Life insurers could see a decline in regulatory costs averaging over 50% if the federal government were to establish an optional federal charter, according to a study just released by the American Council of Life Insurers and the Computer Sciences Corporation.
The study was conducted over 18 months and based on responses to questions on regulatory costs from over 100 companies. The respondent companies represent about 41% of the U.S. life insurance market based on both premiums and assets, with a combined $160.2 billion in premiums and more than $1.5 trillion in assets.
In total, the study showed that state regulatory costs for the life insurance industry total about $1.1 billion annually and that these costs have an effect on virtually all processes of life insurers, from product development to claims payment.
On average, the groups found in the study that a life insurer opting for a federal charter could reduce its regulatory expenses significantly as it resolves the main problems facing companies in the 50-state system.
“A life insurer opting for a single point of regulation addresses two of the key drivers of regulatory cost outside of the regulatory requirements themselves: dealing with multiple regulatory jurisdictions and with non-uniform laws and regulations,” the groups concluded in the study. “Survey results indicate that on the average a 55% reduction in regulatory cost was the improvement potential.”
It was noted in the study, however, that these savings would not necessarily be immediate, as insurers may be held to the state regulatory requirements under which a policy was sold.
However, the product development, producer relations and new business functions that would result from an optional federal charter account for more than one-third of those potential savings, and their effects would be seen more swiftly.
“This report represents a significant contribution to the debate over the future of insurance regulation,” said ACLI President and CEO Frank Keating. “It should prompt congressional action on our OFC initiative.”
The ACLI developed its optional federal charter proposal in 2000, the study noted, although congressional momentum is currently behind the State Modernization and Regulatory Transparency Act, or SMART Act.
The SMART Act “is complex, with more than 500 pages and 17 sections,” the groups note in the study. “In general, it would leave the current state system in operation but mandate a ‘top down’ overhaul of the state system of regulations, including rates, licensing, market conduct examinations and product approval. SMART has the advantage of being supported by two influential members of the House of Representatives but has not been embraced by organizations such as the National Association of Insurance Commissioners.”
Although based on the concept used for federal banking laws, the groups said in the study that the optional federal charter for life insurers was based on the best practices of the states and also that the charter would not change the systems under which states collect premium taxes or for state-based guaranty funds.
“We spent 18 months surveying the industry to gather and review quantitative data regarding regulatory costs,” said Michael W. Risley, president of the Life and Annuity division of CSC’s Financial Services Group. “This report reveals important new information and, like ACLI, we believe it will contribute significantly to the debate on modernizing insurance regulation.”
ACLI President and CEO Frank Keating said the new study, which showed life insurers could see a decline in regulatory costs averaging over 50% under an optional federal charter, “should prompt congressional action on our OFC initiative.”