Federal vs. State Regulated Insurance: Which Is Better?

In an effort to streamline regulations that govern new coverage plans and update existing products when it comes to insurance, the American Council of Life Insurers (ACLI) is proposing to give insurance companies that do business in more than one state the option of operating under federal insurance regulations. The ACLI, along with other industry groups, insurance representatives and legislation, is working to create a new office in the National Treasury Department called the Office of National Insurers.

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This new office would allow insurance companies to decide if they would rather operate under state or federal insurance regulation. It would also oversee consumer protection, regulation of premium rates and sales, as well as marketplace practice. Insurance companies would fund the office, and it is comparable to The Office of the Comptroller of the Currency (for banks) or the Office of Thrift Supervision (for credit unions or institutions for savings).

What areas the Office of National Insurers would cover
If an insurance company opted to operate under federal regulation, they would be required to join the guaranty association for each state they do business with. If the guaranty fund doesn't meet federal insurance requirements for coverage and benefits of a policyholder, a national guaranty association would then be established. "It may be easier for an insurance company to operate under federal regulation rather than state," says David Roush, CEO of Insurance.com. "This way, they won't have to tailor their services to be conducive to that of the state."

If a company prefers to stay regulated by the state, there are a few changes they would have to look at, such as, product regulation, producer licensing and market conduct.

Opposed to the Office of National Insurers
To some insurance companies, the idea of being federally regulated makes no sense, because not every state has the same insurance needs. For instance, Florida residents would be more apt to purchase hurricane insurance instead of earthquake insurance, where as California residents would be more prone to purchase earthquake insurance instead of hurricane insurance. Some state insurance officials argue that if states are going to have a need for more customized homeowners insurance plans, then it would make more sense to let regulation remain at a state level. Property and casualty insurance trade associations are the biggest opponents, because their main focus is to overhaul state regulations-and believe that insurance annuities and products really don't vary that much from state to state.

National Insurance Regulations
The National Association of Insurance Commissioners (NAIC) hopes to establish state task forces to regulate insurance companies. These task forces, acting without help from the federal government, would in effect be the beginning of a "national treatment" plan. Depending on the number of states an insurance company does business with; it will be regulated by up to a total of nine of those states.

The main insurance group that is pushing for federal insurance regulations is life insurance and annuities companies. In being federally regulated, these companies will then be able to be on the same level as banks-since banks can be chartered and regulated at both a state and federal level. Insurance companies and annuities companies feel that banks have an unfair advantage over them, because they can bypass the state-based regulations system - saving them time and money. As it is now, banks and security firms can get new products on the market faster than insurance companies and annuity companies (typically within 30-90 days)-whereas insurers have to wait between six to 18 months.

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