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Reform in Sight

Reform of state-based insurance regulation seems imminent, but some compromise short of an Optional Federal Charter is most likely in the near term.

Much ink has been spilled in recent years over the increasing compliance burdens resulting from federal legislation such as HIPAA and Sarbanes-Oxley. But insurers are far from content with the costs of traditional state regulation. That discontent has fueled advocacy for the adoption of an Optional Federal Charter (OFC), which would permit life and other nonhealth insurers to choose to be chartered and regulated federally or elect to remain within the state regulatory structure. Organizations advocating OFC - including the American Council of Life Insurers (ACLI), American Insurance Association (AIA) and American Bankers Insurance Association (ABIA) - have circulated a Draft National Insurance Act that calls for the establishment of an Office of National Insurance and the appointment of a Commissioner to head that office within the U.S. Department of the Treasury.

According to a recent study jointly undertaken by the ACLI and insurance industry vendor CSC (Austin, Texas), regulatory compliance under the present state-by-state system will cost the life insurance industry $11 billion over the next decade. Information technology is the largest single cost area within that figure, accounting for 22 percent of the total. The study's figures are projected for the entire industry from survey responses from more than 100 companies that, combined, account for $160.2 billion in premiums and more than $1.5 trillion in assets within the U.S. life insurance market.

Adding to the burden, federal deregulation of financial services has made state-by-state regulation of insurers more problematic. The Gramm-Leach-Bliley Act (GLBA), which aimed to tear down barriers among financial services industry sectors, affirmed state regulation of insurance. But, GLBA's rationale makes it hard to sustain the idea of insurance as the sole state-regulated financial services industry, and the Act's provisions increase banks' ability to compete with insurers. These considerations underscore the fact that state regulation is costly, in terms of both outlay of resources - especially compliance-related technology resources - and in the opportunity costs resulting from the delays inherent in state regulatory review of insurance product documentation.

The ACLI/CSC study reports that a single regulatory authority could reduce costs associated with complying with multiple regulatory jurisdictions, but that industrywide compliance costs should not increase under an OFC. The greatest reduction in costs would occur as the result of OFC uniform product approval and product licensing rules, the study concludes, and those reduced costs would be passed on to consumers in the form of greater competition by insurers.

However, it is on the ground of consumer interest that the National Association of Insurance Commissioners (NAIC) questions the adoption of an OFC. Alessandro Iuppa, superintendent of insurance for the State of Maine and president-elect of the NAIC, takes the position that "Modernizing regulation doesn't mean doing away with it, and what [advocates of OFC] are talking about is complete deregulation. With that come potential pitfalls - in particular, the consumer protections that exist in law today may not be there with a deregulated environment." Given that no actual legislation has been proposed yet, the NAIC has no official position on the subject, Iuppa says, but, "It's safe to say we would be inclined to oppose any kind of federal charter."

Commitment to Reform

Still, Iuppa argues that the NAIC has shown a commitment to pursuing technology-related improvements to the regulatory compliance process, exemplified by the creation of SERFF (System for Electronic Rate and Forms Filing). Additionally, he says, the NAIC acknowledges a need for regulatory reform. "There's no question that many life insurance products are the same [across different states], so they certainly lend themselves to more standardization, more uniformity," Iuppa comments.

In fact, about three years ago, the NAIC drafted model legislation for the creation of an Interstate Compact for form filings. The Compact would provide companies a single point of entry to introduce products and gain nationwide approval, according to Iuppa. "With the Compact, you get the efficiency of having national standards and the ability to have a product approved in all the member states," he asserts.

But Bob McDonald, CSC's principal researcher for the OFC study, argues that the Compact falls short. "The ACLI Optional Federal Charter proposal covers much more than insurance product filing and provides for uniformity in many other areas, such as producer certification, examinations, etc.," McDonald says. "Thus, we would expect more opportunity for cost saving from OFC."

That may be the case, but gains in operational efficiency for the insurance industry are unlikely to inspire sufficient political support for OFC, in the absence of compelling benefits to consumers, contends Matt Josefowicz, Celent's New York-based insurance practice manager. "There are entrenched political interests for the status quo," he says. "I don't think the states are easily going to give up their control of this industry, and I don't see anyone at the federal level who would spend their political capital on this fight."

Still, given the recognition by all parties that change is needed, some kind of regulatory reform is inevitable, asserts CSC's McDonald. "The question, then, is how it's going to happen," he says. And, whatever form regulatory reform takes, McDonald adds, "If you're an IT guy, it should get into your strategic plan one way or the other."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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