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2006 - 2007 State Federal Policies for the Jurisdiction of the:
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| Natural Disaster Mitigation and Insurance |
State Sovereignty in Financial Services |
Dual Chartering of Credit Unions
Banking Regulation
The National Conference of State Legislatures is committed to the preservation of the dual banking system. Dual banking refers to the unique system of separate state and federal chartering and regulation of banks and thrifts. States and the federal government act independently to charter, supervise and regulate financial institutions for their citizens’ benefit. A key feature of the dual banking system is the ability of a bank, whether a commercial or savings bank, to choose between a state or national charter. In doing so, a bank chooses as its primary regulator-a state banking department or the federal Office of the Comptroller of the Currency (OCC) or Office of Thrift Supervision (OTS).
The Federal Deposit Insurance Corporation (FDIC), as the deposit insurer, holds back-up regulatory authority over both state and national banks to safeguard against banks taking unnecessary risks with insured deposits. The Federal Reserve, as the central bank, ensures the free flow of funds through the banking system. The FDIC has federal oversight of state chartered banks that are not members of the Federal Reserve.
The Unique American System
The dual banking system is critical to the strength and vitality of the U.S. economy. Unlike in Canada, Europe and other developed countries, the unique American system has promoted the development of a decentralized banking market where banks of widely different sizes efficiently distribute credit to all sectors of the U.S. economy and serve the diverse needs of local, regional, and national markets. Where banking markets outside the United States are dominated by a handful of national banks, America is home to more than 9,000 banks and thrifts-the great majority of which are state chartered.
The dual system enables state governments to apply laws and regulations to banks and thrifts that serve the needs of local economies and that respond to the values and concerns of local citizens. The dual system encourages diversity and innovation. Many of the successful innovations in bank services have occurred first at the state level, including interstate banking, Negotiable Order of Withdrawal (NOW) accounts, electronic fund transfers, check hold limits, and improved disclosure of credit card fees, rates, and terms as well as community reinvestment standards and basic banking availability. Regulatory decentralization is especially important to the strength of community banking, which helps disperse decision-making vital to small business lending and job creation across America rather than concentrate it in the nation’s financial capitals.
The nation as a whole is weakened by preemptive federal actions to limit the flexibility of state legislatures to deal with local economic problems, such as the capacity to make choices about the financing of housing, small business lending and community development. In recognition of the advantages of the dual system to the public and to the health of the financial services industry, NCSL opposes any efforts by the federal government to restrict state authority to charter, supervise, or regulate the powers of state chartered banks and thrifts. Nonetheless, NCSL recognizes that the states have a duty to use their powers responsibly and in a way that does not endanger the deposit insurance system and thereby the nation's financial stability.
The Future of State Banking
As state legislators, we are concerned about the financial viability of our state banking systems. NCSL is well aware of the enormous contribution that state banks have made to the economic vitality of our states and seeks to ensure the preservation and integrity of the dual banking system. However, NCSL acknowledges the uncertain future for state chartered banks in the era of financial services modernization, interstate bank branching, bank consolidations, and mergers and technological advances such as the Internet and online banking services. We also acknowledge that one of the strengths of the dual banking system, the ability of state legislatures and regulators to be the “laboratories” of financial innovation, is jeopardized as the need for more uniform regulatory systems to meet the demand of global competition is advocated by many within our nation’s financial services industry.
At present, there are nearly 6,000 state chartered banks representing 73 percent of the nation’s total banks and holding 44 percent of total bank assets. State banks have $3.5 trillion in total assets and safeguard $2.5 trillion in total deposits. Most state banks are small community banks while some are among the nation’s largest financial institutions. State chartered banks have well-served our nation’s cities and rural areas and have been the economic backbone of our country for over 100 years.
FEderal Preemption
NCSL strongly believes that a high burden of proof must be established before federal preemption of state banking authority is justified and that only Congress-and not federal regulatory agencies-can preempt the actions of elected state leaders.
Federal lawmakers always have intended to apply state laws generally to national banks unless expressly preempted by Congress. This approach was reaffirmed in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which states that the “laws of the host State regarding community reinvestment, consumer protection, fair lending, and establishment of intrastate branches shall apply to any branch… of an out-of-State national bank” unless it is preempted by federal law or ruled discriminatory with respect to state banks [12 USC §36(f)].
NCSL supports the “prevent or significantly interfere with” standard established by the Supreme Court to govern federal preemption of state laws as they apply to national banks. Most recently in the 1997 decision, Barnett Bank of Marrion County, N.A. v. Nelson, the Supreme Court held that a state may not “forbid, or impair significantly, the exercise of a power explicitly granted” by Congress to a national bank. Congress recognized the “prevent or significantly interfere with” language in the Gramm-Leach-Bliley Financial Modernization Act of 1999 as “the legal standard for preemption” established by the Supreme Court [15 USC §6701(d)(2)(A)].
NCSL opposes any effort by the OCC to assert its regulatory authority to weaken the standard of preemption or shield national banks from state consumer protection laws and enforcement. Moreover, NCSL supports congressional efforts to eliminate the judicial deference given to the OCC by federal courts in challenges to state financial services laws and to rein-in OCC abuse of its regulatory authority to preempt state laws.
Functional Regulation
1999, Congress enacted the Gramm-Leach-Bliley Financial Services Modernization Act, which tore down the firewalls between banking and other financial services. NCSL did not oppose congressional repeal of the Glass-Steagall Act, which established those separations in 1934 in response to the Great Depression. However, NCSL consistently and strongly advocated for functional regulation of financial services and opposed provisions in the Gramm-Leach-Bliley Act that preempt state laws and regulations with regard to the business of insurance.
Even before the enactment of the Gramm-Leach-Bliley Act, state legislatures were concerned about regulatory encroachment by the OCC of state authority, especially with regard to the regulation of insurance. Since the enactment of the Gramm-Leach-Bliley Act, the OCC has challenged a number of state laws with regard to the regulation of banks selling insurance. NCSL will continue to oppose this overreach by federal regulatory agencies. NCSL strongly advocates that banks involved in the business of insurance must be regulated for this purpose by the appropriate state insurance supervisory agency, regardless if they are a state or national chartered bank. A consumer in a state must be able to expect that protections granted under state law and regulation will be the same irrespective of the financial institution from which the insurance product is obtained.
Interstate Bank Branching
The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act expressly permits state and national banks to open a bank branch in a new state only if the state permits de novo interstate branching. The Riegle-Neal Act also permits states to adopt "age" laws, which allow out-of-state bank holding companies to acquire a bank branch only after it has existed for a certain number of years. NCSL opposes congressional efforts to preempt state authority to opt out of de novo interstate branching and maintain "age" requirements.
Federal Regulatory Consolidation
NCSL recognizes the need for the federal government to reduce federal regulatory burden that can impede the economic vitality of our nation's financial services industries. In consolidating the federal banking regulators, Congress must ensure that any consolidation does not invalidate the regulatory independence of the dual banking system.
NCSL will oppose any federal regulatory consolidation plan that would:
- Preempt, limit or interfere with the rights of states to regulate state chartered banks;
- Require federal reporting requirements and examinations that duplicate state efforts and place state chartered banks at a competitive disadvantage with national banks; and
- Give oversight authority for state chartered banks to the OCC, the regulator of national banks.
NCSL supports the continued federal oversight by the FDIC and the Federal Reserve of state chartered banks. It would be detrimental to the well-being of the dual banking system for Congress to tamper with present oversight cooperation between state banking departments, the FDIC and the Federal Reserve.
State Bank Fees
Although NCSL appreciates the efforts of the federal government to take appropriate action to reduce budget deficits, state chartered institutions should not be forced to bear the burden of such efforts. NCSL opposes any proposal by the federal government that mandates the FDIC and the Federal Reserve charge and collect from state chartered banks a fee for their yearly examinations. It has been estimated that such a tax on state chartered banks would cost more than $1 billion over five years and place state banks at a competitive disadvantage to national banks. At present, FDIC examinations are covered by deposit insurance that state banks already pay to the FDIC. Federal Reserve examinations are currently paid for by earnings from the Federal Reserve's monetary policy activities.
NCSL acknowledges that, periodically over the last decade, the President’s annual budget submission to Congress has included provisions to tax state banks for duplicative federal oversight. Each time, Congress has removed those provisions from the federal budget. NCSL appreciates the support of Congress in ensuring that state banks are not double-taxed for the same service.
Consumer Protection
With the rapidly changing technological advances in the financial services industries, both state legislatures and Congress must periodically consider legislation to ensure consumer access to basic banking services; to protect the privacy of financial consumers and the security of their personal financial information; to ensure disclosure of information about credit terms, interest rates, fees, and balances; to regulate branch closing; and to otherwise protect the consuming public. In recognition that this is an area of overlapping federal and state jurisdiction, NCSL will ordinarily not oppose such federal consumer protection measures, provided that there is no preemption of complementary state consumer protection legislation. Federal legislation should not prohibit state legislatures and state regulators from providing additional protections for consumers of financial services.
Furthermore, as online banking continues to grow, clear rules must be established as to which jurisdiction's consumer protections apply to a given transaction. NCSL believes that any such rules should be crafted through a partnership between state and federal regulators and should not place state chartered banks at a disadvantage in their ability to provide services over the Internet.
Financial Services and Economic Development
Adequate investment by banks and thrifts is crucial to the maintenance and growth of state and local economies. Rural communities with agricultural economic bases, suburban communities, and urban neighborhoods must continue to get the banking services that meet their particular economic development needs.
NCSL recognizes that racial, ethnic, or gender discrimination by financial services institutions may have an impact on the ability of residents in distressed communities to obtain financial assistance. State legislators also recognize the need for financial institutions to make safe, sound and profitable investments. NCSL, recognizing the responsibilities that states have for financial institution regulation and solvency and for providing for fair lending to its constituents, believes that it is the responsibility of each state legislature to address the unique needs of its state. Likewise, the federal government as regulator of national banks must make the same determinations and act accordingly. However, Congress must not mandate federal guidelines that impede the states' abilities to regulate financial services.
NCSL believes that true economic revitalization will happen only when government, in partnership with the private sector, provides the tools for empowering those Americans within distressed communities to become part of this nation's economic mainstream.
July 2007
Dual Chartering of Credit Unions
Credit unions are member owned, not-for-profit cooperative financial institutions formed to permit those in their field of membership to pool their savings, lend to one another, and own the organization where they save, borrow, and obtain related financial services.
As with the dual banking system, credit unions have a choice to operate as a federal charter or a state charter. State credit union regulators charter and supervise state-chartered credit unions. Federal-chartered credit unions are chartered and supervised by the National Credit Union Administration (NCUA). The NCUA also administers the National Credit Union Share Insurance Fund (NCUSIF), which insures all federal credit unions and approximately 95 percent of state chartered credit unions. Therefore, NCUA is responsible for the safety and soundness of the NCUSIF and, to that extent, has interest and oversight over state chartered, federally insured credit unions. At present, there are approximately 4,000 state-chartered, federally insured credit unions and 6,000 federally-chartered credit unions in the United States.
The historic recognition of the value of maintaining a viable dual chartering system has contributed to today's strong and successful credit union movement. The choice of a credit union charter and regulation plays an important role in creating an innovative operating environment in which all credit unions benefit. However, new challenges to the vitality of the dual chartering system exist in today's environment.
As state legislators, we are well aware of the enormous contribution that state-chartered credit unions have made to the economic vitality of our states and we seek to ensure the preservation of the dual chartering system. However, we acknowledge the challenge for state financial service regulators in the new era of financial services modernization, globalization, and technological advances, such as the Internet and on-line banking services. We also acknowledge that one of the strengths of the dual chartering system, the ability of state legislatures and regulators to be the “laboratories” of financial innovation, is in jeopardy as the need for more uniform regulatory systems to meet the demand of global competition is advocated by many within our nation’s financial services industry. It is critical, as these challenges arise in today's marketplace, that federal regulatory agencies refrain from adopting policies without regard for state regulatory authority and at the expense of innovative state credit union laws.
Credit unions' dual chartering system has benefited by the competitive interplay and "balance of power" between NCUA and state regulators to provide the best system of examination, supervision and regulation. The continuation of this competitive interplay and "balance of power" is essential to the future of the dual chartering system.
The National Conference of State Legislatures believes that state credit union supervisors have the primary responsibility for assuring the safety and soundness of credit unions chartered by and operating under state law and regulation. NCSL also acknowledges that states have a responsibility to provide a credible regulatory environment where powers can be exercised in a way that does not endanger the financial solvency of NCUSIF. NCSL additionally acknowledges that federal deposit insurance agencies, like the NCUA, have a legitimate role to play if state authorized powers lead to unreasonable risks for NCUSIF. However, NCUA regulations and policies should be crafted in a way that minimizes the preemption of state authority. Any preemption of state credit union laws or regulatory authority must be justified only by a clear and certain threat to the credit unions' share insurance fund by those credit unions that are federally insured.
About half the states authorize their credit union regulators to determine whether state chartered credit unions should be allowed an alternative to federal share insurance. In seven of those states, the regulator has determined that a private share insurance option is acceptable. NCSL supports the authority of state governments to determine how state financial institutions must be insured and opposes any efforts by the federal government to preempt states’ authority to govern state deposit insurance requirements.
The dual chartering system has benefited consumers, credit union innovation and our states' economies. NCSL will oppose any effort by the administration and Congress to preempt state credit union laws and regulations, unless to oppose such efforts would adversely impact the financial well-being of state chartered credit unions.
July 2009
Equal Access to FBI Criminal History Records
State insurance regulators are responsible for protecting the rights of consumers by monitoring the management of insurers and their agents. Administering a national Federal Bureau of Investigation’s (FBI) criminal history check on people who seek a license to sell insurance products to the public is a key step to weed out wrongdoers before they can commit fraud or other criminal acts. State regulators should have efficient access to the FBI’s Criminal Justice Information System (CJIS) in order to establish dependable procedures for licensing officers, directors, and agents of insurance companies across the United States.
The National Conference of State Legislatures (NCSL) calls on Congress to give state insurance regulators statutory access to FBI fingerprint files. This information is currently available to federal and state banking and securities regulators. Access will help safeguard insurance consumers from the unnecessary risk of having known fraud artists or violent offenders engaged in the insurance business.
July 2008
Financial Information Security
Americans place great value on the right to privacy, and general support for privacy and confidentiality protections has increased as the ability of individuals to seclude personal matters from the sight, presence and intrusion of others has diminished. In the Information Age—where vast quantities of information drive economic activity—familiar and unfamiliar entities continuously gather, solicit, manage and share personally identifiable data, which commonly includes financial records, medical histories, and information on routine consumer transactions. Although much of this information has long been available in pieces, its conversion into electronic form and concentration into massive, centralized information systems has significantly eroded an individual’s ability to condition or control his or her personal information. It also threatens the confidentiality of information by heightening the likelihood that data—if not one’s identity—will be improperly disclosed, stolen or misused with potentially significant economic harm to the individual.
Protecting personal information traditionally has been a state responsibility. All states have laws to safeguard the security of financial information, and state legislatures continue to consider and enact legislation annually to improve and strengthen financial information security. Congress also has enacted laws to protect financial privacy and confidentiality and to ensure the accuracy of financial information. Federal interest and activity in this area has increased with the onset of the Information Age.
Fair Credit Reporting Act (FCRA)
Personal financial information was protected exclusively at the state level until 1970 when Congress enacted the Fair Credit Reporting Act (FCRA). FCRA established minimum federal standards to ensure that consumers could access information about themselves that lenders, insurers, and others obtain from credit bureaus and use to make decisions about providing credit and other services. Amendments to FCRA, enacted in 1996, imposed new responsibilities on credit bureaus and those who use their information to promote increased accuracy and confidentiality of credit reports. The 1996 Amendments also temporarily preempted, with a limited number of grandfathered exceptions, stronger state laws in seven areas. These included prescreening of consumer reports; the timeframe for handling accuracy disputes; duties of persons who take adverse actions and who use consumer reports in connection with credit or insurance transactions initiated by a consumer; information contained in consumer reports; duties of furnishers of information to consumer reporting agencies; and the sharing of information among affiliates.
Congress reauthorized and made permanent the seven areas of state preemption prior to their expiration with the Fair and Accurate Credit Transactions (FACT) Act of 2003 while further enhancing the accuracy of credit reports, providing consumers one free credit report annually, restricting the use of sensitive information from affiliates to market financial products, and establishing several uniform consumer protections to combat identity theft. Although virtually all the federal anti-identity theft protections in the FACT Act were based on state laws, the measure also preempts state laws in each of the areas where it established federal protection.
Gramm-Leach-Bliley
In addition to FCRA, Congress passed significant financial privacy protections with the Gramm-Leach-Bliley Financial Modernization Act (GLBA) of 1999 that applied to a wide range of financial institutions. GLBA required financial institutions to provide notice to its customers on its privacy policies, including how information is disclosed to affiliates and nonaffiliated third parties, and to offer consumers the opportunity to “opt out” of having nonpublic personal information shared with nonaffiliated third parties. Although FCRA continues to preempt state laws that would restrict information sharing among affiliates, GLBA expressly permits states to exceed the federal standards for nonaffiliated third parties. GLBA also required states to establish minimum privacy protections for the insurance consumers—a requirement that states promptly met.
Financial Information Security
The National Conference of State Legislatures (NCSL) believes that states should continue to play a vital role in protecting the privacy, confidentiality and security of sensitive nonpublic personal financial information. States long have sought to balance the economic value of information sharing with reasonable safeguards against the unnecessary disclosure and inappropriate acquisition of sensitive nonpublic personal financial information, such as credit information, account numbers, account balances, and Social Security numbers. Understanding local and regional economic situations and the unique needs of consumers within these markets, states consistently have ensured the protection of sensitive non-public personal financial information.
State legislatures recognize that financial information security is an area of overlapping federal and state jurisdiction. Therefore, NCSL does not oppose federal baseline standards for the protection of financial information, provided that these standards generally do not preempt complementary state laws. NCSL believes that states should have the authority and flexibility to adopt standards for the acquisition, retention, disclosure and sharing of financial information by and among financial institutions and nonaffiliated third parties that address local concerns or respond in a timely way to incidences of neglect or abuse that may be local or regional in nature. NCSL specifically believes that Congress should preserve state authority to exceed federal baseline standards for information sharing among nonaffiliated third parties.
Credit Reporting
NCSL acknowledges the benefit of a uniform national credit reporting system to the nation's economy. Therefore, NCSL does not oppose the seven limited areas that were subject to federal preemption by the 1996 Amendments of the FCRA and made permanent by the FACT Act. In doing so, NCSL supports the continued exemption of the state laws that were in existence prior to the 1996 Amendments and thus are currently exempted from the preemption provisions.
Data Security Breach Disclosure
Following a series of high-profile financial data security breaches, Congress is considering a range of measures to establish additional federal protections for financial data and to guard against identity theft and account fraud. Federal interest comes on the heels of laws passed in many states that require institutions to notify affected consumers following a data security breach. In fact, many of the reported breaches only came to light following the enactment of a California data breach disclosure law that went into effect in 2003.
Consistent with NCSL’s general policy for safeguarding financial information, NCSL does not oppose baseline federal data security breach notification standards, provided that the requirements do not preempt state authority to adopt standards that provide affected consumers additional protection and notification. NCSL also supports allowing state financial regulators and attorneys general to enforce any new federal data security breach notification standards.
In the event that Congress decides to preempt state law, NCSL urges that the preemption be narrowly construed to preempt only state laws that are inconsistent with the federal standard while preserving state laws that apply to entities that may be excluded from the federal act. Additionally, should Congress decide to preempt state data security breach notification laws, in order to prevent the weakening of consumer protection that exists in over a dozen states, NCSL would support a strong federal law that would require notification of the affected consumers when sensitive personally identifiable information has been, or is reasonably believed to have been, accessed or acquired. In this instance, exceptions should be made only when it is concluded that there is no significant risk that the breach has resulted in, or will result in, harm to the individual whose information has been breached.
Insurance Information Security
In response to the GLBA requirements, state legislatures enacted operationally uniform privacy protections for the nation’s insurance consumers. In their role as the functional regulators of the business of insurance, states have enacted numerous laws and regulations that address the acquisition, retention, disclosure and use of financial information by and among insurance companies. NCSL will oppose any federal effort to preempt these state laws and regulations or to enact federal standards that address the use of financial and credit information in insurance.
July 2008
Terrorism Risk Insurance
The insurance industry has repeatedly encountered new, unexpected, and severe risks but has always, given reasonable time and experience, been able to develop creative ways to price its product. However, losses from the terrorist acts of September 11, 2001, and the threat of future terrorist attacks with chaotic frequency and unknown costs challenge the capacity and risk models of the property and casualty insurance and group life insurance industries to provide coverage for such exposure. The Terrorism Risk Insurance Act (TRIA) of 2002 provided a temporary federal “backstop” to ensure the widespread availability and affordability of property and casualty insurance for terrorism while preserving state insurance regulation and consumer protection. A key aim of TRIA was to provide a transitional period for markets to stabilize, to develop effective terrorism pricing models, and to build private sector capacity to afford future losses.
The National Conference of State Legislatures (NCSL) calls on Congress to reauthorize TRIA to assure that the property and casualty insurance and group life insurance industries can protect Americans from financial losses associated with terrorism and to ensure an available and affordable insurance market for American consumers and businesses. TRIA reauthorization should:
- Not preempt state regulatory or legislative authority;
- Sunset at a date certain and be of limited duration;
- Make use of the expertise of state insurance regulators with respect to such areas as licensing of insurers, solvency surveillance, oversight of rates and forms, licensing producers, assisting policyholders and consumers during the claim settlement process and performing market conduct examinations;
- Include representatives of the National Association of Insurance Commissioners (NAIC) as members of any governing body established to administer the federal program;
- Supplement but not replace other private and public insurance mechanisms;
- Include clear and non-ambiguous definitions of terrorism;
- Encourage loss reduction and hazard mitigation efforts;
- Maintain state jurisdiction over insurer claim settlement practices.
NCSL continues to believe that any reauthorization should recognize the temporary nature of the program, and therefore encourages efforts to further promote development of the private insurance markets. Any federal plan for a temporary and limited federal backstop for terrorism insurance coverage must not adversely impact a state’s ability to levy premium taxes, regulate the business of insurance and set solvency standards for property and casualty and group life insurers.
July 2008
Insurance Fraud - Federal Criminalization
Insurance fraud presents an ever-increasing burden on the solvency of insurance companies and on the costs of consumers to obtain insurance coverage. The most conservative estimates place the annual cost of insurance fraud in the tens of billions of dollars, which is then passed on to policyholders and even state taxpayers in the event of insurer insolvency.
The kinds of insurance fraud can vary from policyholder filing of exaggerated claims to the setting up of a phony insurance company for the sole intent of stealing insurance premiums. The National Conference of State Legislatures (NCSL) recognizes the toll that policyholder and claimant initiated fraud has on the cost of insurance and the solvency of the insurer. We applaud the action taken in various states to pass laws that make it more difficult to file a false claim, increase the penalties for those who are guilty of fraudulent activities, and expand state insurance department fraud units. In those states that have taken appropriate action to curtail fraud, the rate of illegal activity has decreased.
NCSL believes that the prosecution of policyholder and claimant fraud should and must remain in the jurisdiction of state and local law enforcement officials. However, in cases of internal insurer fraud that may be the result of interstate and international conspiracies to defraud, loot or plunder an insurance company, states and the federal government should cooperate to prosecute such criminal activity.
NCSL joined state insurance regulators, state and local law enforcement officials and the insurance industry in supporting congressional passage of legislation that has made it a federal crime to engage in certain fraudulent activity, such as knowingly file a false report with a state insurance regulator; the embezzlement and theft of insurance company money, assets, funds, premiums, or credits; the falsification of company records with the intent to defraud, loot or plunder a company or its policyholders and creditors; and the criminal obstruction of proceedings before state insurance regulatory authorities.
NCSL's endorsement of federal involvement in the criminal prosecution of certain kinds of insurance fraud does not diminish our support for continued state regulation of the insurance business. Federal criminal sanctions will assist state regulators in their efforts to prevent future insolvencies.
As a result of financial services modernization, the various federal and state financial institutions regulators need to coordinate anti-fraud activities. However, federal legislation to assist the coordination of state and federal anti-fraud activities should not unnecessarily preempt state anti-fraud laws and regulations nor grant audit or subpoena authority to a federal entity over a state agency operating under appropriate state constitutions and laws.
July 2008
Natural Disaster Mitigation and Insurance
Natural disasters have the potential to strain the resources of many state and local governments, as well as endanger the financial well being of this nation’s insurance industry. The forecast of increased and more severe natural disasters requires that the federal government in conjunction with the states develop a new national policy, which provides disaster mitigation, response and recovery. The National Conference of State Legislatures (NCSL) urges Congressional action that would provide for and encourage appropriate insurance and reinsurance mechanisms for coping with catastrophic natural disasters. However, any plan for natural disaster insurance and reinsurance must not displace private sector risk transfer mechanisms, adversely impact a state’s ability to levy premium taxes, regulate the business of insurance and set solvency standards for property and casualty insurers.
July 2008
Insurance Regulatory Modernization
The National Conference of State Legislatures (NCSL) is committed to state regulation of the business of insurance. Insurance serves as the cornerstone of the economy. It provides economic security for individuals and their families and allows businesses to manage the risks that are inherent in economic activity. Whereas banking and securities are about access to capital and risk-taking, insurance is a guarantee. It is a legal promise—steeped in state tort and contract law—to provide benefits if and when they are due, often years into the future.
For more than 150 years, the states have proven that they can successfully and effectively protect consumers and ensure that promises made by insurers are kept. As a different kind of financial service, insurance requires a different kind of regulation that the states are best suited to provide. State regulation ensures that rates are fair, adequate and not excessive; that policy language is clear and includes what it should; that insurers are financially sound; that claims are paid; that consumers are informed, and that their complaints are investigated and resolved.
State regulation is accessible, accountable and responsive, and operates with greater efficiency than would a vast new federal bureaucracy. Decentralized authority promotes regulatory innovation and safeguards against the imposition of regulatory controls with potential adverse consequences that would be national in scope. Furthermore, state legislatures are uniquely positioned to set policies that accurately reflect local values and concerns, and the nation as a whole benefits from regulation tailored to serve diverse economic, social and cultural needs as well as varying geographic and environmental conditions.
Insurance Regulation for the Modern Economy
Although strongly committed to the preservation of state insurance regulation, NCSL acknowledges the responsibility of states to adjust state systems to meet the needs of the modern economy. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLBA) tore down Depression-era barriers and created a comprehensive framework to permit affiliations among banks, insurance companies and securities firms. GLBA also compelled state actions in the areas of producer licensing and insurance information privacy while implicitly calling on states to modernize insurance regulation.
States accepted this challenge with remarkable vigor. State legislatures and commissioners quickly met the specific mandates of GLBA. They continued to develop a shared vision of insurance regulatory reform to meet the needs of the modern marketplace while preserving the advantages of the state system. NCSL recognized the importance of state legislatures taking a proactive role, and therefore established a special task force to streamline and simplify insurance regulation. NCSL worked with insurance commissioners to draft and endorse the Interstate Insurance Product Regulation Compact, which creates a national state-based system to quickly make regulatory decisions on life insurance products according to uniform national standards.
NCSL also adopted an insurance regulation statement of principles, which encourages states to consider more competitive systems of product regulation for property and casualty insurance to promote the more efficient introduction of new products into the marketplace while preserving their authority to take action in a noncompetitive market and against rates that are inadequate or unfairly discriminatory. The statement continues to encourage state legislatures to:
- Direct insurance commissioners to simplify and streamline regulatory standards and requirements and eliminate inefficient and redundant regulation;
- Allocate greater insurance department resources to market regulation, anti-fraud and financial solvency efforts;
- Support regulatory efforts to improve market regulation; create more efficient, effective and uniform market conduct examinations; promote the use of technology; and better coordinate with other states; and
- Exercise oversight and investigatory functions to evaluate modernization efforts at the regulatory level and encourage industry participation in improvements to state-based systems.
State-Federal Partnership
Working individually and at the national level, states since the passage of GLBA have worked to modernize insurance regulation. However, state legislatures recognize a legitimate federal role in overseeing and promoting well-functioning insurance markets. Therefore, NCSL is willing to work with Congress to establish a shared state-federal framework to achieve insurance regulatory modernization that focuses on areas where policymakers have reached consensus and that preserve state flexibility and authority to meet the goals of modernization. However, NCSL will oppose any provision of federal legislation that relies on wholesale preemption of state authority; that would compel state compliance with federal standards or those of any non-governmental third party; or that conditions, restricts or redirects state insurance revenues, including insurance premium taxes, fees and fines, either directly or as a condition of a state’s refusal to submit to federal standards or federal efforts to commandeer a state executive branch official to participate in a federal regulatory program.
In recent years, states have enacted a wide range of reforms in critical areas to streamline, simplify and coordinate state systems and to establish uniform regulations and processes, where appropriate. NCSL believes that state efforts to enact significant reforms in critical areas represent tremendous progress and will continue to support further efforts as states move forward to achieve widespread reform in all areas in the years ahead. Some in Congress have criticized states for not moving more rapidly; however, NCSL believes that it is appropriate that modernization efforts be based on deliberate consideration. Reforms must balance legitimate industry needs for efficient, appropriate and transparent regulation with the goals of preserving and enhancing important consumer protections and financial safeguards, which are the hallmarks of the state system. State lawmakers and insurance commissioners must carefully measure these shared priorities as they move forward and should resist efforts from Congress and interested parties to prematurely embrace wholesale reforms in a blind race for uniformity.
Moreover, some in Congress and industry support federal legislation to establish a single federal regulator of insurance or allow for dual federal and state insurance regulation. If enacted by Congress, such proposals would eliminate or diminish state insurance regulation irreparably, bifurcate insurance regulation between the states and the federal government, undermine the state system of consumer protection and financial surveillance, threaten a host of other unintended consequences, and inevitably cause a loss of jobs, taxes, fees and other critical state revenues and resources. Therefore, NCSL opposes any provision of federal legislation that preempts state authority through the creation of a federal insurance official, commission or entity with the authority to regulate insurance, to implement federal standards, to enforce state compliance with federal standards, or to initiate or participate in judicial proceedings to resolve differences between federal standards and state law.
Insurance Company Solvency
The safety and soundness of insurance companies operating in the United States are the prime objectives of state insurance regulation. To ensure that these objectives are met, an effective financial surveillance and regulation system is vital. State legislatures have endeavored to strengthen state insurance departments and to create standards for financial regulation that have improved the solvency of insurance companies.
Although successful and effective, state solvency regulation standards should be reviewed and modified on an ongoing basis in order to meet the changes of a constantly evolving financial services marketplace. In doing so, states are protecting insurance company policyholders and investors. The public depends on solvent insurance companies to provide retirement income, income protection in case of death or disability, health care coverage, protection from catastrophic loss, and safe investment opportunities.
Swift and effective action by state legislatures to reform state solvency regulation proves that states are more capable of adjusting to changes in the marketplace than Congress or federal regulatory agencies. NCSL therefore will oppose any proposal to establish federal standards for state solvency regulation that cedes any authority to federal agencies to regulate financial institutions involved in the business of insurance and congressional ratification of trade agreements that would preempt state regulation of insurance for solvency purposes. Although NCSL continues to support the NAIC Financial Regulation Standards and Accreditation Program, NCSL acknowledges that state legislatures and governors have the responsibility to enact policy, which state regulators enforce. NCSL also recognizes that interstate compact proposals have the potential of addressing binding uniformity and effectiveness in specific areas of regulation.
NCSL also objects to actions taken or contemplated by the Internal Revenue Service or other federal agencies to assert priority claims to the assets of failed insurers. The states should first be allowed to distribute an insolvent company's assets to pensioners, family businesses, other policyholders and others protected by the McCarran-Ferguson Act delegation for the business of insurance to the states.
In the same vein, NCSL is concerned by federal bankruptcy rulings under the federal bankruptcy code that would allow alien insurers and reinsurers to move certain trust fund assets to bankruptcy proceedings in their domicile country. The trust funds established by alien insurers and reinsurers are to serve as collateral for insurance and reinsurance underwriting in the United States and allow such alien insurers and reinsurers to be exempt from state solvency regulation. Federal bankruptcy courts in ruling in favor of alien insurers and reinsurers have placed these collateral trust funds out of the reach of state insurance departments, which are solely responsible for solvency protection. NCSL urges Congress to rectify this situation by amending federal law to eliminate or limit this exemption for alien insurers and reinsurers under the bankruptcy code.
July 2008
State Sovereignty in Financial Services
One of the unique attributes of the American system of federalism is the ability of states to regulate financial services. For most of our history, this bifurcation of regulatory authority has well served our nation’s economic well being. The ability of states to regulate banking, insurance, securities and credit unions has allowed state legislatures and governments to meet the needs of local economies and respond to the values and concerns of local citizens.
The role of states in financial services regulation is in jeopardy. With the enactment of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which brought down the firewalls between banking and other financial services and commercial interests, the continuing consolidation and merger of financial services institutions, technological advances such as the Internet and online financial services and the competition from foreign markets, some of America’s largest financial institutions are advocating a uniform national system of regulation and the preemption of some state laws and regulation which seek to protect the financial well-being of the consumer. NCSL is concerned that Congress, which has heralded the benefits of devolution in social services and health care, has sought to further federal control of financial services in Washington, D.C.
The National Conference of State Legislatures has consistently and strongly advocated for state sovereignty in financial service regulation. NCSL opposes any federal preemption of state legislative or regulatory authority in financial services. A high burden of proof that federal action is necessary, such as a national financial crisis, should be met before any preemption of state financial services laws and regulations.
Preservation of Dual Banking
NCSL opposes any federal attempts to erode the dual banking system, to tax state banks for federal oversight services already performed by the appropriate state banking agencies and departments or to damage the dual, competitive system of banking regulation that has effectively served consumers and the industry.
State Regulation of Insurance
The National Conference of State Legislatures is committed to maintaining the states as the sole regulators of the business of insurance as provided under the McCarran-Ferguson Act. NCSL supports the efforts of states to streamline and simplify insurance regulation. NCSL will oppose any proposal to establish either a federal or a dual system of regulation of insurance, to cede any state authority to regulate financial institutions involved in the business of insurance or to obtain Congressional ratification of trade agreements that preempt state regulation of insurance.
Securities Regulation
Corporate governance and securities regulation are areas where the federal government and the states traditionally share regulatory authority. NCSL recognizes that the federal government has an interest in efficient capital markets and fair dealing in securities transactions. Nonetheless, the states’ securities agencies are responsible for protecting local investors, workers, and communities by ensuring compliance with securities laws.
NCSL is concerned that the unnecessary preemption of state laws regulating corporations and securities trading could threaten the system of state regulation and place the financial well-being of hard- working Americans at risk. NCSL will oppose such federal preemption.
Dual Chartering of Credit Unions
The dual chartering of credit unions has benefited consumers, credit union innovation and our states’ economies. NCSL will oppose any effort by the Administration and Congress to erode the dual chartering system for credit unions by preempting state credit union laws and regulations which do not adversely impact the financial well-being of state chartered credit unions and thus the National Credit Union Share Insurance Fund.
July 2007
Neal Osten, Committee Director
Heather Morton, Senior Policy Specialist
Last Updated August 25, 2006
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