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Opting In or Out?

As the optional federal charter for insurers hits the Senate floor, industry leaders weigh cost savings and enhanced competition against possible risks to carriers -- and policyholders.

With the introduction last month of the National Insurance Act of 2006, which would enable creation of an optional federal chartered (OFC) regulatory system, United States Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.) are challenging the current state system that requires insurance companies to obtain approval from 51 state regulators (including the District of Columbia) in order to offer a product or service nationally. Citing a range of potential benefits, including hefty cost savings, greater competition, increased speed to market and more product innovation, Sununu and Johnson argue in favor of giving life and property/casualty insurance carriers a choice between being federally or state-chartered. An optional federally regulated system for insurance would be modeled after the U.S. banking industry, where elements from state regulations are united into one set of federal standards. "This will give consumers access to more choices by allowing insurers to introduce new products in a faster time period, prevent price control from being used in product introduction and provide businesses with lower regulatory costs," says Sununu.

Regulatory costs are a major concern for the life insurance industry, which spends more than $1 billion per year on regulatory compliance under the state-by-state system, with $250 million alone addressing the requirements of multiple regulatory jurisdictions, according to a 2005 study by the American Council of Life Insurers (ACLI; Washington, D.C.) and Computer Sciences Corp. (CSC; El Segundo, Calif.). "There is tremendous potential for cost savings," says Bob McDonald, a principal consultant for CSC. "With the charter there is a 55 percent reduction in regulatory expenses, which is equal to $250 million annually." Much of the compliance-related spending comes out of the IT budget. According to ACLI and CSC's research, regulatory costs equal 14 percent of an insurer's IT expenses.

The study estimates that if the OFC is passed, industrywide savings on regulatory costs could exceed $600 million annually. "This will affect all the core systems," says Matt Josefowicz, manager of the insurance group at Celent (Boston). "The conversion cost would be a tremendous saving for the industry."

But it was not only the expenses associated with regulation that brought about the push for OFC. As a result of The Gramm-Leach-Bliley Act's (GLBA) exemption of insurers in its deregulation of the financial services industry, insurers are facing increased competition from banks. GLBA's provisions allow banks to create products nationally with the approval of only one regulator, as opposed to insurance carriers, which have to obtain regulatory approval for a new product from every state in which it would be offered prior to the product's release. "The industry operates under a major burden," says Josefowicz. "An optional federal charter could reduce the overall burden of getting products to market, opening up the market for midmarket companies and opening up competition for smaller insurers."

Many industry associations, including the ACLI, the American Insurance Association (AIA; Washington, D.C.), and The Council of Insurance Agents and Brokers (Washington, D.C.) are backing the OFC bill. "We are fully supportive of the bill because it would allow agents and brokers to bypass 50 different licensing tests in favor of one all-encompassing exam set at a higher level," says Joel Wood, the group's senior vice president for government affairs.

But other groups, such as the Property Casualty Insurers Association of America (PCI; Des Plaines, Ill.), believe the bill's introduction could spur the states into legislative action that could actually make the regulatory environment even more complex. PCI instead supports the State Modernization and Regulatory Transparency Act (SMART Act), currently being drafted by the House Financial Services Committee, which would establish a standard set of state regulations. "We are looking for ways to marry the OFC with the Smart Act because inviting the federal government to be a regulator is a concern to us," says PCI's Joseph Annotti, senior vice president of public affairs.

The National Association of Insurance Commissioners (NAIC; Kansas City, Mo.) is concerned that the OFC could lead to less regulatory oversight of the insurance industry, which could create confusion and less protection for policyholders. "We recognize the state system is not a model of perfection, but preempting state regulation could lead to potential confusion among policyholders," says Alessandro Iuppa, NAIC president and superintendent of insurance for the state of Maine. "The industry is not looking for more regulation; it is looking for more oversight to balance the market needs, and this could lead to unintended consequences," he says.

During the next few weeks of hearings on the National Insurance Act, the Senate will be examining the current regulatory system and weighing the pros and cons of instituting the OFC. "It is questionable whether there is enough in it for Congress to push it through," says Celent's Josefowicz. "Still, this should be on every IT department's radar. They should be examining every place where state regulatory filing affects business."

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