiously-at least in public.
Many of them envy the advantages of the national bank charter: faster approvals of new products, uniform rules across the country, presumably lower compliance costs, and a federal regulator who will champion the industry's cause in Washington.
But they are keeping a low profile because the industry is divided and still licking political wounds from its last attempt in the early 1990s. Most telling was the American Enterprise Institute's inability to enlist any life insurance executives to speak on a panel about the benefits of a national charter; they feared reprisals by turf-conscious state insurance commissioners.
Only a few are willing to say they are counting on bankers to take the lead.
"Commercial bankers are not going to be pleased with what they see in terms of coping with this 50-state insurance system," said Ernest T. Patrikis, senior vice president and general counsel of American International Group. "That's going to be another force for change."
Such proposals have numerous foes. They argue that cost savings are uncertain, state regulators are closer to their markets, and the current system allows for more experimentation and confines the risk of regulatory errors to each state.
Political realists also emphasize that states will fight to protect the jobs and revenue that state insurance departments generate.
Creating a federal agency will be a tough sell to a Republican- controlled Congress, too.
"A new federal bureaucracy is something we don't need," said Robert B. Morgan, retired president and chief executive of Cincinnati Financial Corp.
Which lawmakers could offer such legislation is unclear, but some sympathizers reportedly exist on Capitol Hill.
Sen. Rod Grams, R-Minn., chairman of the Banking subcommittee on securities, said during the financial reform debate last month that he plans to hold hearings this year. Serious debate is not expected, however, until after financial reform is settled.
Mr. Patrikis and some others say they feel the banking industry proposal goes too far, too fast. He suggested a scaled-down alternative that would create a federal charter only for commercial property and casualty insurance. Confining it to nonretail customers would avoid any controversies about the inapplicability of state consumer protection laws, he said.
But defenders of the current system remain adamant.
"State regulation by and large does the things that we want it to do," said Michael Kerley, senior vice president of government affairs for the National Association of Life Underwriters.
