A new study that purports to pinpoint the economic losses stemming from state-by-state regulation of the life insurance industry finally provides the smoking gun that advocates of optional federal regulation say they need to bolster their case before Congress.Commissioned by the American Council of Life Insurers (ACLI), the study contends that life insurers could save more than $600 million annually, or $6 billion over 10 years, if a federal regulatory charter option were enacted.

It also suggests that regulatory expenses borne by life insurers could be halved under a federal charter, and that consumers as well as the industry would benefit from those savings.

The existing regulatory morass, according to the survey, has prompted more than 80% of the respondent companies to shelve or postpone new products or product modifications, diminishing the variety of products they can make available to the public.

"As we expected, the study shows there are true inefficiencies in state regulations," says Julie Spiezio, ACLI deputy general counsel and senior vice president for insurance regulation.

Lobbying effort

Spiezio acknowledges that uniformity of state regulations could abate some of the loss. But while ACLI is supporting efforts in Congress to unify state regulations, it believes the only comprehensive way to fix the regulatory system is to give insurers, particularly those with significant interstate business, the option of being governed by federal regulations.

A newly formed group of brokers and agents, Agents for Change, will cite the results of the study when its members blitz Capital Hill in Washington this month to lobby for a federal charter (see "Agents for Change Seek Unified Voice").

"I think the study gives us rock-solid information that we can use to go up on the Hill and say, 'Look at the costs of the current system,'" says Robert Poli, chairman of Agents for Change and a broker agent and vice president for Insurance Marketing Center of Rockville, Md.

The study was conducted over 18 months for ACLI by Computer Sciences Corp., an El Segundo, Calif., provider of information technology services.

CSC says it has no position on the merits of a federal charter but acknowledges its own compliance costs would be reduced by regulatory reform.

CSC surveyed more than 100 life insurers-all ACLI members, interviewed industry executives, and held focus group sessions to obtain its data.

The insurers surveyed, both large and small and from across the country, represent $160.2 billion in premiums and $1.5 trillion in assets, or 41% of the U.S. life insurance market.

In concluding that regulatory costs represent a major share of a life insurer's cost structure, the study explains that fees are merely one component of those regulatory obligations.

"Nearly every aspect of a life insurer's value delivery system is affected by regulatory cost," the study states, "beginning with the design and introduction of products and moving through the payment of claims."

In fact, the study finds, regulatory costs covering information technology and product development supersede those involving fees.

The strongest opposition to federal regulation comes from the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.

Earlier this year NAIC President Diane Koken, Pennsylvania's insurance commissioner, testified before Congress that any federal regulation would hinder state commissioners' ability to protect consumers and would "create both legal and practical problems for this industry and its customers."

The state commissioners say their own plan for an interstate commission is the preferable way to modernize the regulatory system and develop nationalized standards.

ACLI and Agents for Change, on the other hand, while supporting efforts in Washington to bring state regulations into uniformity, argue that a federal charter is needed to put the life insurance industry on an equal footing with bankers, who already have the option of operating under state or federal aegis.

"There is significant room for improvement," the ACLI study reports. "More than $250 million, or 55% of all regulatory costs, are directly related to addressing the requirements of multiple regulatory jurisdictions. Under a singular regulatory authority, then, insurers' regulatory expenses potentially could be reduced by more than half."

An optional federal charter, the study finds, would sharpen competition for the insuring public's dollars. That's because the companies participating in the study say they lost or had to defer more than $842 million in premium income directly because of regulatory delays or variations in state regulations. That computes to a $2 billion annual loss to the nation's life insurance business.

Charter unlikely in 2005

While both insurers and agents are confident about the eventual prospects of a federal charter, they don't see any imminent action coming from Washington.

Maurice Perkins, ACLI's vice president of financial services and a lobbyist for the Council, says modernization of insurance regulations is "on the radar" on Capitol Hill, but other issues are likely to take precedence in both the House and Senate for the remainder of the year.

Still, Perkins believes the ACLI study exposes how inefficient, burdensome, and costly the state regulatory system is. He's hoping that the federal charter proposal, which ACLI first presented five years ago, will receive serious consideration in 2006.

Agents for Change's Poli is less sanguine about charter enactment over the next year or so, although he is convinced it will one day become a reality.

"We will get this passed," he says. "It makes all the sense in the world. The [ACLI] report shows that something needs to be done. But we have a long row to hoe."

Agents for change seek a unified voice

A new lobbying group representing insurance agents and brokers was formally established in August to help speed the enactment of an optional federal charter for the regulation of the life insurance industry.

The group, Agents for Change, is coordinating an October fly-in on Capitol Hill in Washington, during which it hopes to have 100 insurance agents meet with as many as 50 members of the House and Senate to discuss insurance regulation and push for the passage of a federal charter.

A similar but smaller fly-in took place in May, before Agents for Change had officially organized. The agents will tell members of Congress that the current SMART legislation, which calls for the unifying of state insurance regulations, falls short of solving the problem.

"It's far from enough," says Robert Poli, chairman of Agents for Change and vice president of Insurance Marketing Center of Rockville, Md. "It gives broad strokes, but it doesn't get to the crux of the matter. There really needs to be a national charter."

While life insurers already had a lobbying arm in the American Council of Life Insurers (ACLI), Agents for Change was created to give a unified voice to individual brokers and agents, independent of the ACLI.

Agents for Change is the outgrowth of a number of focus groups the Financial Services Roundtable sponsored a year ago, in conjunction with Bonner and Associates, a Washington, D.C., provider of grassroots consulting services, to come up with a way to give impetus to the proposal for optional regulation of the life insurance industry.

Currently, Agents for Change has more than 500 members from more than 40 states. The goal is to elevate membership to more than 1,000 by the end of the year. In addition to the Washington fly-in, Agents for Change plans to have a presence at industry meetings and conferences, where members will attempt to rally support for an optional federal charter.

Like many agents, Poli says he has been exasperated by the multiplicity of red tape and costs he faces every time he must seek licensing in another state where he wants to do business.

"Our desire to get this optional federal charter done is really driven by the ridiculousness of the whole system in general," he says. "I have brokers I work with spending $10,000 or more in licenses. It's out of control. Something needs to be done."

Louis Berney is a freelance writer based in Baltimore.

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