Federal charter may be cure for 'beat up,' inefficient industry

WASHINGTON—Allowing insurers to choose a federal rather than state charter might improve market conditions in catastrophe-prone areas, according to a Louisiana state representative.

Lawmakers continue to "beat up" the insurance industry more than a year after Hurricane Katrina made landfall despite the industry's payment of billions of dollars in claims, Republican Louisiana state Rep. Shirley Bowler told those attending a discussion titled "Hurricanes, Terrorism and the Looming Congressional Debate on Regulatory Modernization" at the American Bankers Insurance Assn. in Washington in September. But "I also know that the federal government can beat up on companies as well as we can," she said.

When asked whether an optional federal charter for insurers would encourage underwriters to return to catastrophe-ravaged areas like Louisiana, Rep. Bowler said that allowing insurers to choose a federal charter could present "an opportunity" for agents to represent more companies and increase consumer choice. She called for an end to rate suppression and said that an optional federal charter could get rid of "some of the regulatory impediments."

An optional federal charter would streamline regulations and eliminate some barriers to market entry, said Jamie Burnett, legislative director for Sen. John Sununu, R-N.H, who served as a panelist.

Sens. Sununu and Tim Johnson, D-S.D., co-sponsored a bill that would allow life and property/casualty insurers to choose federal rather than state charters. The McCarran-Ferguson Act of 1945 gives states the responsibility for most aspects of insurance regulation, including chartering. Critics of the current insurance regulatory system hold that state-based regulation leads to unnecessary cost and inefficiency.

In fact, a member of the House Financial Services Committee used his keynote address less than 24 hours after the panel discussion to announce his intention to introduce optional federal charter legislation in the House before the end of September. Rep. Edward R. Royce, R-Calif., said that the current system allows large states such as California and New York to become de facto national regulators regardless of the quality of their regulatory efforts.

The question of who can best regulate insurance is far from the only issue arising from Katrina's aftermath.

"The response to the storm is still continuing," Rep. Bowler said at the panel discussion. "It's hard to go back at this point and second-guess" who should have responded first as the catastrophe unfolded, she said. In fact, "It's still in turmoil."

For example, another panelist pointed out that about one-third of the debris in New Orleans has yet to be removed. In large part, this is due to regulatory concerns, particularly environmental, said Andrew Weis, staff director of the House Homeland Security Committee's Subcommittee on Emergency Preparedness, Science and Technology. Mr. Weis stressed, though, that he wasn't "making a value judgment," simply pointing out some of the difficulties involved in rebuilding the city.

Another issue confronting the insurance industry is how to guarantee adequate and affordable terrorism insurance capacity. The Terrorism Risk Insurance Extension of Act of 2005 provides a federal backstop for insurers having to deal with claims arising from future catastrophic terrorist attacks. The backstop will expire on Dec. 31, 2007, unless specifically extended by Congress.

Congress, however, did not act directly on the backstop issue this year because lawmakers wanted to see what a federal report due by Sept. 30 would say about terrorism insurance market conditions.

"It's a little unclear what will happen in the next year," said Mr. Burnett. He said there are "likely" to be hearings on the issue next year.

"We will be forced to deal with that relatively soon," he said.

C. Chris Roth, vp and general manager of Hancock Insurance Agency Inc.--a subsidiary of Gulfport, Miss.-based Hancock Bank--and James T. McIntyre, a partner in the Washington-based McIntyre Law Firm who represents the ABIA, also participated in the discussion. Beth Climo, executive director of ABIA, moderated the panel.