The key issues that affect the life insurance industry, such as taxes and pensions, are federal in nature and there should be a federal authority with expertise in the insurance industry, says an industry representative.
In testimony before a Senate Commerce Committee panel on insurance regulation, Stephen E. Rahn, vice president and associate general counsel with Lincoln National, says the issue of product speed-to-market is only one of the life insurance industrys biggest concerns over the current regulatory system.
As important as speed-to-market, Rahn says in testimony on behalf of the American Council of Life Insurers, is the absence of a federal insurance office that could advise Congress on key issues involving life insurance.
“The importance of insurance protection was underscored by the events of Sept. 11, as was the fact that it is in the national interest to have a federal authority with expertise and involvement in the U.S. insurance industry, given the industrys significant and substantial importance to the overall financial health of the nation,” Rahn says.
Rahns testimony came just a day before the industry was scheduled to defend corporate-owned life insurance before the Senate Finance Committee.
The industry contends that recent attacks on COLI are based on misunderstandings over the nature of the product and the current legal environment.
Rahn says the current regulatory system is not suited to the circumstances of todays marketplace.
In the past, he says, life insurers competed only against other life insurers, so the regulatory burden was spread equally. But now, Rahn says, life insurers are in direct competition with brokerages, commercial banks and mutual funds, which have far more efficient regulatory systems.
The National Association of Insurance Commissioners, Rahn says, has been trying to address the problems in the current system, but progress has been incremental, at best.
While ACLI continues to support efforts to improve state regulation, life insurers should be given the option of applying for a federal charter, he says.
But J. Robert Hunter, director of insurance for the Consumer Federation of America, says the optional federal chartering system sought by some insurers would lead to a “race to the bottom” as the competing regulatory systems reduce consumer protections in order to attract insurers.
Existing regulation is already too weak, Hunter says, stating that the NAIC has done absolutely nothing about unsuitable sales of insurance.
While insurance companies insist that speed-to-market is a critical issue, Hunter says, consumers are in no rush to have bad products appear in the market.
He says that because of the nature of life insurance, different types of regulation are needed.
Term life is easy for consumers to understand, Hunter says, so price regulation is not necessary.
But cash value life, he says, is a complex product and the problem is that the life insurance industry has resisted calls for tools to help consumers understand the product or to create suitability standards for agents.
Thus, he says, competition is weak and prices for cash value life have not declined the way term prices have.
There should be more regulation of cash value life prices, Hunter says, unless the industry “truly agrees to stop the obfuscation and promote rules that let the consumer see what each policy is truly like.”
But Rahn argues that optional federal chartering will not lead to regulatory arbitrage.
Indeed, he says, there are 51 opportunities for regulatory arbitrage today, since companies have a right in virtually all jurisdictions to change their state of domicile.
The notion that adding one more system of regulation on top of the 51 that already exist will lead to regulatory arbitrage is groundless, he says.
As for the COLI hearing, which was scheduled to take place after press time, the life insurance industry plans to tell the Finance Committee that COLI is already heavily regulated and no new restrictions should be imposed.
Frank Keating, president of ACLI, will testify that state laws govern insurable interest and notice and consent.
Indeed, he says, as part of the notice and consent requirements in most states, employees are provided with documentation on the reasons for the coverage and how the employees as a group will benefit.
Moreover, Keating says, the Internal Revenue Service also places restrictions on COLI in that COLI premiums are not deductible.
Keating says the General Accounting Office is currently conducting a study of COLI and the Finance Committee should review the recommendations of the study when they become available.
Testifying on behalf of the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, AALU President Bob Plybon will testify that employers generally use COLI to fund the cost of new or expanded employee benefits.
Because of Financial Accounting Standards Board requirements, Plybon says, retiree health and other benefit liabilities must be accrued as they are earned over the working lifetime of the covered employee, rather than as they are paid after retirement.
Companies use life insurance, he says, to build an asset to offset this balance sheet liability. This provides assurances to employees and investors that companies are not making promises they cannot keep, Plybon says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 24, 2003. Copyright 2003 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.