One Charter to Rule Them All?

As Senate hearings on the possible federal regulation of the life and property-and-casualty insurance industries continue this fall, insurers, analysts and vendors are weighing the benefits and risks of the National Insurance Act of 2006 - a plan to adopt an optional federally chartered regulatory system - as well as the impact the federal regulation could have on IT systems.

While small and regional carriers are concerned that the IT cost of transitioning to federal regulation could break the bank, flatten niche competition and create redundant licensing processes for producers, most national insurers believe an optional federal charter (OFC) would result in significant cost savings and increased speed to market for products, as well as enable product rate making, greater product innovation and increased competition.

Because compliance touches upon almost every core system used by insurers, most of the cost to comply with regulations is shouldered by the IT budget. Consequently, a possible switch from the current state-based regulatory structure to federal regulation likely would have a tremendous impact on insurer's expenses. "[An] OFC will impact IT, and IT is a big piece of any insurer's budget," says Bob McDonald, a principal consultant for Computer Sciences Corp. (CSC; El Segundo, Calif.). "The implications will be on the product development, policy administration, distribution, infrastructure and the applications portfolio."

The proposal for an OFC was put on the table this past spring by United States Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.). A vote on the proposal is not expected until 2007 or 2008. Modeled after regulation of the U.S. banking industry, the OFC would give life and P&C carriers a choice between being federally chartered or state chartered - an option that extends to each of a firm's affiliates, which may represent different lines of business. The federal system would combine selected laws from each state's regulations. A federal regulator would run the system, and insurers electing to take part in the federal system would fund all expenses of the federal regulator.

"The concept here is not to reinvent insurance regulation," says Gary Hughes, executive vice president and general council for the American Council of Life Insurers (ACLI; Washington, D.C.), an association for the life insurance industry that is advocating the adoption of an OFC. "It is to take the best that is out there and stitch those 51 states' [including Washington, D.C.] regulations together into one comprehensive federal system."

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