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Regulation and Compliance > State Regulation

It's Time for an Optional Federal Charter

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When the 112th Congress gets underway in January, the long-stalled optional federal charter will be on the agenda. After five years of on-again, off-again debate over the merits of the OFC, it’s high time that Congress pass this critical legislation.

The OFC is clearly in the interest of the life insurance industry–and of producers. Unveiled during the 109th Congress as the National Insurance Act of 2006, the bill would allow life and property/casualty insurers, and their agents, to choose to be regulated by the federal government or remain under the current the state system.

Numerous industry trade associations are backing the bill, among them the American Council of Life Insurers, the Council of Insurance Agents and Brokers and the National Association of Independent Life Brokerage Agencies. The various groups, supported by carriers that operate nationally and that stand to benefit from a uniform regulatory framework, collectively make up the Optional Federal Charter Coalition.

The OFC would offer stakeholders harmonized rules across all 56 U.S. jurisdictions–the 50 states, plus D.C. and American territories–that are now subject to disparate regulations. For insurers and agents that operate across states lines, such consistency will eliminate costly and time-consuming red tape now devoted to securing approval of products, policy forms and licenses in multiple jurisdictions.

By having a single point of filing for new insurance products, insurers can speed time to market for new offerings. Currently, it can take up to two years to get a new life insurance product approved. (Banks and securities firms that are federally regulated, by contrast, can get new products to market in 30 days).

True, the Interstate Compact, a model law drafted by the National Association of Insurance Commissioners in 2006 for the states, would accomplish much the same thing. But, as noted in my feature article on the NAIC beginning on page 24, to date only 36 states have adopted the legislation. To judge by past experience, the NAIC won’t secure 100% adoption.

And there’s the rub. For all the good the NAIC does in striving to bring uniform laws and regulations to the states, the association inevitably falls short because of the difficulty of satisfying so many constituencies. Among them: state governors who appoint certain NAIC member commissioners, voters who elect others; plus 56 state and territorial legislatures that jealously guard their right to modify model laws and rules.

There are, too, industry and consumer groups that, as seems likely following the recent debate over the NAIC’s Medical Loss Ratio Blanks Proposal, aim to secure modifications in the states to model laws they deem inadequate–thus undermining the uniformity they say they all want.

Why, then, navigate this minefield when an optional federal charter offers a painless path to regulatory uniformity? OFC opponents would have you believe that the state regulation is superior because: (1) a federal office would not have the expertise needed to properly regulate the insurance industry; (2) insurance needs vary from region (true, perhaps in the P&C space, but certainly not in the life arena); (3) an OFC could (a) result in overlapping licensing requirements and/or (b) direct state premium tax dollars to the federal government.

These are all bogus arguments, for an OFC could easily be structured to address opposition concerns. The real problem for opponents is that the optional federal charter fundamentally alters the balance of power among regulators and the competitive landscape for insurers–and the opponents stand to lose.

An OFC would shift regulatory oversight from state-based insurance commissioners and legislators to a federal regulator among carriers that opt for a federal charter. And it widens the competitive gulf between (1) carriers that operate within individual states or regionally and (2) national carriers that, upon adopting a federal charter, would enjoy even greater economies of scale. This competitive threat is evident in the makeup of a new group opposed to the OFC: The States Alliance for Balance Insurance Regulation (SABIR), which is composed chiefly of small and mid-size insurers.

The OFC, in short, promises to benefit the public by eliminating regulatory duplication, overlap and contradictions; and by allowing a more efficient marketplace to take hold. Those who insist on maintaining the status quo are, in effect, anti-consumer.

And that doesn’t sit well with me. The optional federal charter needs to be passed. I trust that Congress will have the good sense –and the courage–to make it happen


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