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Regulation and Compliance > State Regulation

ACLI Finds Same State Regulatory Problems More Than a Decade Later

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The American Council of Life Insurers (ACLI) said that progress has been slow in making the state regulatory system uniform across all jurisdictions and that the areas of state regulation that were problematic when the trade association did a benchmark study about 12 years ago remain today, despite global economic forces that should have spurred regulatory change. 

The ACLI also presented a follow-up survey of state insurance regulation in its remarks Dec. 13 to the Federal Insurance Office (FIO) of the U.S. Treasury as part of a process FIO is undertaking to get input on improving and modernizing insurance regulation under the Dodd-Frank Act. 

Comments are due Dec. 16 and most are expected late this week. See more here.

In the ACLI’s  most recent assessment of member CEOs in January 2011, over 63% rated the current system of state regulation as needing improvement.

However, of 19 emerging issues, companies express the greatest concern over expanding federal regulation of insurance. Specifically, “two issues rated as important and in need of improvement in 2000 were similarly rated in 2011: policy/contract form approval and market conduct examinations,” according to the study, noting that expertise/capacity is the primary reason securities valuation is rated poorly. Many areas were found seriously wanting since the 1999 study, but statutory accounting still found its way into the hearts of more than half the CEOs.

To add to the depth of its assessments, the ACLI said a new CEO task force is now analyzing the industry’s policy position on regulatory reform, and reviewing the survey results and factoring in the implications of global regulatory issues as well as those resulting from the passage of the Dodd-Frank financial regulatory reform, it told the FIO.

However, the trade group said it was not in a position to offer specific federal legislative suggestions for implementing improvements to the insurance regulatory system to the FIO at this time. It stood by its established policy position on regulatory reform, from 2000, which calls for a two-track approach to the issue, with one track focusing on improvements to our state-based system and the second track calling for the implementation of an optional federal charter. 

Although the state-based regulatory system has served the industry well over “withstood the recent financial crisis admirably,” it hasn’t kept pace with the changing times marked by with the advent of Solvency II, the emerging role of the IAIS and efforts to address institutional oversight on a multinational basis, Dodd-Frank and its implementation and G-20 and Financial Stability Board (FSB) regulatory reform measures, according to the ACLI. 

In its filing, written by ACLI General Counsel Gary Hughes and addressed to FIO Director Michael T. McRaith, the ACLI went on to note that “…in many areas of regulation a lack of uniformity from state to state persists both in terms of the laws and regulations themselves and in terms of their interpretation and enforcement. This lack of uniformity is a major impediment to an efficient and cost-effective regulatory system.” 

With regard to regulatory creep, “companies are concerned that existing federal oversight by the Treasury, Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and Department of Labor (DOL), added to new oversight imposed by implementation of Dodd-Frank rules and regulations by various federal agencies, combined with existing state regulations, is making the life insurance regulatory regime increasingly complex, fragmented and difficult to coordinate.”

But, as a federal presence and the FIO role, the ACLI stated that the FIO should work with a myriad of offices to get the U.S. interest well-represented to FSB, the ACLI told FIO.

Specifically, the Office of Technical Assistance at the Treasury Department should come on to provide  insurance technical assistance and that the FIO should have the “necessary resources to participate in bilateral insurance regulatory dialogues along with state insurance prudential regulators, the Treasury Department’s Office of International Affairs, the Office of the U.S. Trade Representative and the Commerce Department.”

ACLI also noted FIO should have beefed up staff and funding “ to facilitate the strongest possible partnership” among state insurance prudential supervisors, ederal financial services supervisors and the Treasury Department’s own Office of International Affairs to fully represent the U.S. interest to FSB on global SIFIs, or companies deemed systematically important globally. 

Some of the results from the study include:

Four aspects of regulation stand out as being rated of “critical/major importance” and “unsatisfactory/needs improvement” among companies of all sizes, according to the study, which asked questions about 49 aspects of regulation in the areas of product regulation, financial regulation of companies, market conduct, and authority to do business:

  • Policy/Contract Form Approval (83% critical/major importance, 81% unsatisfactory/needs improvement);
  • Market Conduct Examinations (71% critical/major importance, 63% unsatisfactory/needs improvement);
  • Producer Appointments (67% critical/major importance, 52% unsatisfactory/needs improvement); and 
  • Securities Valuation (66% critical/major importance, 52% unsatisfactory/needs improvement)

Of six areas of regulation ranked as important by at least half of companies and rated as “unsatisfactory or needs improvement,” the reason most often cited for the poor rating is “lack of uniformity”, the survey found. Those six areas are policy/contract Form approval; insurance guaranty system: uniform coverage ; market conduct examinations; market conduct analysis; producer appointments; and advertising.

However, “uniformity” is not the only reason a regulation ranked as important receives a poor rating in the assessment.

“Speed/timing” is a reason for poor ratings in the following areas: policy/contract form approval; company licensing; market conduct examinations; producer appointments, according to the 15 page letter with appendices.

“Cost” is a reason for poor ratings in the following areas: market conduct examinations; producer appointments; market conduct analysis, the ACLI assessment found. 

Areas in which at least half of respondents who did respond to pronounce an aspect of insurance regulation as “good,” or “excellent” — excellent responses were minimal — include annuity disclosure; holding company regulation; affiliate transactions, privacy; risk-based capital; rehabilitation, receivership, and liquidation, reserving and valuation actuary opinion; statutory accounting (a total of 66% found it good or excellent) and permitted practices.


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