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.

The election likely ushered in Sen. Tim Johnson, D-S.D., as new chairman of the Senate Banking Committee, and Rep. Spencer Bachus, R-Ala., as chairman of the House Financial Services Committee.

A key issue for insurance agents will be the final adviser and broker obligations as determined by the Securities and Exchange Commission.

The SEC is currently conducting a study of the current regulations, a study which must be completed by Jan. 21, according to Jill Hoffman, assistant vice president for federal government relations at the National Association of Insurance and Financial Advisers.

She said it is “too soon to know” what the SEC will ultimately do, or whether Congress will intervene. She said this is a bipartisan issue, and that both Sen. Johnson and the House Financial Services are likely to hold hearings on the issue.

But, she said, the final decision rests with the SEC, “and we will have to wait to see what the study says to determine our next step,” she said.

Repeal and Replace vs. De-fund and Delay

On the critical issue of healthcare, Beth Mantz-Steindecker of Washington Analysis, expects a lot of noise, but little legislative enactment.

“In many cases,” Ms. Mantz-Steindecker said, “the current law’s market reforms, medical loss ratio policy, industry fees and Medicare cuts to insurers, hospitals and home health are unlikely to be rolled back either due to Democrat opposition or scarcity of offsets.”

She said a Republican House will propose and pass measures to repeal healthcare reform – likely among the first bills for the new Congress, amounting to the GOP’s version of the past Democratic initiative for government negotiation of drug prices.

Mantz-Steindecker said the House will also pass measures eliminating key components like the individual mandate, taxes and industry fess, employer responsibility requirements, MLR policy, and the Independent Payment Advisory Board. Another likely legislative effort from the Republican House will be to defund government agencies responsible for implementing healthcare reform, thereby stalling the reform itself.

“Any bill that would materially gut the Democrats’ landmark legislation is unlikely to muster sufficient Senate support or get past a veto by President Obama,” she said, noting, however, that some healthcare reform changes have legs and could be enacted. The most likely changes include eliminating the 1099 tax reporting requirement on small business; tweaking the individual mandate to allow more people to claim a hardship exemption; and narrowing the eligibility for reform subsidies.

Other possibilities include allowing more people to buy cheaper health insurance on the exchanges.

Mantz-Steindecker says that despite the House Republican takeover, the Department of Health and Human Services and the Centers for Medicare and Medicaid Services “still have their rulemaking and regulatory powers, despite likely House efforts to starve the agencies of funding to implement reform.” She predicted that there will be few instances where defunding will occur and even then, healthcare reform won’t be gutted.

The biggest change in healthcare is significant congressional oversight. Several House committees are itching to haul up a number of prominent figures on a revolving basis, including HHS’ Kathleen Sebelius, Joel Ario (who heads the group implementing the exchange provision that goes into effect in 2014) and CMS’ Don Berwick.

“Besides eating up time and resources, that could help slow down implementation, giving the GOP multiple opportunities to re-air opposition to healthcare reform and put the administration on the defensive,” she said.

Bring in the Commissioners

As for state elections, the new insurance commissioner in Georgia is Ralph Hudgens. Joel Wood, senior vice president of government affairs at the Council of Insurance Agents and Brokers, noted that Hudgens’ ascendency ended the career of John Oxendine, the long-time former commissioner who gave up that post to run in the Republican primary for governor.

Democrat Dave Jones was elected California insurance commissioner, while Oklahoma commissioner Kim Holland was swept out of power in the Republican tidal wave. Jones was supported by the trial bar and labor unions.

Wood also said that “all eyes will be on New York Gov.-elect Andrew Cuomo. Will he reappoint insurance superintendent James Wrynn? We hope so.”

As for Congress, amongst those defeated was Rep. Earl Pomeroy, former insurance commissioner of North Dakota. Sources in the state said his vote in favor of health reform was responsible for his defeat. Also defeated was Rep. Baron Hill, D-Ind., who helped the industry reshape onerous provisions of the healthcare bill.

Also defeated was Rep. Paul Kanjorski, D-Pa., who would have been next in line to head the Financial Services Committee.

Rep. Barney Frank, D-Mass., a particular target of Republicans because he was the primary drafter of the House version of the financial services reform law, was easily re-elected to a 16th term, defeating political neophyte Sean Bielat by 11 percentage points.

Frank called in former president William Clinton, loaned the campaign $200,000 of his own money and received strong support from the insurance industry, both in Massachusetts and nationally, as he campaigned tirelessly over the last several months to save his seat.

Back to Work

With one of the most divisive campaigns in recent memory finally over, the hard work of lawmaking will be the final, and most important test of the sweeping changes that hit Washington on Tuesday. At long last, the GOP has gotten its wish – the ability to stop further legislation from the Democrats. But at what cost? Senate majority leader Harry Reid (D-NV) has already said that it will not be enough for the GOP to simply say “no” to any and all legislation it opposes. A new era of compromise must be built out of the wreckage of years of partisan politics, and that, combined with the deeply entrenched nature of the Washington political culture, has the unique ability to scour the revolutionary fervor from even the most ardent crusader. Whether the GOP capture of the House leads to better regulatory conditions for the life and health industry remain to be seen. But if nothing else, there appears to be a glimmer of certainty for the L&H world, where before there was none.