The life industry last week sought to build support for optional federal charter legislation introduced in the Senate by Sen. Tim Johnson, D-S.D., and Sen. John Sununu, R-N.H., citing a recent study showing federal regulation could cut costs for life insurers by $5.7 billion or more.
Conducted on behalf of the American Council of Life Insurers by Dr. Steven Pottier of the Terry College of Business at the University of Georgia in Athens, the study found that an optional federal charter as proposed in legislation would significantly increase the efficiency of insurance regulation for insurers operating on a nationwide basis.
The $5.7 billion in savings, Pottier said, would be the result of eliminating “largely regulatory compliance costs” that are duplicated by each of the various jurisdictions nationwide. Such costs would include licensing and other fees required to be paid by insurers, such as those to cover market conduct examinations, but do not include state premiums taxes, which would continue to be collected under the Johnson-Sununu bill.
Pottier said $5.7 billion was actually a “conservative” estimate, and that the study did not include the additional potential benefits that a federal charter could provide, such as increased competition or an enhanced ability for insurers to bring new innovations to market swiftly.
“An optional federal charter system would allow life insurers to conduct business either under the existing state regulatory system or a new federal system, depending on which better suits their customer base,” said Frank Keating, president and CEO of the ACLI. “The result would be a more efficient regulatory structure that imposes fewer costs on insurers, costs that are often passed on to the customer.”
In discussing the bill prior to its introduction, Sununu spoke along many of the same lines, repeating an 1871 quote by New York State Insurance Commissioner George W. Miller that the state commissioners were then “fully prepared to go before their various legislative committees with recommendations for a system of insurance law that will be the same in all states” and would be uniform rather than reciprocal.
“We are no closer to that today than we were 136 years ago,” Sununu said.
According to Sununu, the OFC legislation he introduced with Johnson is officially budget-neutral. The proposed federal regulator would be established with funds borrowed from the Treasury, but that loan would be repaid over time using money assessed from federally regulated insurers.
However, Keating said discussions on Capitol Hill provided the impetus for the ACLI to commission the study and for 3 others to be released in the coming months.
“In the course of conversations over the last year, a number of Hill staffers have made it clear to us that it would be helpful” if they had a statistical analysis of the potential benefits a federal charter option would bring with it, Keating said.
Exactly how great such benefits would actually be was questioned by an opponent of the OFC bill, Charles Symington, senior vice president for government affairs and federal relations for the Independent Insurance Agents and Brokers of America.
Symington said that a different study, conducted by Computer Sciences Corp. on behalf of the ACLI and released in August of 2005, showed a very different number in terms of the potential savings.
“According to another ACLI-sponsored study 2 years ago, the annual savings in creating an OFC for the life industry was $600 million,” he said. “And now it is nearly $6 billion, 10 times the prior estimate? Which is it? Sounds like fuzzy math to me.”
In either event, Symington noted, “there is nothing to ensure that these alleged cost savings will be passed on to consumers.”
Symington said the IIABA feels that a federal charter would weaken protections for consumers. “Consumers seem to agree, as there is no consumer cry for a new federal bureaucracy in Washington, D.C.,” he added. “That call is only coming from some in the insurance industry.”
In discussing the study, Keating sought to defuse the notion that a federal regulator would be less responsive to consumer concerns, noting that a dual charter system has worked well for the banking industry’s regulatory structure, on which the Johnson-Sununu bill is based.
“It has not resulted in a dive to the bottom” by regulators seeking to draw more companies under their jurisdiction, he said, adding that “it has resulted in healthy competition” instead.
The ACLI expects a companion bill to be introduced in the House by Rep. Ed Royce, R-Cal., in the next 3 to 5 weeks. Although not currently a co-sponsor of the Royce bill, Rep. Paul Kanjorski, D-Pa., who chairs a House Financial Services subcommittee, has spoken positively of the concept in the past. He has also suggested, however, that the federal option be phased in gradually, with life products initially being open to federal regulation and other lines added over time.
Johnson and Sununu actually expanded the scope of their bill over a version introduced in the last Congress, bringing surplus lines under its proposed umbrella.
Keating said the mechanism in which the federal charter is established is a “political decision,” adding that the ACLI has been working with members of the property and casualty industry to “get as many friends and allies as possible” behind the current bill.
However, he also said that if the decision was made by lawmakers to only provide the federal option for life companies, it would still have the support of the ACLI.
“If the ship only has one life raft,” he said, “then we want to make sure that it’s for the life industry.”