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Regulation and Compliance > State Regulation

ACLI Study Sees More Pluses Than Minuses For States With OFC

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Last week a study was released which argues that creating an optional federal charter for insurance companies would have little or no impact on state economies and any effects are more likely to be positive than negative.

The new study is being published as state lawmakers and regulators are joining together and ratcheting up their opposition to federal legislation–the National Insurance Act–that would create an optional federal charter for insurers.

In fact, one member of the group, the National Conference of Insurance Legislators, Troy, N.Y., was at press time scheduled to pass a resolution on March 1 voicing strong opposition to creation of an OFC by Congress.

The resolution says that an OFC “would eventually draw from the states the almost $14 billion of critical premium tax revenue they receive, bifurcate insurance regulation, result in a quagmire of federal and state directives, erode key consumer protections and compromise guaranty fund coverage, among other things.”

They are being supported by a private group based in Washington, D.C. and Birmingham, Ala., which is serving as a coordinator for agent and industry groups opposed to an OFC and which last week also reiterated its opposition to an OFC.

The coordinator of that group, the Coalition Opposed to a Federal Insurance Regulator (COFIR), issued a statement Feb. 22 expressing its “strong” opposition to a federal insurance regulator and optional federal charter legislation.

The study commissioned by the ACLI is titled “The Effects of an Optional Federal Charter for Life Insurers on State Economies.”

The study, conducted by Martin F. Grace and Robert W. Klein of the Center for Risk Management and Insurance Research at Georgia State University, found that the increases in competitiveness and efficiency that would be fostered by an OFC will likely benefit states by boosting economic activity and insurance industry-related employment.

While the employment changes would vary across states, and some states might experience a decrease, the impact would be relatively small, the study says.

The study seeks to counter arguments in the NCOIL resolution and a recent letter by Sandy Praeger, the Kansas insurance commissioner and president of the NAIC, that an OFC would cost the states billions of dollars in revenue and could potentially impact the jobs of the 11,000 people employed by states to regulate insurance.

Moreover, the letter by Praeger says, not only would an OFC create a new “bureaucracy,” but that federal regulators would employ far less people to regulate insurance.

Praeger’s letter was in response to a letter from Marc Racicot, the president of the American Insurance Association and former governor of Montana, asking the NAIC to drop its opposition to a federal insurance charter.

The Racicot letter said that in 2006 the states collected more than $16.7 billion in revenues from insurance sources. Of this amount, $1.2 billion–roughly 7.2%–went to regulate the business of insurance, while the remaining $15.5 billion went to the states’ general funds for other purposes.

The study commissioned by the ACLI said that state insurance department revenue from fees and other charges would likely decrease if insurers opt for federal regulation. However, insurance department expenses would also decrease, the study added.

In terms of tax revenue, the study notes that the OFC legislation pending before Congress preserves the rights of states to collect premium and retaliatory taxes.

Commenting on the study, Frank Keating, president of the ACLI, said critics of OFC are concerned that it would damage state economies by diverting substantial amounts of revenue that now go to states to the federal government.

“The Grace-Klein study should reassure everyone that these grim forecasts won’t be realized. 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 said.

He further argued that, “It is important to address one other issue not mentioned in the Grace-Klein study: The suggestion that while OFC legislation preserves state premium taxes, it is only a matter of time before Congress strips states of this important revenue source.”

Keating said that “as a practical matter, it is difficult to imagine a scenario where it would be politically possible for Congress to inflict such harm on the states.

“The outcry back home and the potential fallout to individual members of Congress would be too great,” Keating said.

“In fact, national banks have functioned under federal oversight for 100 years and Congress has never tried to prevent states from taxing their income. Whether an income tax or a premium tax, history shows that Congress will not tamper with state revenue-raising measures,” he added.

“Consumer protection, efficiency and competitiveness would all be enhanced under an OFC system. Now that fears of a major decrease in state revenues from an OFC have been debunked, it is time for Congress to move forward on this vital legislation,” Keating said.


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