Washington, D.C. (July 29, 2008) -- An optional federal charter for insurance regulation (OFC) would create a more innovative, efficient and competitive life insurance industry that functions under a strong, nationwide consumer protection standard for insurers choosing the federal option, a representative of the American Council of Life Insurers (ACLI) testified today to Senate Banking Committee.
“In the two years since this Committee last held a hearing on insurance regulation, the case for regulatory reform has become even stronger as domestic operational concerns have been joined by pressing international regulatory and competitive issues,” said John Pearson, chairman, president and CEO of Baltimore Life Insurance Company.
Pearson testified on behalf of ACLI at a Committee hearing on “State of the Insurance Industry: Examining the Current Regulatory and Oversight Structure.”
While there is a growing need for retirement security and life insurance products as the baby boom generation nears retirement age, the existing state regulatory system has failed to keep pace with marketplace developments. It inhibits the ability of life insurers to offer innovative products in a timely manner, he said.
“Product standards, capital requirements, consumer protections—indeed every aspect of our business—need not and should not vary from one state to another. Yet we operate under a system in which companies must navigate a multiplicity of different regulatory gauntlets in parallel, each subject to its own timetable, in order to operate nationally, regionally, or even in just a handful of jurisdictions,” Pearson said.
“Virtually every aspect of our business is subject to disparate laws, disparate regulations and disparate interpretations of those laws and regulations that stifle innovation. The result fractionalizes what, for so many companies, is a national business—depriving insurers of the scale and speed-to-market necessary to effectively sustain innovation,” he added.
While the states are making some progress in uniformity, overall, positive change has been frustratingly slow. Indeed, the Government Accountability Office noted this recently in the context of long-term care, citing variations in state laws as the reason some consumers enjoy greater policy protections than other consumers, Pearson added.
OFC would also help U.S. life insurers compete overseas. Indeed, when U.S. life insurers try to expand into foreign markets; such as India, where life insurance premium growth was 60% in 2006; they are often rebuffed, he said.
“The reason is that, from the European Union to China, other countries perceive that our current insurance regulatory structure discriminates against foreign companies and is so complex, inefficient and costly as to be a de facto trade barrier,” Pearson said.
Pearson also addressed several misperceptions regarding OFC:
- Consumer Protection — Some critics say consumer protections would diminish under OFC. ACLI strongly disagrees. Any legislation enacted by Congress would have protections at least as strong as those now in place. Moreover, OFC would eliminate regulatory gaps that may occur when consumers move from one state to another. In addition, financial and market conduct examinations would occur more regularly for federally-chartered insurers.
- Regulatory Arbitrage — While some critics suggest that OFC would encourage insurers to seek increasingly lax regulation, ACLI believes that Congress will assure that a federal regulatory option will be on a par with the strongest state system. Moreover, the potential for regulatory arbitrage already exists under the current system, since insurers, by and large, have the right to change their state of domicile.
- Smaller Companies — While some have said that OFC would only benefit larger companies, mid-sized and smaller life companies, which have smaller in-house resources to deal with the state-by-state product-approval and producer-licensing hurdles, also want the option of a federal charter.
- State Premium Tax Revenue— While some say that OFC would allow national insurers to escape state premium taxes, this fear is unfounded. Such federally-chartered financial institutions as commercial banks, savings banks and thrifts pay state income taxes. Insurers’ state tax obligations take the form of a premium tax. There is no precedent for, nor is there any expectation of, exclusion from this state tax obligation.
“For the benefit of our country, our customers and our industry, we urge you to work with us on an expedited basis to put in place an appropriate federal regulatory option,” Pearson told the Committee.
Download Mr. Pearson's full testimony (PDF).
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The American Council of Life Insurers (ACLI) is a Washington, D.C.-based trade association whose 353 member companies account for 93 percent of the life insurance industry’s total assets in the United States, 93 percent of life insurance premiums and 94 percent of annuity considerations. In addition to life insurance and annuities, ACLI member companies offer pensions, including 401(k)s, long-term care insurance, disability income insurance and other retirement and financial protection products, as well as reinsurance. ACLI's public Web site can be accessed at www.acli.com.