Study Finds Strong Case
For Federal Charter Option
Optional federal chartering could enhance both consumer protection and competition in the life insurance marketplace, a new study says.
The study finds that a dual insurance regulatory system, similar to the dual banking system, could streamline the product approval process, free up more resources for consumer protection oversight and encourage smaller companies to compete in multiple jurisdictions.
The study was conducted by former Treasury Department official Sheila C. Bair, who is now Deans Professor of Financial Regulatory Policy at the Isenberg School of Management of the University of Massachusetts, Amherst.
She released the study, which was funded by the life insurance industry, at a press briefing here last week.
Bair says the current structure of insurance regulation is resistant to 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 lacks legal authority over individual insurance commissions, it cannot force agreements on uniform standards.
And even if an agreement could be reached, she says, it would be up to individual state legislatures to adopt model legislation, which they are unlikely to do without their own modifications.
As a result, Bair says, the current system for product review is cumbersome and inefficient.
Currently, according to Bair, there are on average 208 product filings per insurance department staff person per year. This heavy workload, she says, 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 to 9 months, Bair says, adding that this inhibits the ability of life insurers to modify products in response to consumer demands and impairs their competition 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 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.
Since, under current OFC proposals, states would continue to collect premium taxes, she adds, OFC would help reduce state insurance department workloads while preserving an important source of state revenue.
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 financial and market conduct examinations.
By 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 surveyed, she says, reported they would be more likely to expand to new states under an OFC system because they would not be burdened with the front-end regulatory costs of multiple jurisdictions.
Bair also challenged suggestions that OFC would lead to regulatory arbitrage in which there would be a “race to the bottom” as states and the federal government compete with each other to attract insurers.
Under the dual banking system, she says, there has been no such regulatory arbitrage, with less than 1% of banks per year switching charters.
Finally, Bair says, a federal regulator could achieve a better integration of life insurance in 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 multiple state regulators.
Insurance groups funding the study include MassMutual, Equitable Life, Lincoln National, Northwestern Mutual, Principal Financial, Prudential and the American Council of Life Insurers.
Reproduced from National Underwriter Edition, April 2, 2004. Copyright 2004 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.