Legislation that impacts an industry or business generally falls into one of two broad categories. One is forced upon them and initiated by others, while the other is initiated and promoted by the industry itself. Both are fraught with peril and can be equally dangerous and require the expenditure of legislative capital, meaning time, money, influence and bargaining power.

The first type of such legislation may be punitive in nature and intended to curb some abuse, perceived or real. Or, it may simply be an increase in taxes to satisfy a Congress looking for additional revenue. Sometimes it is a combination of both, if, for example, tax preferences are being used to benefit the wealthy in unintentional ways. We have been down that road before when life insurance was being hailed as the last great tax shelter. That’s how we got modified endowments. Currently we may be vulnerable because of the way some life settlements are stretching the envelope.

The second type, initiated by an industry, may also come at a price. What is the business willing to give up to get this new piece of legislation? It is important not to swap an orchard for an apple. The best example of this that I can remember occurred as a result of the real estate business, through its association of realtors, aggressively assaulting Congress to balance the federal budget. Congress took a step in that direction by shutting down real estate tax shelters then in vogue. The result–real estate prices plummeted and savings and loan institutions collapsed, costing the government mega millions.

Be careful what you ask for; the price may be more than you can bear.

In any event, both types of legislative initiatives are always impacted by the current environment. As I write this, the Treasury Department has just announced that it is taking over Fannie Mae and Freddie Mac, backers of about 50% of the country’s mortgages. Additionally, the last count indicates that there are 117 banks in various degrees of “trouble.” Some will make it, some won’t. The takeover of Fannie and Freddie has been estimated to cost up to $25 billion; no telling what propping up these banks will cost. Add to this the plight of investment banks and hedge funds and it’s a pretty dismal picture of the federally regulated sector of financial services.

With few exceptions the state-regulated insurance business is standing tall among financial institutions. This is a fact that will not be overlooked by both NCOIL and the National Association of Insurance Commissioners as they continue to oppose the creation of an optional federal charter. They will no doubt be aggressive in pointing this out to a Congress saddled with the ills and costs associated with the foregoing failures.

It is interesting to contrast the present environment with that which existed in the mid 1970s. Interest rates at that time spiked to more than 20%, placing the life insurance business in great peril. The business had most of its assets subject to withdrawal (policy loans) at a rate of 5% or 6%. Financial writers (God bless them?) were quick to point out that policyholders could tap the cash value of their policies for 5% or 6% and buy a certificate of deposit at 12% or 14% and it would be insured by the federal government.

Such disintermediation could have wrecked the business and brought down a number of companies. Worried company executives went to the Federal Reserve Chairman Paul Volker and asked if the Fed window would be open to them if their worst fears were realized. They were told, “There would have to be blood on the floor before help from the Fed would be available.” A long answer meaning “No.”

However, the states did cooperate and quickly passed legislation enabling the introduction of variable loan rates giving the business a tool to work its way out of the problem Interestingly, focus groups run by Arizona State University and financed by the National Association of Life Underwriters (now NAIFA) at that time revealed that even though whole life policyholders were aware of the chance to capitalize on the high interest rates, they were reluctant to do so because they regarded the cash values as sacrosanct–the asset available if all else failed. A great testimony to the business and its products.

Today the federal government is already extending its reach into regulation of insurance largely because of the products we have developed that the SEC believes look and act like securities. This back-door approach is being opposed, which presents a dilemma for the business. How do you say to the government, “You can’t come into our business by the back door–but it is OK to come in the front door with an OFC?”

The current possibility of taxation of insurance products is a critical issue. It may look like an assault on insurance companies (never very popular because of bad press) but the incidence of taxation will fall squarely on the customer–our policyholders. Any attempt to enact such legislation should engage policyholders to the fullest extent. We can present ourselves as surrogates for our policyholders in our lobbying, but an aroused populace is far more effective.

Proponents of an OFC should recognize that the environment is not right for it and it is not the top priority. We have only so much legislative capital and it should be spent defending our tax preferences.