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Post-election: What's in store for the insurance industry?

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Barack Obama was re-elected president of the United States Tuesday night in a close election that portends that current policies will be maintained.

This includes healthcare reform and implementation of the Dodd-Frank financial services reform law.

There will be key changes on House committees, with Rep. Jeb Hensarling, R-Texas, a strong supporter of the insurance industry, likely taking over as chairman of the House Financial Services Committee. The outgoing chairman is Rep. Spencer Bachus, R-Ala. And, with the decision of Rep. Barney Frank, D-Mass., not to run for re-election, he will likely be replaced as ranking member by Rep. Maxine Waters, D-Calif.

At the same time, Rep. Judy Biggert, R-Ill., was defeated for re-election, a victim of redistricting. She headed the Subcommittee on Insurance, Housing and Community Opportunity of the House Financial Services Committee, and was expected to be a big player on insurance issues. She shepherded the NFIP bill through its tortuous, five-year path to a long-term extension, finally enacted in July. It is unclear whom will be named to succeed her as chairman of the insurance subcommittee.

And, she was expected to be a key player on regulatory issues as well as guiding passage through the Congress of extension of the Terrorism Risk Insurance Act, which expires in December 2014. Joel Wood, senior vice president of congressional affairs of the Council of Insurance Agents and Brokers, called her defeat, “extremely disappointing to the insurance industry.” Regulatory issues she dealt with in her role as head of the Insurance Subcommittee include designation of insurance companies as systemically significant and consolidated regulation of insurance companies with thrifts. Wood called her a” thoughtful, moderate ally of the industry.”

Regarding Hensarling and Waters, Wood called Waters a “liberal firebrand.” He also said that Hensarling and Waters “will be quite the odd couple.”

However, it is almost certain that the “fiscal cliff” will be averted. Speculation by pundits early this morning was that Congress will move the Dec. 1 deadline for implementation of the cuts and phaseout of the Bush-era tax cuts will be extended, but only for several months.

Practically, however, that won’t work.

One of the key issues is estate tax policies. Given that estate and trust tax planning is expensive, as is the need for the Internal Revenue Service to issue guidance on mid-year course corrections, as well as complex, it appears that a common sense solution is to extend everything for one year while comprehensive tax form is debated in the next Congress.

A bipartisan group is working on comprehensive tax reform in the Senate, and Rep. Dave Camp, current chairman of the House Ways and Means Committee, has held joint hearings with the Senate Finance Committee on the issue.

Key issues include inside buildup, Corporate-Owned-Life-Insurance and Bank-Owned-Life-Insurance, the estate tax, general federal tax rates, non-qualified deferred compensation plans and the dividend-received deductions on variable annuity contracts.

Based on the Obama administration’s proposed 2013 budget, other provisions on the table include generation-skipping transfer taxes and grantor retained annuity trusts.

“This was a status quo election,” said Eli Lehrer, president of the R Street Institute, a think tank.

“The Senate will stay Democratic and the House Republican. President Obama will stay in the White House,” Lehrer said.

At the same time, in acknowledging his victory, President Obama strongly signaled a renewed attempt to work across the congressional aisle with Republicans. And, in his concession speech, Republican Mitt Romney also dropped the stridency of the presidential campaign, and implied he would not attempt to hinder the president in carrying out government policies.

The first implication is that implementation of the Patient Protection and Affordable Care Act (PPACA) will continue.

“After two years of raging debate about health care and the most expensive and polarizing presidential election campaign in our nation’s history, Obamacare won tonight – and it’s here to stay,” said Ethan Rome, executive director of Health Care for America Now. “The re-election of President Obama seals the deal.”

Karen Ignagni, president and CEO of America’s Health Insurance Plans said in a statement this morning that, “We congratulate President Barack Obama and members of Congress in both parties for winning their elections.”

She said health plans are committed to working with policymakers to make coverage more affordable, promote choice and competition, and maintain a strong safety net for our nation’s most vulnerable populations.

“As the health care reform law is implemented, policymakers must prioritize affordability for consumers and employers,” Ignagni said. “Several provisions in the law, such as the new premium tax, minimum coverage requirements, and age rating restrictions, need to be addressed to keep coverage as affordable as possible and ensure broad participation in the system.”

However, a key question remains, whether, as rumored, the administration moves to delay implementation of the exchange system from Jan. 1, 2014 to perhaps Jan. 2015.

Beth Mantz-Steindecker, a health regulatory analyst at Washington Analysis, is suggesting that implementation of the exchanges may be pushed back because so few states are prepared to implement the program.

Washington Analysis analyst Ira Loss also confirms that it is unlikely that insurance agents will be able to win an exemption from the Medical Loss Ratio (MLR), their No. 1 legislative priority, given the election results.

Such legislation has passed a House panel, but whether the full House will decide to proceed with floor action in the face of the likelihood that Senate Democrats have the votes to block its passage is a very big question.

At the same time, the likelihood is that release of the report on proposals to modernize regulation of the insurance system is likely imminent. The report, mandated by the DFA and supposed to have been released in January, has been kept in cold storage by the Treasury Department out of concern it would generate partisan attacks.

Other important regulatory issues for the life industry include the controversial proposal by the Securities and Exchange Commission to impose a uniform fiduciary standard on sale of investment products and the Department of Labor’s proposal to expand the definition of fiduciary. Investment advisors oppose the former because it imposes a stronger legal standard of care on investment products and the DOL’s proposal because they fear it eliminates financial advisors’ ability to be compensated through commissions on retirement advice they provide to IRA holders and participants in ERISA Covered Plans.

And, SEC chairman Mary Schapiro is seen as likely stepping down next year although her term does not expire until 2014.

The election also ensures that the Financial Stability Oversight Council will likely follow through on designating certain non-banks such as insurers as systemically significant, perhaps as early as early next month.

The likely insurance company candidates are American International Group, MetLife and Prudential Insurance.

It also means that consolidated regulation of insurance companies which operate thrift holding companies will proceed. Implementation will likely be delayed beyond Jan. 1, and revisions in the proposed rules, which insurance companies universally oppose, are likely. The Fed might even postpone implementation until 2015; however, there ultimately will be consolidated regulation of insurance companies by the Federal Reserve Board, with or without congressional debate.

The total impact of the so-called “fiscal cliff” was delayed for six months when the Senate Sept. 22 passed legislation that extended the current budget for the 2013 fiscal year for six months.

However, the so-called “extender” only dealt with discretionary federal appropriations and $1.2 trillion in automatic spending cuts over 10 years are still due to take effect on January 1.

This would impact both entitlement and defense spending, and would likely result in a cut of government expenditures and tax hikes totaling $600 billion in 2013.

A key Republican senator was quoted before the election as saying that if President Obama is re-elected Republicans would have to bend to give him some tax increases in order to fend off a huge cut in defense spending.

“We might as well cut a deal,” Sen. James DeMint, R-Sc. said of what would happen if Obama wins. “If Republicans want to maintain the defense, we’re going to have to give tax increases to Obama.”

“When Jim DeMint is suddenly open to revenues, you know the tide is turning,” a grinning Sen. Charles Schumer, D-N.Y., responded.

The thinking was that if Romney won, Republicans would offer Obama a deal whereby severe cuts in Medicare and other entitlement programs will be averted in exchange for a one-year, across-the-board extension of the Bush tax cuts.

But in the spirit of reconciliation that President Obama emphasized in his acceptance speech this morning, it is likely that the whole “crisis” will be averted in favor of a one-year extension of the status quo.

That gives Congress some breathing room to forestall the deep cuts in expenditures for the 2013 fiscal year mandated by the legislation that some feared would throw the country immediately into a deep recession.

However, the Bush tax cuts, the so-called Economic Growth and Tax Relief Reconciliation Act of 2001 (EGGTRA), expires Dec. 31. If Congress fails to act, the tax rates in effect at the beginning of 2001 take effect. That, combined with fixing the AMT, and dealing with tax extenders, amounts to about a $4 trillion tax increase. 

By year-end, Congress will also have to decide whether to extend federal, supplemental unemployment benefits, and the current two-point cut in employees’ share of Social Security taxes.

Additionally, doctors who treat Medicare patients will take almost a 30 percent cut in the rate by which Medicare reimburses them if Congress doesn’t enact the so-called doc fix. Add another $1 trillion to the total from these issues.

And, the estate tax returns to a $1 million personal exemption and a 55 percent top tax rate.

“The uncertainty that has surrounded our estate tax laws has made it impossible for Americans to plan for a reasonable transition of their assets to the ones they love and to charity for the greater good,” Robert Kerzner, president and CEO of LIMRA, LOMA and LL Global, said in October.

“Today, there are three likely possibilities that Congress could adopt — if they address this issue before the end of the year — which would impact many American families and businesses.”

The three proposals Congress is most likely to consider are:

  • Let the estate tax law revert back to $1 million and 55 percent maximum tax;
  • Extend the current law with $5 million exemption and 35 percent maximum tax;
  • Enact a compromise of $3.5 million exemption and 45 percent maximum tax.

If Congress fails to act, 14.7 million U.S. households would have a potential estate tax liability of $1.4 million, on average. While households can use life insurance proceeds on the deceased to pay the estate tax, LIMRA analysis indicates that 55 percent of these households do not have enough coverage to pay the tax. On average, these households would still owe $1.6 million.

If Congress extends the existing law, 2.4 million households (slightly higher than two percent) would have a potential estate tax liability. At a 35 percent tax rate, the average tax would be $2.4 million. LIMRA’s analysis shows that 43 percent of these households do not have enough coverage to pay the tax and would still owe $3.1 million, on average.

If Congress agrees to the compromise of $3.5 million exemption and 45 percent tax rate, 3.6 million households (slightly higher than three percent) would owe an average $2.6 million. More than half (53 percent) of these households do not have enough coverage to pay the tax, according to LIMRA, and would still owe $3 million, on average.


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