United States Treasury Issues Draft Legislation to Establish the Office of National Insurance

Written By Attorneys: Francine L. Semaya and William K. Broudy

Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

Proposed changes in the regulation of financial institutions issued by the Obama Administration generally have left the regulation of insurance primarily to the states. An exception has been proposed in draft legislation entitled the "Office of National Insurance Act of 2009" (the "Act"). With the release of the Act, the Administration, through the U.S. Treasury Department, has added meat to the bones of a proposal for an Office of National Insurance ("ONI"), first released in June, 2009, as part of a report calling for sweeping changes in the regulation of financial institutions. See discussion of the June, 2009 Report in  the June 18, 2009 article.

The ONI concept was born in 2008 as the Insurance Information Act, reintroduced in the U.S. House of Representatives in May, 2009 as H.R. 2609, a Bill to establish an Office of Insurance Information in the Department of the Treasury. The Act is similar to H.R. 2609 in that it permits preemption by the ONI Director of state laws and regulations that affect international insurance matters. Unlike H.R. 2609, under the Act, the Treasury Secretary cannot stay a preemption decision and a preemption decision cannot be overruled by Congress. Other aspects of the Act not present in H.R. 2609 are a grant of authority to the ONI Director to Assist the Treasury Secretary in administering the Terrorism Insurance Program and a grant of subpoena power to the ONI to collect data on insurance companies and their affiliates, enforceable in the federal district courts.

The ONI is charged with monitoring all aspects of the insurance industry, "including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry of the United States financial system". This monitoring function ties the ONI into the changes in the overall regulation of financial institutions proposed by the Administration. As part of the process, the ONI can recommend to the Board of Governors of the Federal Reserve System that it designate an insurer as an entity subject to regulation as a Tier 1 financial holding company, defined on page 9 of the June, 2009 Report as "Any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed."

To that end, the ONI is empowered to collect information from insurers and their affiliates and may create an exemption from such data collection for small insurers. If the necessary data is available from state insurance departments, it may by collected from those sources and confidentiality provisions under both federal and state law that protect release of the data shall be maintained.

The authority of the ONI extends to all lines of insurance except health insurance. Other types of authority granted to the ONI are:

● To coordinate Federal efforts and establish Federal policy on prudential aspects of international insurance matters, including representing the United States as appropriate in the International Association of Insurance Supervisors and assisting the Secretary in negotiating International Insurance Agreements on Prudential Measures;

● To determine whether State insurance measures are preempted by International Insurance Agreements on Prudential Measures;

● To consult with the States regarding insurance matters of national importance and prudential insurance matters of international importance.

The Act does not provide a definition of "prudential", although it includes a definition of "International Insurance Agreement on Prudential Measures" as follows:

The term 'International Insurance Agreement on Prudential Measures' means a written bilateral or multilateral agreement entered into between the United States and a foreign government, authority, or regulatory entity regarding prudential measures applicable to the business of insurance or reinsurance.

In general, "prudential" regulation is aimed at limiting the risk-taking of financial institutions that receive funds from customers.

The question of whether the Act excludes Congress from the process of negotiating treaties on international insurance matters has been raised. The United States Constitution, however, requires Senate ratification of treaties made by the Executive Branch.

The main purpose for the preemption of state insurance measures, defined as laws, regulations, administrative rulings, bulletins, guidelines or practices, is to give the federal government, acting through agreements with other nations, the sole authority to regulate international insurance matters. Therefore, under a series of procedures including publication of a notice in the Federal Register, the opportunity to comment and the publication of a determination by the ONI Director, the ONI has the authority to preempt a state insurance measure that:

(A) directly or indirectly treats a non-United States insurer domiciled in a foreign jurisdiction that is subject to an International Insurance Agreement on Prudential Measures less favorably than it treats a United States insurer domiciled, licensed, admitted, or otherwise authorized in that State; and

(B) is inconsistent with an International Insurance Agreement on Prudential Measures.

Preemption is not applicable to certain state insurance measures. Nothing in the Act shall:

(1) preempt any State insurance measure that governs any insurer's rates, premiums, underwriting or sales practices, or State coverage requirements for insurance, or to the application of the antitrust laws of any State to the business of insurance;

(2) be construed to alter, amend, or limit any provision of the Consumer Financial Protection Agency Act of 2009; or

(3) affect the preemption of any State insurance measure otherwise inconsistent with and preempted by Federal law.

The mandate of the Consumer Financial Protection Agency Act of 2009, another recent proposal by the U.S. Treasury Department, is "to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services." The CFPA expressly exempts the business of insurance (with limited exceptions) from the term "financial activity" as follows:

...except that the Agency shall not define engaging in the business of insurance as a financial activity (other than with respect to credit insurance, mortgage insurance, or title insurance...)

The provision that the Act establishing the ONI shall have no effect on provisions of the CFPA gives the CFPA precedence over the ONI, despite the fact that the CFPA, by its terms, has limited application to insurance. Such an approach is consistent with the view that the CFPA is designed to give the federal government broad oversight of financial markets and such oversight is not to be altered or limited by the authority with respect to insurance vested in the Director of the ONI.

Major trade organizations, including the American Insurance Association, the American Council of Life Insurers, the Council of Insurance Agents and Brokers, the Risk & Insurance Management Society and the American Bankers Insurance Association quickly announced support for the ONI.