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House Subcommittee Holds Hearing on Federal Regulation of Insurance

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The U.S. House of Representatives Committee on Financial Services’
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises last week held a hearing addressing how the federal
government should oversee the regulation of the insurance industry.

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Rep. Paul Kanjorski, D-Pa., subcommittee chairman, opened the hearing
with a statement that reflected the growing interest in the federal
regulation of insurance. Rep. Kanjorski also indicated that he planned
to move quickly on federal oversight legislation for insurers. However,
committee member statements clarified that there is limited consensus
on how to modernize the U.S. insurance industry.

Witnesses at the hearing included:

• Baird Webel, specialist in Financial Economics, Congressional Research Service;

• Patricia Guinn, managing director, Global Risk and Financial Services Business, Towers Perrin;

• J. Robert Hunter, director of insurance, Consumer Federation of America;

• Martin F. Grace, James S. Kemper professor, Department of Risk Management and Insurance, Georgia State University; and

• Scott Harrington, Alan B. Miller professor, Wharton School, University of Pennsylvania.

Webel’s testimony began with a brief description of the current state
of the insurance and financial industries. He then differentiated
between life and property/casualty insurance and offered seven options
for the federal government’s role in insurance regulation.

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During his testimony, Webel said, “Property/casualty companies have
generally shunned federal aid, with one industry group arguing
strenuously that property/casualty insurers typically do not present
systemic risk and the federal government should avoid providing
assistance to them.”

Webel outlined seven current policy options for Congress to consider:

• Do Nothing

• Create a Federal Office of Insurance Information

• Harmonization of State Laws Via Federal Preemption

• Create a Federal Systemic Risk Regulator
• Create a Federal Solvency Regulator

• Establish a Federal Insurance Charter

• Reform the Complete Financial Service Regulatory System

Grace, an advocate for federal regulation of insurance, also testified
at the hearing. He believes that to have an effective system in current
times, the federal government must regulate the insurance industry. He
said, "In insurance, the focus of regulation has been on the individual
company and not on the group or holding company. This needs to change,
at some level, to allow for the proper accounting of systemic risk. A
state regulator cannot realistically regulate an insurer for its
possible systemic effects on national and international markets
especially in situations where the insurer within the state is a
separately organized corporation from the corporation which might
induce a systemic risk issue.”

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Grace explained that an Optional Federal Charter (OFC) system is
outdated because it is based on a structure designed in the 1860s.

“Today’s problem is not based on regulation of solvency, market conduct
or insurance pricing that have been undertaken by the states. It is,
instead, the problem of systemic risk which, for the most part, has not
been an issue with the insurance industry. Further, systemic risk is of
national scope rather than state,” he said.

Hunter, also at the hearing, reiterated the Consumer Federation of
America’s (CFA’s) support for the repeal of the McCarran-Ferguson Act.
He did outline points for Congress to consider in defense of continued
state regulation. He said:

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• “While the CFA supports a greater federal insurance role, we
vigorously oppose an optional federal charter, since such a system
cannot control systemic risk, has failed miserably in protecting
banking consumers and sets up pressures that can only lead to reduced
consumer protections through regulatory arbitrage.

• “We believe that consumer protection is best accomplished at a
government regulatory level close to the people, and we therefore
believe that the states should continue to handle consumer protection
regulation at this time.”

Bob Redding, the Automotive Service Association’s Washington, D.C.,
representative, said after the hearing, “There are members of Congress
who want to help us with the federal regulation of insurance and the
repeal of the McCarran-Ferguson Act, but collision repairers will have
to communicate with their representatives to let them know they support
these issues. We encourage collision repairers to join ASA to help
advocates for insurance reform succeed.”

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ASA’s collision members will be on Capitol Hill this summer, asking
members of Congress to support the federal regulation of property and
casualty insurance and the repeal of McCarran-Ferguson. To participate
in ASA’s Capitol Hill Fly-In, visit www.TakingtheHill.com.

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