Pros and Cons of Optional Federal Chartering for Insurers

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The National Insurance Act (NIA) (H.R.3200, S. 40) proposes an optional federal chartering (OFC) system for the nation’s insurance industry. An OFC would allow insurers to choose between the existing state licensing system or the proposed federal licensing system. 

Optional federal chartering can offer two clear benefits. First, participating insurers may operate in any state without having to file separate state applications. Second, having the federal and state governments compete for licensing revenues should encourage both to create more efficient regulations. Caution is called for in a world of high administrative costs, consumer confusion, and political regulation.

Some consumer groups, including the Consumer Federation of America, back an OFC and emphasize the benefits of uniform minimum protection standards. The life insurance industry also favors the NIA, because it would level the playing field—on which the banking and financial services industries already offer similar products nationwide.

This essay weighs the pros and cons of both federal and state insurance regulation, as well as of competition between the two. Such competition, as will be shown, promises considerable benefits, if done right. In addition, it should be kept in mind that regulatory competition could be further enhanced by the participation of private agents, but the details of such a discussion are beyond the scope of this essay.