Study: OFC Could Improve Processes

By Steven Brostoff, Washington Editor

NU Online News Service, March 30, 4:38p.m. EST, Washington, D.C.?Optional federalchartering could enhance both consumer protection and competitionin the life insurance marketplace, a new study found.[@@]

A dual insurance regulatory system, similar to the dual bankingsystem, could streamline the product approval process, free up moreresources for consumer protection oversight, and encourage smallercompanies to compete in multiple jurisdictions, according to astudy conducted by former Treasury Department official Sheila C.Bair, who is now dean's professor of Financial Regulatory Policy atthe Isenberg School of Management of the University ofMassachusetts, Amherst.

Although the survey focused on life insurance, the optionalfederal charter proposals on the table would apply to both life andproperty-casualty insurance and are being followed by tradeassociations.

Ms. Bair released the study, funded by the life insuranceindustry, at a press briefing here.

Ms. Bair said that the current structure of insurance regulationis resistant to the types of changes needed to improve competitionand consumer protection.

She emphasized that state insurance regulators exercise theirduties with a high level of commitment and professionalism.However, Ms. Bair said, because the National Association ofInsurance Commissioners lacks legal authority over individualinsurance commissions, it cannot force agreements on uniformstandards.

And even if an agreement could be reached, she said, it would beup to individual state legislatures to adopt model legislation,which they are unlikely to do without their own modifications.

As a result, Ms. Bair said, the current system for productreview is cumbersome and inefficient.

Currently, Ms. Bair said, there are on average 208 productfilings per insurance department staff person per year. This heavyworkload, she said, raises questions about the quality of productreviews.

Moreover, a survey of the five largest states in which lifeinsurers do business shows that the average time for productapproval ranges from six to nine months, Ms. Bair said.

This, she added, inhibits the ability of life insurers to modifyproducts in response to consumer demands and impairs life insurercompetition with banks and securities firms. Similarly, Ms. Bairsaid, insurance department staffers have extremely high caseloadsfor producer licensing.

According to survey data, she said, there are 1,284 new licenseapplications per staffer per year, which suggests that applicationsmay be receiving only cursory review.

Centralized processing, uniform standards and greater staffresources would put a federal regulator in a better position toreview producer applications, Ms. Bair said.

Since under current OFC proposals states would continue tocollect premium taxes, she added, OFC would help reduce stateinsurance department workloads while preserving an important sourceof state revenue.

One problem, she said, is that insurance companies now mustdevote the bulk of regulatory spending to "front-end"regulation.

Life insurers spend 65 percent of total regulatory costs onfront-end regulation, Ms. Bair said, which includes items such ascompany and producer licensing and product approval.

This leaves only 35 percent for back-end regulation such asfinancial and market conduct examinations.

By contrast, she said, federal bank regulators place far lessemphasis on front-end regulation, particularly in the area ofproduct approval. As a result, Ms. Bair said, state insurancecommissions conduct solvency exams much less frequently than dofederal banking regulators.

The extra costs of front-end regulation in the insuranceindustry are particularly hard on smaller companies, Ms. Bair said.Several small companies surveyed, she said, reported they would bemore likely to expand to new states under an OFC system becausethey would not be burdened with the front-end regulatory costs ofmultiple jurisdictions.

Ms. Bair also challenged suggestions that OFC would lead toregulatory arbitrage in which there would be a "race to the bottom"as states and the federal government compete with each other toattract insurers.

Under the dual banking system, she said, there has been no suchregulatory arbitrage, with less than 1 percent of banks per yearswitching charters.

Finally, Ms. Bair said, a federal regulator could achieve abetter integration of life insurance in the development of federalincome policy. A federal regulator, she said, may be betterequipped to work with federal policymakers on issues such asexpanding the availability of annuities to middle income Americansthan multiple state regulators.

Insurance groups funding the study include MassMutual, EquitableLife, Lincoln National, Northwestern Mutual, Principal Financial,Prudential and the American Council of Life Insurers. Ms. Bair didnot address property-casualty insurance in her study.