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Academics: Insurance Regulators Outspend Bank Regulators

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By some measures, state insurance departments and the National Association of Insurance Commissioners may spend more on regulation than federal bank regulators spend.

State insurance departments and the NAIC, Kansas City, Mo., spent an average of about $157,437 per regulated insurance company in 2006 and about $197 for each $1 million in regulated insurance company assets, Martin Grace and Robert Klein, scholars at the Center for Risk Management and Insurance Research at Georgia State University, report in analysis commissioned by the American Council of Life Insurers, Washington.

The federal Office of Thrift Supervision, the Federal Reserve Board, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency together spent an average of $85,249 for each regulated financial institution in 2006, or about $93 for each $1 million in regulated financial institution assets, Grace and Klein write.

“These figures do not necessarily imply that one regulator is more efficient than another,” Grace and Klein note in a discussion of the data. “Such an assessment is not feasible given that the regulatory activities that each entity undertakes are possibly quite different. Each of these regulatory organizations has a somewhat different mission than the states and the NAIC in terms of regulation.”

But Grace and Klein observe that insurance regulatory budgets have increased 47% between 2004 and 2008, and that the number of employees working for state insurance regulatory agencies has increased about 21% over that same period, while the Consumer Price Index increased only about 10%.

“The growth in insurance regulatory expenses appears to be outstripping inflation and general employment growth, suggesting an expansion of regulatory activities with consequences for insurers,” Grace and Klein write.

Although state insurance regulatory agencies spend more per institution regulated than federal bank regulators spend, the state agencies spend less per agency employee.

State insurance departments had an average budget of just $97,011 per employee in 2006, while the federal bank regulatory agencies had an average budget of $214,668 per employee, Grace and Klein write.

The ACLI commissioned the Grace-Klein analysis in an effort to increase support for efforts to give insurance companies the option of choosing between keeping their state charters and sticking with state regulation, or adopting federal charters and submitting to regulation by a new national insurance regulatory agency.

The NAIC and the National Conference of Insurance Legislators, Troy, N.Y., have opposed passage of a National Insurance Act bill.

Last week, the Coalition Opposed to a Federal Insurance Regulator, Washington, a group that coordinates insurance agent and insurance company anti-OFC efforts, issued a statement repeating the coalition’s opposition to OFC legislation and the idea of creating a federal insurance regulator.

NCOIL officials say an OFC program would cost states billions of dollars in revenue and endanger the jobs of 11,000 state insurance regulators.

Grace and Klein conclude in their analysis of OFC proposals that an OFC program could increase the efficiency of the U.S. insurance industry, boosting state economic activity and insurance industry-related employment.

Insurance industry employment might drop in some states, but the effect would be relatively small, Grace and Klein write.

The NIA bill now before Congress would preserve states’ right to collect insurance premium taxes and related taxes, and that should preserve state insurance tax revenue, the researchers predict.

The fee revenue that state insurance departments receive for regulating insurers would likely fall if many insurers opt for federal regulation, but insurance department expenses also would fall, the researchers write.

ACLI President Frank Keating says the Grace-Klein analysis contradicts the predictions of critics who warn that an OFC program would shift substantial amounts of state revenue to the federal government.

“If anything, the increase in insurance-related commerce that would naturally follow from a more efficient and competitive industry if OFC is enacted would benefit just about everybody,” Keating says.

Allison Bell contributed information to this report.