Life insurance is an important component of a client’s financial plan.
Life insurance is an important component of a client’s financial plan.

Washington — While it is widely held that legislation creating an optional federal charter (OFC) for insurers is unlikely to pass during an election year, this perception has done little to dull the intensity of the debate. In recent weeks, a series of public broadsides from protagonists on both sides of the issue have made this abundantly clear.

The opening salvo came from Marc Racicot, president of the American Insurance Association (AIA), Washington, and staunch backer of an OFC, who penned an open letter to Sandy Praeger, Kansas Insurance Commissioner and current president of the National Association of Insurance Commissioners, Washington, (NAIC), urging NAIC to reconsider its opposition. “As an industry, insurers need a modern and efficient regulatory structure that reacts quickly to rapid changes in the marketplace and serves our consumers effectively in the most competitive way,” the letter states. “It is only through a federal charter option that this can be achieved.”

In the letter, Racicot also sought to counter an oft-stated argument against an OFC–that it will drain states coffers. “States will not lose revenue through an OFC because premium taxes would continue to be collected by the states in which the premiums are drawn,” the letter reads. “In fact, not only would states be able to maintain the reliable stream of state revenue but they would also be able to provide new revenues–without raising taxes–for essential state services.”

Racicot also brushed aside the contention that an OFC would require creation of a costly, new federal bureaucracy, stating funding for the start-up costs of the proposed Office of National Insurance to be housed within the Treasury Department could come from assessments levied on insurers.

These assurances did little to mollify Praeger, who quickly responded with an open letter of her own. “There are presently more than 11,000 individuals working in state insurance departments across this country who help to protect insurance consumers,” the letter says. “It takes quite an imagination to assume the Treasury Department could assume even a partial role in regulating insurance without creating a huge bureaucracy.”

Praeger then upped the ante by questioning the motives of OFC proponents, charging that the push for an OFC is a stalking horse for deregulation. “Current proposals would gut consumer protection, while outsourcing most critical regulatory functions to an industry-run self-regulatory organization. In addition, allowing insurers to pick their regulator threatens a regulatory ‘race-to-the-bottom.’ The push for an OFC is, in reality, nothing more than a call for little or no regulation.”

While Praeger and NAIC can count the National Association of Mutual Insurance Companies and the Independent Brokers & Insurance Agents of America among the insurance organizations in opposition to a charter, Racicot and the AIA also have industry allies. A recently released study commissioned by the Washington, D.C.-based American Council of Life Insurers (ACLI) contends that optional federal chartering of insurance companies will have little or no impact on state economies.

Entitled “The Effects of an Optional Federal Charter for Life Insurers on State Economies,” the study was conducted and authored by Martin Grace and Robert Klein of the Center for Risk Management and Insurance Research at Georgia State University. “We conclude that a life insurance OFC may have a beneficial effect on many state economies and any negative effects are likely to be confined to a few states if any,” the authors said. “Either way, the economic effects of an OFC are likely to be limited.”

“Many critics of OFC are concerned that it would d mage state economies by diverting substantial amounts of revenue that now go to states to the federal government,” says Frank Keating, president and CEO of ACLI. “The Grace-Klein study should reassure everyone that these grim forecasts won’t be realized.”

Sources: AIA, NAIC, ACLI

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