Envision our banking industry without dual chartering. It's not a pretty picture, but banks running multistate insurance businesses wrestle every day with a state-by-state regulatory scheme that American bank regulators jettisoned long ago in favor of the more efficient and innovative dual system.
At the ABA Insurance Association (ABAIA) we have endorsed the concept of an optional federal charter and regulator for insurance. And we have gone one logical step further, developing a blueprint modeled on the dual banking system.
The model should be the current dual banking system, which by all measures has been a resounding success in America for 140 years. The New York Times not long ago editorialized: "The country has been well served by what amounted to competing regulatory jurisdictions, a flexible arrangement that has given the country the strongest banking system in the world."
Federal Reserve Chairman Alan Greenspan agrees that dual regulation has meant better regulation. "Banking supervision and regulation," he has said, "can only benefit from the variety of viewpoints and checks and balances of a system of more than one regulatory authority. A system in which regulations result from the give and take involving more than one agency, stands a better chance of avoiding the extremes of supervision."
So let's apply the concept to insurance.
Quite simply, insurance companies should be free to decide whether they want a state or federal charter and regulator. Insurance operations could choose a state charter, or a national charter, depending on what works best for them and their customers. The state system remains indispensable. Indeed, it is the presence of alternatives that creates the crucial dynamic. A recent National Underwriter editorial, declaring in a headline that ABAIA's "Proposal Merits Serious Consideration," clearly grasped the dynamic.
Allowing insurance firms to tailor charters to operations would lead to variety in the approaches and emphases of companies. In turn, this would let people choose a company with the characteristics and products most useful to them. Charter choice creates a flexible, competitive industry open to new products that benefit consumers and business customers.
A two-charter system would also let states focus on designing licenses suited to the particular needs of their residents and businesses, in some cases following the lead of national innovation and in others leading the way themselves.
Competing regulators are forced to maximize efficiency. Permitting a choice forces regulators to update and improve examination techniques and training.
William M. Isaac, a former FDIC chairman who once said, "I cannot overemphasize the benefits of the dual banking system," also pointed out that a dual system "embodies a system of checks and balances between two levels of government and helps to ensure the decentralization of decision-making power. It serves as a safety valve against concentration of power in the hands of a few decision makers, who can become imperceptive or complacent, and against the potential for abusive or simply unwise actions."
But neither charter would be advantageous, or even workable, in all circumstances, at all times. As Mr. Isaac has said, "The history reveals ebbs and flows in the attractiveness and dominance of the state-chartered and nationally-chartered banking systems, as the respective legislative and regulatory bodies were more or less responsive to changing conditions in the industry."
Or as Edward Kane, then the James Cleary Professor in Finance at Boston College, put it, "Competition between overlapping federal and state regulators looks in the short run like wasteful duplication but leads in the long run to better-adapted regulatory rules."
Dual chartering of insurance would benefit the industry and consumers, lead to better regulation, and bolster both state and national economies. ABAIA's blueprint is not just a solution to a present impasse but also a positive, innovative step toward an insurance industry that is more protective of and in step with the needs of America's citizens than ever before.
Mr. King is president of Wells Fargo Insurance Inc. and president and chairman of the ABA Insurance Association.
