The Dingell bill, entitled Federal Insurance Solvency Act of 1993 but commonly referred to as H.R. 1290, was carefully crafted to elicit support of some segments of the insurance industry (for example, large national and international insurers writing large commercial accounts and major insurance brokers). H.R. 1290 opted for a two-tier approach dividing solvency regulation between the federal government and the states. The core of the legislation is affording insurers who qualify the option to be regulated for solvency at the federal level or to remain under state insurance regulatory authority.

H.R. 1290 would create a Federal Insurance Solvency Commission (FISC) to establish standards that an insurer must meet in order to receive a federal certificate of solvency. These standards would vary, depending upon the insurer's size, type of business it writes and whether it is a United States or foreign company. A federally certified insurer would be regulated on all matters pertaining to solvency by the FISC. Furthermore, the FISC rather than the states would be responsible for the rehabilitation and liquidation of all certified insurers and reinsurers finding themselves in financial difficulty. However, any insurer may opt to remain under state regulation rather than seek federal certification.

A federally certified insurer could operate anywhere throughout the country without regard to state regulatory solvency requirements. States would continue to be responsible for regulation of rates, policy forms, unfair trade practices, unfair settlement practices and residual market mechanisms. But a state would be precluded from impeding a federally certified insurer from withdrawing from any market unless the FISC determines that withdrawal will cause undue disruption. Furthermore, highly capitalized federally certified insurers providing commercial insurance to large insurance buyers would be exempt from state rate, policy form, unfair trade practice and unfair settlement practice regulation by the states.

The FISC would set standards for the certification of professional reinsurers and would be the sole regulator of their reinsurance activities. To obtain the federal certificate, a reinsurer would have to maintain a minimum capital and surplus of $50 million. These reinsurers would be exempt from state regulation except for taxation and corporate governance matters. If reinsurers do not obtain a federal reinsurance certificate, those insurers ceding business to them may not take credit for the reinsurance. Solvency regulation for the nonprofessional reinsurers remains with the states and depends upon the regulation of their other business. Federally certified reinsurers are regulated by the FISC.

H.R. 1290 would also establish the National Insurance Protection Corporation as the guaranty fund in which all federally certified insurers must participate. Unlike the state guaranty funds, the NIPC would be funded by risk-based pre-assessments. There would be separate claims divisions for different types of insurance.

Furthermore, the Dingell bill would create a National Association of Registered Agents and Brokers to provide a mechanism to simplify the ability of agents and brokers to maintain licenses in multiple states. Any state-licensed producer is eligible. The NARAB would set membership criteria (integrity, education and training). No state would be permitted to impose any requirement upon a NARAB member which varies from the criteria for NARAB membership and renewal. And the NARAB would possess authority to issue uniform producer application and renewal forms, establish a central clearinghouse for applications for licenses and create a national database for regulatory information. The NARAB would be overseen by the FISC. States would continue to regulate the market conduct of the agents and brokers in areas other than areas subject to regulation under the federal bill.

In addition to the traditional arguments for the advantages of state versus federal regulation of insurance, the two-tiered approach has been subject to substantial criticism.

The first and most fundamental flaw in the two-tiered approach stems from its convoluted division of regulatory authority between the federal government and the states. It introduces a massive amount of dual regulation in two forms. First, the insurance industry would be split into two groups for solvency regulation with one regulated by the states and the other by the federal government. Second, even federally regulated insurers, as well as their agents and brokers, would be subject to state regulation of some matters. These splits in regulatory authority would not only remove a level competitive playing field between insurers, but they would also inevitably result in conflicts when two different regulators regulate the same persons or entities. In turn, this would lead to years of costly and time-consuming litigation with all the problems attendant to a long period of dragged out uncertainty. Furthermore, the creation of dual regulation, with the attendant confusion as to which agency is responsible for what regulation, almost assuredly would create gaps in a wide variety of situations thereby allowing problems to fall between the cracks.

Second, one can question the soundness of a public policy creating incentives for forum shopping by insurers for the least burdensome regulatory structure. (This includes incentives for the regulators to weaken requirements to attract a constituency.) If federal regulation for solvency best meets various public policy objectives, it can be argued with force that the entire responsibility should be shifted rather than a complex and unwieldy hybrid such as the two-tiered system. Some might suggest, however, that the hybrid approach is simply the politically necessary first installment to an ultimate shifting of the entire authority to the federal level.

Third, although the federal government would be responsible for solvency regulation of federally certified insurers, the states would remain responsible for market conduct, rate and form regulation. Splitting the responsibilities for solvency regulation and rate control, in the view of many, courts disaster. For example, solvency regulation is intricately intertwined with rate regulation. The pressures for politically suppressed rates (to foster the public objective of reasonably priced and affordable coverage from the buyers’ perspective) already are very substantial in many if not most states. If the state insurance regulator is not responsible for solvency, political incentives to avoid permitting inadequate rates may further deteriorate. This contributes to impairing the financial condition of insurers. In turn, because of the federal responsibility for solvency, one might expect indirect federal efforts to influence rates from afar leading to more regulatory conflict and contentious disputes. Furthermore, information gathered in the regulation of market conduct affords an important input in the solvency detection process. The federal agency (FISC) responsible for regulating federally certified insurers would lack this fundamental regulatory tool thereby lessening its ability to prevent and/or lessen the magnitude of an insolvency through timely regulatory intervention.

Fourth, the Dingell bill, by granting the FISC authority to determine what constitutes a matter pertaining to solvency or financial condition, would afford the new federal regulatory commission very broad power to preempt state regulatory activities since virtually all insurance regulation can be found in some way to affect solvency or financial condition. Either actual or the threat of such federal preemption would subject state efforts even in nonsolvency areas to a very chilling effect.

Fifth, if the larger, better capitalized insurers become federally certified, the state guaranty funds might come to lack sufficient financial resources to deal with insolvencies. Thus, whether intentionally or inadvertently, separate guaranty fund systems for federally certified insurers and state regulated insurers would undermine the existing state system of guaranty fund protection to the detriment of policyholders relying on that system. Furthermore, the federally certified insurers might gain a competitive advantage in possessing an FDIC type seal of approval.

There is little in the proposed legislation demonstrating innovation or pioneering in solvency regulatory technique. The general thrust is essentially implementing at the federal level what has been, is being and/or readily could be done at the state level. Furthermore, the two-tiered system is designed, whether intentionally or inadvertently, to create duplication and conflict in regulatory effort. The ultimate resolution promises a shift of regulatory authority to the federal government.