American voters remade the state and federal political map last week in a historic election that swept Republicans into strong control of the House and substantively reduced Democratic control of the Senate.
At press time, it appeared that Republicans picked up six Senate seats and 60 House seats, far more than enough to seize control of the lower chamber.
But, a combination of factors signals that the next few years will be one of upheaval for the insurance industry as well as political deadlock in Washington as the GOP seeks to put the brakes on the Obama administration’s legislative agenda and reshape the implementation of both financial services and healthcare reform, possibly even attempting to repeal them. At the very least, the victory of so many Tea Party candidates promises a new level of verbal strife on the Congressional floor, even though both sides will now need the other to get much done.
Despite the sour economy and the outlook for a stalemate, Marc Cadin, senior vice president of government affairs at the Association for Advanced Life Underwriting, remained optimistic that the industry will thrive “Regardless of which party is in power, challenges from Washington remain, but the drive and entrepreneurial spirit of the life insurance agent will ensure the ongoing success of this industry,” he said.
The political logjam will have a key impact on the industry, affecting expiring tax provisions that are the lifeblood behind the sale of industry products, and the fact that the Dodd-Frank financial services reform gives the administration the authority to look over the shoulder of state insurance regulators for the first time.
Michael Kerley, senior vice president of federal government relations for the National Association of Insurance and Financial Advisors, said the big issue Congress will be dealing with in the lame-duck session is the rate for top-earning taxpayers.
And, he said, the capital gains rate on dividends, reduced to 15 percent from 20 percent in 2001, is critical to the insurance industry.
He said that the 2001 law did not include a cut in dividend rates for variable annuity and variable life products, which remained at the top tax level.
“That rate really impacts insurance industry rates,” Kerley said. “It is unlikely that will be changed. We argued for a compromise in 2001 to no avail.
“If nothing happens, what would happen to our products?” he asked.
Order from Chaos
Given the fact that the political upheaval means that more than one-third of the nation’s insurance regulators will be different by mid-year, Howard Mills, chief advisor for the insurance industry group at Deloitte, New York, cautions that the significant turnover in insurance commissioners is happening as the Treasury Department shapes the Federal Insurance Office created by the Dodd-Frank bill.
It may offer the opportunity for the FIO to seize the initiative and take advantage of a lot of the loss of many experienced commissioners at the National Association of Insurance Commissioners, he said.
On top of that, Congress and the new House Republican majority may be looking at what they perceived as over-regulation from the perspective of a weak economy that may tempt them to revisit some of the regulatory issues.
“And the whole issue of tax policy may afford the life insurance industry some opportunities,” Mills said.
As high net worth individuals look for a possible reinstatement of the estate tax, they may look at insurance products as tools to mitigate the impact of the tax increases and boost sales of life insurance products, Mills said.
Congress is likely to compromise on estate taxes and extend the 2001 Bush-era exemption for one or two years in a lame duck session, said one veteran insurance industry lobbyist.
The Washington-based lobbyist, who asked not to be named so as to preserve his relationship with members of Congress, predicted that the compromise estate tax exemption will be in the $3.5 million to $4 million range with a 35 to 45 percent tax rate for the next several years, probably a one-year extension.
“I don’t think either party wants to see taxes go up with a soft economy,” the lobbyist said. “Republicans don’t want to raise taxes and the Republicans won.”
Congress will return Nov. 15 to pass a must-do omnibus appropriations bill, then come back after Thanksgiving to wrestle with the issue of the expiring Bush tax exemption.
On the estate tax, there appears to be a middle ground, with the Democrats supporting the extension of the 2009 estate tax rate of a $3.5 million per-person exemption and a 45 percent maximum tax rate. Republicans support a $5 million exemption and a 35 percent tax rate. “The deal will be a $3.5 million to $4 million exemption and rate in 35-45 percent range,” the lobbyist said. “That will likely occur in the lame duck.”
Getting the Message
One of the reasons he doesn’t want to go on the record, the lobbyist said, “is that it is impossible to predict the mindset of Republicans and Democrats and the White House.”
“Members will draw conclusions as to why they won or lost,” he said. “The results are likely to strengthen their resolve, and therefore rule out compromise, or, it will weaken their resolve and make it more likely they will compromise. It is impossible to predict what their conclusions will be,” he said.
He cited the message for the Republicans after the February 2010 election of Scott Brown as the Republican senator from Massachusetts. “The message to them was that healthcare reform was not a good idea.”
But, he said, it will take a little time to figure out what will be the message from this election.