Life Insurer Regulatory Reform May Benefit P-C Carriers As Well

I believe there is a slim, but definite, possibility that Congress will establish life insurance-only optional federal chartering.

The p-c industry should either support or not oppose a life-only system.

The reason I say this is because it is high time that we all acknowledge the fact that p-c insurance and life insurance are entirely separate and distinct industries. The p-c industry is no more related to the life industry than it is to the real estate industry. Life insurance companies face an entirely different set of competitive issues than p-c insurers and need a regulatory system suited to their unique business.

The only way the life industry will achieve that goal is to break the traditional mindset that mistakenly links it to the p-c industry as one element of a broader insurance industry. As long as that mindset persists, the disunity that exists in the p-c industry on OFC will sink any chance the life industry has of achieving its own OFC system.

I often describe the difference between the p-c industry and life industry by saying p-c insurance is about risk management, while life insurance is about asset management. Another difference is that p-c insurance is about if, while life insurance is about when.

Being in the asset management business, life insurers must compete against banks and securities firms, which can bring new products to market much more quickly. Except in certain specialty areas, p-c insurers tend to compete mainly against other p-c insurers.

In terms of regulation, p-c insurance is much more closely tied to state law than life insurance. Property-casualty insurance is related to state tort law, state workers compensation law and state financial responsibility laws, while life insurance is not. Property-casualty is rate regulated, while life is not.

Every insurance department in the country has a separately staffed p-c side and life side. Every multiline insurance company I know of also maintains an entirely different management and staff for its p-c operations and its life operations.

And except for a couple of lucky reporters (such as yours truly), the bible of the insurance industry, National Underwriter, has an entirely different staff covering p-c and life.

But perhaps the most important distinction is the Internal Revenue Code. Every business in the country comes under the IRC. But life insurance is one of the few businesses in which the very essence of the product–tax-free inside buildup–is a function of the IRC.

The most important legislative and regulatory battles facing the life insurance industry involve the tax treatment of the product and some of the more sophisticated uses of it. Its no wonder that the life insurance industry has largely reached the conclusion that OFC is a survival issue.

So why am I bringing this up in the p-c edition? Because I believe that despite the fact that these are two entirely separate industries, the p-c industry has a stake in life insurance regulatory reform.

While there is major disagreement within the p-c industry on OFC, there is no disagreement that insurance regulation must be reformed. And there seems to be a general attitude that the pace of reform at the state level is too slow.

I cannot think of anything more likely to spur action on p-c regulatory reform at the state level than for the life industry to achieve its goal of OFC.

Losing jurisdiction over life insurance, and fear that the same could happen in p-c, could be the shock to the system some recalcitrant states need to bring p-c regulation into the 21st century. It might spur states to accept necessary, but politically difficult, reforms such as market-based rating.

As for OFC for the p-c industry, I am personally neutral on the subject. I am more interested in the substance of regulation than the location. I would probably be all for an OFC system that is truly optional and truly market-based, but I just dont think it is politically possible right now.

But the life industry, which is largely united and which does not have to contend with politically volatile issues such as rate regulation, has a chance. And that chance may provide the best opportunity for the p-c industry to achieve market-based reforms, even if regulation remains with the states.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 5, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.