Industry-Funded Study Backs Optional Federal Charter

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.