Feds Knocking on the Life
Insurance Industry’s Door
Life insurance has always been regulated at the state level
in United States. When you bought your life
insurance policy, it was regulated by the state you purchased the policy
in. Now there is increasing momentum to add a federal regulatory body to manage
the insurance industry.
Although the federal-versus-state regulation debate has been
waged for decades, in March 2008, the Treasury announced a proposal to offer
insurance companies an Optional Federal Charter (OFC), similar to the banking
industry and proposed the creation of a federal Office of National Insurance.
Insurance companies, agents, brokers and reinsurers will be able to choose
between state regulation and a federal regulatory system. Originally, the
Treasury described state regulation as overly cumbersome, making it more costly
for insurance companies to develop national products and created complication
for U.S. insurance companies operating abroad and for foreign insurance
companies in the U.S.
Since March, the financial world has collapsed. The AIG
meltdown and the subsequent federal rescue package have turned up the heat for
federal oversight. With the passage of the Troubled Asset Relief Program
(TARP), the Treasury has $700 billion dollars at its disposal to attempt to
stabilize the financial market. Eying access to this money, several insurance
companies (The Hartford, Genworth, Lincoln National and Aegon) proposed or are
in the process of buying banks to qualify for relief under the plan. There are
several reasons why insurance companies find themselves in financial hardship:
exposure to losses from credit default swaps; exposure to the Lehman bonds
(since bankrupted); the general downturn in the economy; a 40% collapse of the
stock market; a frozen credit market and, in the case of Genworth, loses from
their mortgage insurance unit.
In addition, President Barak Obama campaigned on modernizing
regulation and providing more oversight for the financial services industry.
The insurance industry will be swept by the wave of this financial regulatory
transformation. Momentum is undeniably in the direction of a federal regulatory
regime taking hold next year.
What are the Outcome for Insurance Companies, Insurance
Producers and the Consumer?
The advantage for insurance companies is that the regulation
may simplify a complex system. There are excessive costs currently for
compliance of state laws. The unnecessary expense of filing each new product
and policy forms in 50 states causes undue delays in bringing new products,
innovation and consistency of coverage to the marketplace. Filing products,
policy forms and licensing are examples of the inefficiency of the current
system. Life insurance
companies also can compete with other financial services companies with more
modern and uniform regulation.
Opponents of a federal regulation say that it would create a
massive and unnecessary new bureaucracy. In fact, the states regulations would
remain over some areas like consumer protection and solvency funds.
For insurance agents and brokers (producers) that work in
more than one state or nationwide, having the option of one license for life
insurance can greatly reduce expense and time needed to manage the sales
process. Having to manage many different state forms, insurance rates and
processes also create a level of complexity and unnecessary expense.
Federalization may also relieve producers from navigating the nuanced
differences in regulations from state to state. On the negative side, some
worry that another layer of oppressive regulation will be added to what is
already a highly regulated industry.
For consumers, federal regulation may mean faster delivery
of products that the market demands. More nimble insurers will be able to
respond faster to consumer needs. Consumers living in state border areas will
not have to concern themselves with where the policy was bought and which state
has regulatory authority. If a consumer moves to another state, currently their
policy is still regulated in the state the purchased their policy. Some states
also have quirky regulations and laws that make it difficult for certain
products to be made available or to replace a policy without burdensome
paperwork and weeks of delays.
The regulation system needs to be modernized. Other
countries already have federal regulation. The proposed Treasury hybrid system
may be just the beginning of a tilt toward more federalization down the road.
In the current environment, the feds may not have broken it, but they will buy
it and hence regulate it.
©2008, ReliaQuote Insurance