How the OFC Proposal Can Ease Your Licensing Headaches

The Optional Federal Charter proposal might lead to producers needing only a single national license.

From the early days of life insurance in the United States, the states have regulated the business. The system worked well for generations, but the world of insurance has changed since New York passed the first general insurance law in 1849. Indeed, dramatic changes have taken place since 1945 when Congress passed the McCarran-Ferguson Act, which ratified the role of state regulation of insurance.

Long gone are the days when the producer's sole purpose was to ensure a family's financial security would not be affected by the death of the breadwinner. Today, producers and companies are offering a full menu of financial services to their clients.

Companies are administering Section 401(k) and similar plans offered by employers. Producers are helping millions of people protect their financial futures through not only life insurance but also long-term care and disability income insurance. As people work to secure their retirements, producers and insurers are offering annuities that help clients save for retirement and manage savings to last a lifetime. And they are working not only in their communities and states but also across the country and, in some cases, internationally.

Yet producers and companies are finding it harder to compete in a financial services market that rewards product innovation and technological advances. The reason is the burdensome state-based system of rules and laws that require producers and insurers to contend with multiple, inconsistent regulation.

For example, in many cases, insurers must create 50 versions of the same policy to comply with varying state regulations. Sometimes the changes they have to make are as insignificant as ensuring the proper font size or paper color. The end result is unnecessary administrative cost.

Producers need to be licensed in each state where they want to do business and must comply with the disparate licensing examination, continuing education, and other requirements mandated by each state. Meanwhile, consumers easily can work with banks and mutual funds across state lines.

The lack of uniformity in insurance regulation is a significant hindrance. It requires the expenditure of labor that otherwise could be focused on meeting customers' growing needs and thwarts the business's ability to compete effectively with other financial institutions.

That is why the insurance business is pressing Congress to adopt a solution to address these inefficiencies. It's called the Optional Federal Charter (OFC) proposal. The idea is simple: Create a framework for a strong, efficient national regulatory system. The proposal is based loosely on the current regulatory structure for banks.

The OFC proposal would give companies the choice of being regulated federally or at the state level. The choice would be based on the company's market needs and operations.

For insurers who choose the OFC model, the same regulation would apply in all states and U.S. territories. For producers, the streamlined regulatory system under an OFC would enable them to respond to their customers' ever-changing financial needs and help them maintain a competitive advantage in the financial services market.

Producers and the OFC
Under the current system of state-based regulation, producers selling the same product in more than one state are burdened by multiple licensing, qualification, and continuing education requirements. Producers selling on behalf of an insurer regulated by an OFC would benefit from a national license as well as one set of continuing education standards and market conduct requirements administered by a federal insurance regulator.

The national license would allow the producer to sell, solicit, or negotiate an insurance policy on behalf of an OFC-regulated insurer in all 50 states, plus the District of Columbia and the U.S. territories. It also would allow the producer to sell the products of state insurers, subject to state market conduct standards. For producers holding one or more state licenses, the OFC proposal would enable them to use that license to sell for national insurers under most circumstances. This arrangement should afford producers the same flexibility and choice that companies would enjoy under an OFC.

In addition, with a single, national license, producers selling for an OFC insurer could sell to Internet customers across the U.S.

Equally important, an OFC would help producers better serve and retain their clients. Under an optional federal charter, companies could get new products to producers more quickly. Under the current system, companies that want to roll out a product nationally have to wait a year, and sometimes up to two years or longer, before they can secure approval in every state. Meanwhile, mutual funds and banks can roll out new products in a matter of weeks or months. An OFC would guarantee the timely delivery of new insurance products to the producer and to the market.

Usually, when a client moves to another state, producers have to share their commissions with local agents when new products are written or existing products are modified. An optional federal charter would eliminate this requirement, allowing producers to continue the working relationships they have built with clients no matter where they live.

Increased sales and customer service are not the only benefits to producers under an OFC. As recent news reports in The Wall Street Journal and The New York Times demonstrate, allegations of inappropriate sales, no matter how few they are, can leave an indelible mark on the entire business. An OFC could help protect the reputation of honest producers by making it easier to track and discipline bad actors who engage in unscrupulous activities.

Improved Cost
In addition to being a hindrance to business growth, a recent study shows that the current regulatory system adds significant cost to insurers. A study by the American Council of Life Insurers (ACLI) and Computer Science Corporation (CSC) shows that regulatory cost is a major part of a life insurers' cost structure, totaling more than $11 billion over a 10-year period for the entire business. A single regulatory authority could reduce the costs associated with complying with multiple jurisdictions.

The study also concluded that a streamlined regulatory system under an optional federal charter should increase competition for the consumer's insurance dollar. Insurers will not have to postpone or shelve product rollouts as they do today because of state regulatory delays and differences in states laws.

Moving Forward
While an OFC would create regulatory uniformity, it is not an attempt to deregulate the life insurance business. On the contrary, the proposal calls for an overall level of regulatory oversight that is at least equal to that which already exists under the best state regulatory practices.

Under an OFC, states will continue to regulate insurers retaining a state charter, just as they continue to regulate state-chartered banks. Plus, state insurance departments will continue to have exclusive authority over insurers who choose to be state chartered.

Indeed, many producers and life insurance companies will want to remain state regulated. ACLI, for one, is fully committed not only to a federal regulator but also to improving the state-based system.

Insurance business leaders, who include producers, companies, and trade associations, have put an extensive amount of time and resources into crafting a proposal that will help insurers and their products remain competitive while maintaining a strong regulatory structure.

These same leaders have formed the Optional Federal Charter Coalition with the goal of urging Congress to enact an optional federal charter for the insurance business. The proposal quickly is gaining recognition in Washington, D.C., and across the U.S.

It will take time to convince policymakers to change a regulatory structure that has been in place for generations. There is a growing consensus among business and government leaders, however, that an optional federal charter will bring needed reforms to an antiquated system and will help producers and companies better serve consumers looking for modern solutions to their financial services needs.

Frank Keating took over as president and CEO of the American Council of Life Insurers in January 2003 after leaving office as Oklahoma's 25th governor. At ACLI, Governor Keating is the chief representative and spokesman for the life insurance business in Washington, D.C., and all 50 state capitals. He works as an advocate for nearly 400 life insurance companies that account for 80% of the life insurance and annuity markets in the U.S. His 30-year career in law enforcement and public service included stints as an FBI agent, U.S. Attorney and state prosecutor, and Oklahoma House and Senate member. He served Presidents Ronald Reagan and George H.W. Bush in the Treasury, Justice, and Housing departments. His service in Treasury and Justice gave him responsibility for all federal criminal prosecutions in the U.S. and oversight over such agencies as the Secret Service, U.S. Customs, the Bureau of Alcohol, Tobacco and Firearms, U.S. Marshals, the Bureau of Prisons, and the Immigration and Naturalization Service. In 1993, he won a three-way race for Oklahoma's governor and was reelected in 1998, becoming only the second governor in Oklahoma history to serve two consecutive terms. Governor Keating won national acclaim in 1995 for his compassionate and professional handling of the Oklahoma City bombing. His accomplishments as governor include winning a public vote on right-to-work, tort reform, tax cuts, major road building, and education reform.-