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For over a decade some insurance industry officials have chased the dream of working with a single federal regulator — as many of their banking counterparts have done — instead of having to deal separately with 50 states, one District of Columbia, and several territories and possessions like Puerto Rico. Thanks to pressure from the largest insurers and their trade associations, the prospect of unitary regulation has gained force in recent months over the opposition of state insurance official regulators, state legislators, and some agent and consumer groups. Congressional enactment of some legislation reforming the U.S. regulatory system is distinctly possible in 2005 — with potentially important effects for banks in the insurance arena. In the meantime, New York insurance regulators have recently abandoned attempts to regulate debt cancellation products as insurance contracts, enabling both federal and state-chartered banking organizations to offer them as loan enhancements. MULTI-STATE MAZE Ever since the Supreme Court ruled in the mid-19th century that insurance is not an article of interstate commerce, the states, not the federal government have been the principal insurance regulators in the United States. Occasionally, Congress has stepped in to legislate about discrete aspects of insurance regulation, most notably as to health insurance, but insurers, agents and consumer advocates have long been used to the vagaries of state rules. In 1999, determined to erase the Depression-era restrictions on banks selling insurance or owning insurers, Congress went further than ever before in pre-empting state laws that restricted such sales or which prevented insurers from being part of holding companies with banking or securities affiliates. Another part of the 1999 Gramm-Leach-Bliley Act required greater uniformity in the licensing of insurance agents so that an agent licensed and living in California, for example, would easily be licensed as a non-resident agent in another state. These limited steps did not quell the insistence for much more extensive reform by the larger U.S. insurers — indeed, they just added force to those demands. Companies railed about not just having to undergo expensive and time-consuming licensing in each state, but also that, once they finally were licensed, most states required them to get approval for many policy forms they wanted to issue. Life insurers, in particular, have been vociferously complaining that a national bank or a SEC-registered issuer can offer a new investment product on a nationwide basis many months before a licensed, A-rated life insurer can do so with 51 separate approvals required (not counting Puerto Rico or the U.S. Virgin Islands). Banks that distribute life products, particularly annuities, as agents of insurers have been vocal allies of the largest insurers in seeking the optional federal charter by which those insurers would be able to quickly obtain approval for new products that the banks could then sell on a nationwide basis. STATES’ TEPID RESPONSE Since 1999 the state regulators have tried to mount something of a public relations counter-attack to these complaints. Through their association, the National Association of Insurance Commissioners, state regulators have adopted various procedures designed to foster more speed and efficiency and somewhat greater uniformity in regulation. For example, they devised a common licensing application, developed a mechanism for filing proposed policy forms and rates electronically, and adopted a model law for licensing non-resident agents on a reciprocal basis that has been accepted by 39 states to date. Though welcoming these steps, leading insurers and major banks consider these steps “too little, too late.” Because each state insists on retaining sovereign authority over insurance, most state officials resist waiving their specific rules, even when these vary from most other states’ regulations. To take just three examples, New York has page after page of detailed laws as to what investments a licensed insurer can make; New Jersey has its own complex set of rules as to what automobile insurers can charge; and Maine and Ohio even have their own unique procedures and forms which must be followed for an insurer to be licensed, even though both states profess to use the common license application. CONGRESSIONAL PROPOSALS Dissatisfied with the slow and uneven pace of change, the associations representing the largest insurers, both life and property/casualty, have enlisted congressional allies to introduce specific legislation. The principal proposals are: � Allowing insurers the option to seek a federal charter, instead of traditional state licenses. Proposals backed by the American Council of Life Insurers and American Bankers Insurance Association would vest regulatory power in a new office in the Treasury Department that would license federally chartered insurers and exempt such insurers from all regulation as to the terms of their policies and the rates they may charge. Treasury would still have oversight over claims settlement practices of such insurers, and even with their federal charters, they would still have to participate in state residual market mechanisms, such as assigned risks for motor insurance, and state insurance guaranty funds. � A bill introduced by Sen. Charles Schumer, D-N.Y., is similar in affording the option of a federal license but would appear to allow rates and policy forms to be supervised at the federal level. Yet another proposal, this one by retiring Sen. Fritz Hollings of South Carolina, would vest regulation exclusively in the federal government, but is very unlikely to advance because the change is considered too radical. � Rep. Richard Baker of Louisiana, chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, a subcommittee that must approve any reform bill, is currently considering a different tack. According to a discussion draft his staff released on Aug. 23, the legislation would not replace state regulators with a single federal one, but, rather, would require state officials to implement congressionally enacted standards within three years designed to produce much greater uniformity in (i) licensing insurers and agents and in (ii) allowing products to be sold in every state. The congressman is also aiming to gradually de-regulate rates for both commercial and personal lines, much the way Illinois has already done and other states are considering. � Finally, some state officials, with the encouragement of the National Association of Insurance Commissioners, are exploring a contractual approach whereby numerous states would have their state legislatures authorize them to enter into a binding agreement with other states called an interstate compact. The compact would allow an insurer to issue life, disability and annuity products in all of them, if a commission comprised of representatives elected by the states gives its approval. Although a few states have already enacted the necessary legislation, advocates of an optional federal charter object to this proposal on the ground that it would take many years for a large number of individual states to all agree on the same version of the compact, and any state could thereafter decide to withdraw from it. Also, because the compact idea is limited to life and health insurers it does nothing to speed the introduction of property/casualty products. Nevertheless, Representative Baker’s bill essentially requires states to join the interstate compact for standardizing and streamlining approval of life insurance and annuities within two years, or else their ability to disapprove policy forms will be substantially restricted. REFORM LANDSCAPE Hearings on bills that would allow insurers the option of submitting to a single federal regulator have been held, and more hearings will follow once various constituencies have weighed in on Rep. Baker’s discussion draft bill. State officials are busy touting the limited improvements they have undertaken to date and promising more uniform rules in the future without being too specific. Although not yet willing to advocate a particular congressional bill, state insurance regulators are becoming more receptive to implementing a set of uniform national standards, as long as Congress delegates to them the task of formulating what the standards shall be — an idea the large insurers and the American Bankers Insurance Association are resisting. Consumer advocates in the United Sates have long expressed unhappiness with state insurance officials who, in their view, are too unwilling to crack down on perceived abuses by insurers in terms of rates and trade practices. Yet the activists themselves are uncertain that a federal regulator would be any more stalwart in vigorously protecting consumers. On the other hand, to attract support from Senate Democrats reform legislation could repeal the specific exemptions from U.S. antitrust laws that the insurance industry has enjoyed since 1945, and that is a change consumer advocates have sought for years. The large insurers have a congressional “card” to play in the negotiations over insurance regulatory reform in that next year the Terrorism Risk Insurance Act of 2002 expires. Congress and the administration in office then will need those insurers’ agreement to renew that legislation, which the banks and their real estate borrowers have considered crucial in the post 9-11 marketplace. A key issue in renewing the Act will be how much the industry must pay out before triggering the federal reinsurance “backstop” under that act. Predicting congressional action with certainty is hazardous, but right now the most likely development seems to be passage in 2005 or early 2006 of a federal regulatory reform bill based on Representative Baker’s approach, if renewal of the act proceeds smoothly. Consumer advocates, particularly in the Senate, will object to any push to de-regulate insurance rates nationwide, but the combined forces of large insurers and major banks will probably achieve somewhat greater uniformity in insurance regulation — particularly on state approval of new annuities and life products for banks to sell — with states continuing to be the principal regulators. Last year the New York Insurance Department stated it would not regulate debt cancellation and debt suspension agreements between national banks and their borrowers. The Department has regarded the agreement of a lender to forgive all or part of a debt for reasons based on fortuitous events, such as death or disability, to be an “insurance contract” under �1101 of the Insurance Law. Nevertheless, the department recognized that under Gramm-Leach’s preemption provisions and because the Office of the Comptroller of the Currency issued specific regulations in 2002 governing debt cancellation and suspension agreements issued by a national bank, [FOOTNOTE 1]the department concluded that national banks were exempt from state insurance regulations as to those agreements. [FOOTNOTE 2] The department’s opinion in 2003 left open the question whether state-chartered banks which issued debt cancellation and debt suspension agreements were subject to New York’s insurance laws. In April of this year the New York Banking Department issued a guidance letter that adopted the same view as the Office of the Comptroller of the Currency had — namely, that debt cancellation and debt suspension agreements were incidental to the business of banking and could be issued by New York-chartered banks, trust companies, savings banks, savings and loan associations and credit unions. According to the Banking Department, foreign licensed banking organizations enjoy the same powers. [FOOTNOTE 3] The Insurance Department has now taken the same position on state-chartered and state-licensed banking organizations as it did last year in regard to national banks. So long as the Banking Department allows those institutions to issue debt cancellation and debt suspension agreements, New York will not license and regulate them as insurers. In addition to exempting state-chartered and state-licensed banking organizations, including credit unions, the Insurance Department’s 2004 opinion also exempts federal credit unions from New York insurance rules. The Insurance Department based the exemption on the issuance of regulations by the National Credit Union Administration of regulations governing debt cancellation agreements and suspension agreements by federal credit unions that are similar to those promulgated by the Office of the Comptroller of the Currency for national banks. [FOOTNOTE 4] Clyde Mitchell is adjunct professor of banking law at Fordham Law School, having practiced in the banking and financial services group at White & Case for more than 38 years. Richard G. Liskov, of counsel to the firm and former deputy superintendent and general counsel of the New York State Insurance Department, assisted in the preparation of this article. If you are interested in submitting an article to law.com, please click here for our submission guidelines. ::::FOOTNOTES:::: FN112 CFR Part 37; 67 Fed. Reg. 58976 (Sept. 19, 2002). FN2Opinion of the Office of General Counsel, New York Insurance Department, June 17, 2004. FN3Guidance Letter, New York State Banking Dept., April 2, 2004. FN412 CFR Part 721; 66 Fed. Reg. 40,845 (Aug. 6, 2001).

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