Optional Federal Chartering: Be Careful What You Ask For
The American Council of Life Insurers last month decided to formally pursue optional federal chartering for life insurance companies and agents who do business with them.
We don’t think too many people in the business were surprised by the decision of the ACLI board. It seemed almost a foregone conclusion that after such a prolonged period of study, the federal option proposal would be approved.
It’s also not surprising why the ACLI is pushing the proposal. Life insurers are understandably impatient as they watch federally regulated banks and securities firms bring products to market in 30-to-90 days, rather than the six-to-18 month wait they must too often endure under state regulation.
In addition, ACLI is not without its supporters in other areas of the insurance business. Among property-casualty groups, for instance, the American Insurance Association called the ACLI’s decision “a positive development.”
Yet, doubts linger. While the advocates of dual chartering argue that a competitive regulatory system would prevent either state or federal regulation from becoming overly burdensome, the reality might be quite different. Once Congress sinks its teeth into this issue, it has the authority to impose all sorts of new regulatory mandates on all insurers, whether state or federally chartered.
Robert Rusbuldt, CEO of the Independent Insurance Agents of America, warned about this risk when he said, “anyone following the federal insurance terrorism issue should realize that the legislative process rarely goes the way you want it to go. Anyone who thinks we will get a clean federal chartering bill is dreaming.”
For instance, insurers so eager to be regulated like banks could find themselves subjected to the same Community Reinvestment Act requirements imposed on bankers. Housing advocates are eager to expand CRA to insurance, and have already called on Congress to include such mandates in the federal terrorism reinsurance bill that has undergone so many changes.
This could mean insurers might have to publicly disclose information on the race, gender and income of all policy applicants, as well as report why applicants were rejected, all at the census-tract level. What’s more, insurers of all stripes might be subjected to Federal Trade Commission oversight and federal consumer protection laws, as well as new federal taxes.
We doubt that federal chartering advocates would back the imposition of these unwanted and unnecessary federal regulatory burdens, but once the debate begins, there’s no telling what course the legislation would take.
ACLI says it still supports state regulation, and will continue working in the meantime with the National Association of Insurance Commissioners to improve the efficiency of state oversight. But it will be tough for ACLI or any backer of federal charters to have it both ways.
If insurers invite federal regulators into the industry, dual chartering might indeed produce a more efficient regulatory system, but in the pursuit of efficiency, supporters and foes alike in the industry must not lose sight of the price that might have to be paid.
The ancient Greeks cautioned people to be careful what they ask for. There’s a good reason we remember this wisdom some 2500 years later.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.