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Optional federal charter supporter slams 'Balkanized' state regulation

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WASHINGTON—A bill that would allow insurers to seek federal rather than state charters will be introduced in the U.S. House this week, the measure's chief sponsor said.

"The insurance markets are Balkanized," said Rep. Edward Royce, R-Calif., during a luncheon address at the Risk & Insurance Management Society Inc.'s RIMS on the Hill legislative meeting last week. "We need a world-class regulator" to oversee insurers that chose to be chartered federally rather than by the states, as required by current law, he said.

RIMS is among the organizations that support an optional federal charter for insurers.

Rep. Royce, who introduced an optional federal charter bill last fall, said he planned to reintroduce a bill this week. He declined to name any co-sponsors, but said it would be "very close" to the Senate optional charter bill introduced late last month by Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D. (BI, May 28).

Rep. Royce noted that other industries have federal regulators who can act as advocates for their concerns. "Look what we've done in other sectors," he said. He noted that banks can choose a national charter rather than a state charter, and that the Federal Reserve chairman can act as an advocate for financial institutions' concerns.

"Somehow, I don't think 50 state insurance commissioners" would be able to serve as an "adequate advocate" for insurers, Rep. Royce said.

The congressman likened the current insurance regulatory system to the system of government created for the infant United States by the Articles of Confederation during the Revolutionary War. States interfered with each other's commerce, and colonial lawmakers ultimately replaced the articles with the Constitution, of which the Commerce Clause specifically forbids states from such interference, he said.

Rep. Royce also questioned the wisdom of having elected insurance commissioners--who are subject to political considerations--oversee the industry. "Would you want the head of the Securities and Exchange Commission" to be elected every four years? he asked his audience.

Rep. Royce said that since he first introduced an optional federal charter bill in the House last fall, he's seen a variety of positive developments that could enhance its chances of enactment. These include a study by McKinsey & Co. supporting the concept, as well as a U.S. Chamber of Commerce report endorsing the optional charter as a means of making U.S. capital markets more competitive.

The Bush administration also appears to be critical of the current state-based insurance regulatory system, particularly in regard to matters such as form and rate regulation, he said.

Yet Rep. Royce acknowledged that the insurance industry remains divided over the issue. Some insurance companies oppose the idea, while "the agents are split," he said.