NU Online News Service, March 29, 2004, 12:21 p.m. EST, Washington – Optional federal chartering could improve both consumer protection and competition in the life insurance marketplace, researchers say.[@@]
The researchers conclude that a dual insurance regulatory system, similar to the dual bank regulatory system, could streamline the product approval process, free more resources for consumer protection oversight and encourage smaller companies to compete in multiple jurisdictions.
The study was conducted by former U.S. Treasury Department official Sheila Bair, who is now a management professor at the University of Massachusetts, Amherst.
She released the study, which was funded by the life insurance industry, at a press briefing.
Bair says the current structure of insurance regulation resists the types of changes needed to improve competition and consumer protection.
She emphasizes that state insurance regulators exercise their duties with a high level of commitment and professionalism. However, Bair says, because the National Association of Insurance Commissioners, Kansas City, Mo., lacks legal authority over individual insurance commissions, it cannot force agreement on uniform standards.
Even if an agreement could be reached, it would be up to individual state legislatures to adopt the resulting model legislation, and the state legislatures likely would make their own modifications, Bair says.
As a result, Bair says, the current system for product review is cumbersome and inefficient.
Currently, Bair says, there are an average of 208 product filings per insurance department staff person per year. Bair says this heavy workload raises questions about the quality of product reviews.
Moreover, a survey of the 5 largest states in which life insurers do business shows that the average time for product approval ranges from 6 months to 9 months, Bair says.
Bair says the delays inhibit the ability of life insurers to modify products in response to consumer demands and impair life insurers’ ability to compete with banks and securities firms.
Similarly, Bair says, insurance department staffers have extremely high caseloads for producer licensing.
According to survey data, she says, there are 1,284 new license applications per staffer per year, which suggests that many applications may be receiving only cursory review.
Centralized processing, uniform standards and greater staff resources would put a federal regulator in a better position to review producer applications, Bair says.
Because under current optional federal chartering proposals states would continue to collect premium taxes, optional federal chartering would help reduce state insurance department workloads while preserving an important source of state revenue, Bair adds.
One problem, she says, is that insurance companies now must devote the bulk of regulatory spending to “front-end” regulation.
Life insurers spend 65% of total regulatory costs on front-end regulation, Bair says, which includes items such as company and producer licensing and product approval.
This leaves only 35% for back-end regulation, such as conducting financial and market conduct examinations.
In contrast, she says, federal bank regulators place far less emphasis on front-end regulation, particularly in the area of product approval.
As a result, Bair says, state insurance commissions conduct solvency exams much less frequently than do federal banking regulators.
The extra costs of front-end regulation in the insurance industry are particularly hard on smaller companies, Bair says. Several small companies told Bair’s team that they would be more likely to expand to new states under an optional federal chartering system because they would not be burdened with the front-end regulatory costs of multiple jurisdictions.
Bair also challenges suggestions that optional federal chartering would lead to a “race to the bottom” as states and the federal government competed with each other to attract insurers.
Under the dual banking system, she says, there has been no such regulatory arbitrage, with fewer than 1% of banks per year switching charters.
Finally, Bair says, a federal regulator could do a better job of integrating life insurance into the development of federal income policy. A federal regulator, she says, may be better equipped to work with federal policymakers on issues such as expanding the availability of annuities to middle income Americans than state regulators would be.
The organizations that funded the study include Massachusetts Mutual Life Insurance Company, Springfield, Mass.; Equitable Life Assurance Society of the U.S., New York; Lincoln National Corp., Philadelphia; Northwestern Mutual Life Insurance Company, Milwaukee; Principal Financial Group Inc., Des Moines, Iowa; Prudential Financial Inc., Newark, N.J.; and the American Council of Life Insurers, Washington.