Optional Federal Chartering Opponents Duel At Congressional Hearing
The first hearing on optional federal chartering revealed the stark differences between the life insurance and property-casualty insurance industries that are certain to make enactment of OFC legislation that much harder than if the industries were unified.
While the American Council of Life Insurers, Washington, supports OFC, as do some in the p-c industry, other powerful forces among p-c insurers strongly oppose it.
The widespread view is that some type of consensus will have to be achieved before any OFC legislation can move ahead. Based on the testimony at a Financial Services Subcommittee hearing, that will be a daunting task.
The case for OFC was made forcefully by Steve Bartlett, chief executive officer of the Financial Services Roundtable, Washington.
He says that OFC is a top legislative priorty for his group, which represents 100 of the nations largest integrated financial services firms.
The costs of the present system are reflected by industry profitability, Bartlett says.
“It is profitability, after all, that allows our companies to offer products and services at the lowest possible cost to consumers,” he says.
The rate of return for life insurance companies, Bartlett notes, was 10% in 2000. By contrast, commercial banks experienced a 16.7% ROR, while that for diversified financial firms was 21.3%.
The overall rate for Fortune 500 companies was 14.6%, he adds.
He says one of his member companies, which he did not identify but which is primarily in the life insurance business, estimates that it will save between $21 million and $25 million annually with OFC simply by eliminating duplicate costs for materials, licensing and fees, technology and personnel.
“These figures, extrapolated across the breadth of the industry, are illustrative of the savings companies could afford consumers if insurance regulation were modernized,” Bartlett says.
Clearly, he says, insurance companies are not as healthy as other financial services companies under the present regulatory system.
“In fact, it is reasonable to assume that under the current state-based system, diversified financial services companies will continue to steer away from insurance as a core business,” Bartlett says.
Consumers, he says, will ultimately bear the cost in terms of reduced choice and convenience.
But two major p-c associations–the National Association of Mutual Insurance Companies, Indianapolis, and the Alliance of American Insurers, Downers Grove, Ill.–say they will fight OFC and continue to work towards reform of the present system.
Wayne F. White, president of Home Mutual Fire Insurance Company of Conway, Ark., says he fears that OFC would not lead to streamlined regulation.
The fear, he says, is that it would lead to dual regulation, creating an unfair environment for the thousands of smaller companies.
White testified on behalf of NAMIC, which primarily represents smaller p-c companies, some of which do business in only one or two counties of a state.
(Ironically, the nations largest commercial lines company, AIG, and the nations largest personal lines company, State Farm, are also members of NAMIC.)
White says NAMIC is encouraged by the performance of the National Association of Insurance Commissioners following the enactment of Gramm-Leach-Bliley Act in its effort to modernize state regulation.
Moreover, he says, state legislative groups, such as the National Conference of Insurance Legislators, are working to put these modernization initiatives into law.
Congress, he says, should give the states more time to act.
“NAMIC joins with our colleagues in asking for fundamental reform of insurance regulation,” White says. “We disagree with some on the method to bring this about.”
But Bartlett says that even if the state system reforms, that may not be enough. The states may achieve uniformity, he says, but it could be a uniformly bad system.
“We dont want to simply change a grossly inefficient system to a largely inefficient system,” Bartlett says.
Creating an optional federal system, Bartlett says, will create a healthy competition that will improve regulation at both the state and the federal levels, just as it has done in the banking industry.
The subcommittee is scheduled to hold two more days of hearings on OFC this month. ACLI and the National Association of Insurance and Financial Advisors, Falls Church, Va., are expected to submit testimony.
In other news, sources told National Underwriter that a vote on full repeal of the estate tax could take place in the Senate the week of June 17.
These sources quoted Senate Majority Leader Tom Daschle, D-S.D., as telling an industry group that the estate tax issue may be brought to the floor on June 14, with the debate continuing on the 17th.
Under an agreement between Daschle and Senate Republican leaders, a super-majority of 60 votes will be needed for estate tax repeal to prevail. Sources say they expect the vote to be close.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 10, 2002. Copyright 2002 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.