While the health care debate consumed much of the attention for the beginning year, insurers are engaging with legislators on multiple fronts. To help make sense of this fast-shifting landscape, Insurance Networking News caught up with Patrick Reeder, senior director of government relations for Minneapolis-based Allianz Life Insurance Company of North America.
INN: On the legislative front, what are the big issues facing the industry in year ahead?
PR: The obvious answer is health care, which has occupied the political consciousness for months.
At the federal level, in addition to the financial services regulatory legislation that is working through the process, there are a number of issues that are important to the life and annuity industry. For example, we were pleased to see the Obama administration's budget proposal that advocated changing the tax code to permit partial annuitization. Under current law, if a consumer elects to annuitize only a portion of their annuity, they do not get the exclusion ratio tax treatment. Unlike full annuitization, in which only a portion of the annuity payment is treated as taxable gain, a partial annuitization payment is considered all taxable gain. The administration's proposal would give the exclusion ratio treatment for partial annuitization if a taxpayer irrevocably elects annuitization for a period of at least 10 years or life.
At the state level, we're seeing legislatures struggle with closing budget gaps, so insurance is not necessarily at the front of legislators' minds, but we continue to work with states on important consumer protection issues. For example, the life and annuity industry remains committed to working with state legislators to strengthen state insurable interest laws to prevent consumers from being harmed through stranger-originated life and annuity transactions.
We are, however, concerned about proposals, such as that which was included in the health care reform package, which would impose a Medicare tax on annuity income for upper income individuals. We believe that this sets a dangerous precedent, and punishes individuals who sacrificed to save.
INN: Are you pleased with the creation of a federal insurance office within the Treasury Department?
PR: Exactly how the Office of National Insurance is established and purposed is still a work in progress, as Congress is working through its legislative process and we are monitoring these developments closely. I do think that it stands a good chance of passage, as it is included in the House and Senate bills, and there seems to be no strong Congressional opposition to it.
I believe the ability for such an Office to work on international insurance treaties can be good for the U.S. market. Another contemplated role for the Office would be to study the current state-based regulatory system. Done properly, such a study could identify what is working well, and what could be improved in state regulation.
INN: Is 2010 the year we see a federal charter for insurers?
PR: I don't think so. Congress has been focused on health care, and now will move to job creation. I don't see the political will to move forward on federal charter legislation, and I think the road for insurance regulatory reform, at this time, will start and end with the Office of National Insurance.
INN: Would you like to see a national suitability standard?
PR: We certainly want to see a uniform suitability standard for annuity sales in all states. The NAIC worked very hard last year to revise the Suitability in Annuity Transactions Model Regulation, and we applaud their efforts. We expect it to be adopted by the full NAIC membership at the Spring NAIC meeting in March. [Editor's Note: The standard passed on March 28] We would like to see that model adopted-and enforced-uniformly in each state.
INN: Should insurers have to pay into a systemic risk resolution fund?
PR: How the resolution authority may be structured is very fluid right now, and often changes day-to-day, but we remain concerned that it applies a "bank-centric' regulatory approach that does not reflect the practical reality of how insurance companies operate and are regulated.
First, I think that 2008 and 2009 demonstrated that insurance companies are generally built-and currently regulated-to weather "storms" successfully, and that the conservative-based approach of mandating liquid assets and strong reserving did, in fact, work. This is not to say that insurance companies are immune to failure, for this does happen, and when it does occur, there exists a well-functioning state guaranty fund program that protects policyholders. It, therefore, makes a federal resolution authority redundant and causes concerns that insurance companies and their policyholders would be asked to subsidize banks.
Second, it is not clear under what circumstances non-bank companies will or will not be included in the authority and its assessments. This lack of objective and predictable selection criteria creates potential unintended consequences. For example, does a company forgo a business opportunity because growth associated with a successful venture may cause that company to be considered a systemic risk?
Third, the current drafts have the companies covered by the authority pre-funding it by assessing $50 billion in the next five to 10 years. This takes capital away from the insurance marketplace that may otherwise be directed to products and growth.
