June, 2009

The National Insurance Consumer Protection Act’s Potential Impact on the Social Resiliency of Hazard-Prone Regions

  • David Marlett

    Network Scholar, Mercatus Center
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The ability of communities to recover from disasters depends on a well-functioning property insurance market.  However, many states insurance markets are substantially distorted or are hobbled by excessive regulation.

As a solution, there has been proposed an Optional Federal Charter (OFC) system, under which insurers would be able to opt into a federal regulatory system, leaving behind the system of patchwork state regulations.
 
The merits of moving toward federal regulation have been debated for many years to try and alleviate some of the problems of current regulatory systems. The most common model in recent years is the Optional Federal Charter (OFC). This approach would provide insurers the option of obtaining either a state or a federal charter.
 
This paper discusses the benefits and problems with both the state-based and federal-based regulatory systems and suggests that, if policy makers choose to proceed with an Optional Federal Charter system, they should focus attention on:
 
1.       Minimizing political risk,
2.       Allowing competitive rating and minimizing rate suppression,
3.       Minimizing the immediate impact on policy holders, and
4.       Maintaining the antitrust exemption.