Feds and Life Insurance
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.