For more than 135 years, individual states have regulated the insurance industry with-in their respective borders. States have their own insurance commissioners, regulatory bodies, and rules to enforce. In turn, insurance companies have to follow the regulations of each state, which means some can only do business in certain parts of the country or could carry products they can legally sell in some states but not in others.
Agents have to monitor the requirements of each state, as well. Their licensing process must include every state in which they do business, and their marketing efforts must engage only those in states in which they are licensed to do business. For generations, the insurance industry has followed this model -- it was the only option.
But among the financial over-hauls re-cent-ly propo-sed by the Bush administration, which are designed to give the government broad authority to regulate those institutions that impact the nation's financial health, are regulatory changes that affect the way states, insurance companies, and agents operate within the life insurance industry.
While many of the proposals focus on banks and financial markets, the insurance industry has garnered special attention.
U.S. Treasury Secretary Henry Paulson proposed creation of an Optional Federal Charter for insurance companies, which would allow insurers to choose to be governed under federal regulation instead of submitting to state oversight. His comments on the Blueprint for Financial Regulatory Reform, of which the Charter proposal was a part, indicate a trend toward a more centralized approach than the traditional state-based regulatory structure currently used within the insurance industry.
"Insurance presents a clear need for regulatory modernization," Paulson said March 31 in Washington, D.C. "While a completely state-based regulatory system for insurance may have been appropriate at one time, insurance market changes have put increasing strains on the system." He went on to say that without a federal regulatory option, U.S. insurers are at risk of being less competitive and national product development may be hindered.
What does it mean for you?
While the proposal does not set in stone any rules or laws -- congressional approval is required to enact any of the suggestions within the Blueprint -- this attention highlights new challenges for agents who are already adapting to a rapidly changing regulatory environment. Agents naturally want to know how the insurance industry might be impacted by a larger federal presence monitoring business practices, as well as how their businesses might evolve as a result.
But what are the advantages and disadvantages of such a change, and what impact could it have on insurance companies and agents? According to Julie Spiezio, senior vice president and deputy general counsel for the American Council of Life Insurers (ACLI), these are not new questions for her organization.
In fact, while it continues to work closely with the states, the ACLI has for years been advocating a federal oversight system similar to that of the banking industry.
"Taking a look at the future, we felt that the banking system as it currently exists in this country -- which allows banks to choose either to be federally regulated or state regulated, depending on their business model -- would be something that would fit the life insurance industry particularly well," Spiezio said. It would also create a Washington, D.C.-based office with knowledgeable federal regulators who could discuss various issues with different government branches.
Spiezio said that the issue has international implications, as well, since most other countries have nationwide regulations and federal oversight structures that make it easier for them to forge agreements with one another. In the United States, each state has a separate system with its own regulators, with none able to speak for the entire nation.
Spiezio also sees new opportunities for agents under such a framework. One big change would include the possibility of a federal license, eliminating the need for separate licensing, fees, and compliance requirements from every state in which producers do business. Instead, one license would cover all states and allow agents to write policies with companies that opt for federal or state regulation.
"I would think that's a big boon for producers, a real effect on some of the producer licensing issues they've faced over the years," Spiezio said. To illustrate that point, she referenced a study conducted by Temple University Professor Lauren Regan. The study found that, as a whole, producers could save between $268 million and $377 million every year in compliance costs alone under an Optional Federal Charter system.
Spiezio said that agents themselves would also enjoy additional benefits. Under a streamlined system, companies could more quickly bring a variety of new products to market, which would give agents more options for their clients. And in a highly mobile society, agents wouldn't be concerned if a client moved out of state, since their license would cover their business throughout the nation.
But if those features don't appeal to an agent, Spiezio said that they can continue with their current licensing situation. Proposed legislation simply gives agents an option similar to that of insurance companies -- they either can keep the system they have or pursue the federal option.
No benefit to consumers?
Not everyone believes a federal charter option is the best way to accomplish those goals. Roger Sevigny, president-elect of the National Association of Insurance Commissioners (NAIC) and commissioner of New Hampshire, said that his organization is opposed to that kind of federal regulation.
"State regulators don't believe that having an optional federal charter system would be of any benefit of consumers whatsoever," Sevigny said. He believes that insurance companies will simply opt for whatever system offers the least regulation, which might not be congruent with what's best for clients.
Sevigny said that his organization is aware of arguments in favor of a federal charter and is exploring ways to accomplish them without taking power from the states. The NAIC is interested in discussing the international issue with Congress to see if some type of empowerment authority could be granted to an organization that would provide a voice that could speak for the industry. He also said that uniformity among states can be accomplished in ways that that will benefit agents.
"The producer community and producer licensing and the issue of reciprocity among states with regard to producer licensing absolutely lends itself to uniformity," Sevigny said. He is currently part of an initiative to work with different trade associations and regulators to create and bring uniformity measures to Congress.
But aside from potential advantages, Sevigny believes that certain aspects of the federal regulation proposal would negatively impact both agents and clients. He said that states know their residents well and can address issues and concerns related to their specific population, often with a more personal touch than a federal system could offer.
"If any consumer calls my line directly, I answer my own phone," Sevigny said. "I would doubt that you're going to get a federal commissioner to answer his or her own phone." He also credits agents with informing him on developing trends and concerns and said he believes that both agents and states would lose out on that important communication with a more federalized system.
Need for change
Whether most of the power is held by the states or the federal government, there is a common sentiment among some groups that the industry needs an overhaul. Tom Orecchio, the chair of the board for the National Association of Personal Financial Advisors (NAPFA), said that whichever entity regulates the industry, it needs to ensure that consumers understand the products they purchase.
"I think (NAPFA's) position is that a move toward regulation that does a better job of protecting the consumer's interests, which we think means more disclosure and more transparency in the products and services coming out of the insurance world," Orecchio said. While he believes that either system has the potential for success with proper coordination, he admits that an evolving product line and changing environment makes it challenging for states to regulate the industry properly under the current system, and federal oversight might have some advantages.
But Orecchio also recognizes that people are often resistant to change, and he encourages agents to see potential regulatory changes as opportunities. "If the products are being innovative, then the people who are selling the products or the people who are advising on the products need to be innovative, as well. So, I think in general they should be embracing the change."
The agent's voice
Harris Simkovitz, a general agent in New Jersey, is ready to embrace regulatory change. Over the past 14 years, he has done business in a half-dozen states and is frustrated by the current system.
"I think the federal (government) would absolutely do better than what the states are doing. I don't think the states are doing a good job at all," Simkovitz said. He cites a lack of resources and manpower as reasons why states are poorly equipped to properly regulate the industry.
He also believes that agents are hampered by having to be licensed separately in every state since some current methods of communication, like the Internet, are readily seen around the country and the world. Instead of having to limit their business to states where they do enough business to afford the license and putting disclaimers on Web sites because prospects around the country can see it, agents would be able to do more business in a cost-effective manner if they could write business across the country.
While Simkovitz and others are ready for a new direction in regulation, the timetable for real change is uncertain. With a new administration set to take over in January and a number of congressional seats on the ballot, it's unclear how far proposed legislation would go in a changing political environment or what changes would need to be made to ensure passage. But many feel that the issue is here to stay, and agents can expect some changes to the way they and insurance companies do business in the future. While Spiezio could not provide any timetables, she mentioned bipartisan support for legislation and confidence that changes are on the horizon.
"There is no evidence that, whatever happens in Congress, this discussion there will stop. It will only move forward," she said. "The ACLI currently is of the opinion that it's no longer 'if' there will be an optional federal charter for the insurance industry. It's simply a matter of 'when.' "
Michael Murillo is a freelance writer and frequent contributor to the Agent's Sales Journal. He can be reached at vivamurillo@hotmail.com.
