The decision is important for p-c insurers, however, because whatever Congress ultimately does on federal chartering, it will apply to both p-c and life insurance, she believes.

Rodger Lawson, president of the Alliance of American Insurers in Downers Grove, Ill., praised ACLI for its commitment to continue improving state regulation, but said the Alliance is disappointed by the decision to seek optional federal chartering. Still, he said, it is understandable that life insurers have a different perspective than p-c insurers.

“They will have to decide their own best interests,” Mr. Lawson said. “That said, we continue to believe that the p-c sector is quite different and best served by a state-based system.”

However, Gretchen Schaefer, a representative of the Washington-based American Insurance Association, which supports optional federal chartering, called the ACLI decision “a positive development.” Although AIA has been focused on terrorism coverage, she said, optional federal chartering remains a primary goal. It is good to see support for the concept from ACLI, she added.

The ACLI board voted to formally endorse optional federal chartering at its annual meeting last week in Boston, after more than a year of study. The Washington-based ACLI called regulatory reform a “survival issue” for life insurers.

“Regulatory reform and modernization is crucial to the continued success and competitiveness of life insurers,” said Joe Gasper, president and chief executive officer of Nationwide Life in Columbus, Ohio. “In todays rapidly evolving financial services marketplace, life insurers no longer compete only with one another, but with banks and securities firms as well.”

He said that banks and securities firms, due to more streamlined and centralized regulatory systems, can bring products to the national marketplace usually within 30-to-90 days, compared with six-to-18 months for life insurers, he said. “Failure to reform insurance regulation would pose a competitive burden that may threaten the viability of the life insurance industry,” said Mr. Gasper, who is ACLIs incoming board chairman.

ACLI formally began exploring optional federal chartering in June 2000. About one year later, ACLI released a draft proposal on the issue, but did not formally endorse it until today.

The ACLI proposal would create an Office of National Insurers at the Treasury Department, headed by a director who would be appointed by the President and confirmed by the Senate. The director would be appointed for a five-year term.

ONI would have authority to conduct regular financial examinations of federally-chartered insurers and prescribe all necessary regulations. The ACLI proposal would require federally-chartered insurers to meet specified requirements regarding accounting principles, investments, asset valuation, risk-based capital and auditing standards.

Federally-chartered insurers would still be subject to all state taxes that apply to state-chartered companies.

The ACLI proposal does not establish a federal guaranty fund. Rather, to acquire a federal license, insurers would have to be a member of a “qualified” state guaranty association in each state in which the insurer does business. (A “qualified” association is one that provides coverage and benefits similar to those under the Life and Health Guaranty Association Model Act developed by the National Association of Insurance Commissioners.)

However, a backup mechanism called the National Insurance Guaranty Corp. would be established to cover insurers that do business in states that do not have qualified associations.

The ACLI proposal also calls for federal licensing of life insurance agents. Indeed, agents would be required to obtain a federal license to sell insurance for federally-chartered life insurers.

However, p-c agents were skeptical about the wisdom of pursuing this initiative. “Optional federal chartering and federal regulation could be very precarious paths for the industry to follow,” said Robert Rusbuldt, CEO of the Independent Insurance Agents of America in Alexandria, Va. “Anyone following the federal insurance terrorism issue should realize that the legislative process rarely goes the way you want it to go. Anyone who thinks we will get a clean federal chartering bill is dreaming.”

The ACLI proposal only covers life insurers at the outset. However, health insurance would be included as a regulated line for federally-chartered life insurers on the third anniversary of the effective date of the proposal.

There is no provision in the ACLI proposal on property-casualty insurance. However, ACLI has said that p-c insurance could be included in the structure ACLI is proposing should p-c firms pursue optional federal chartering.

While approving optional federal chartering, the ACLI board also said it will continue to devote all resources necessary to working with the NAIC on improving state insurance regulation.

ACLI says it expects Congress to hold hearings on federal chartering of life insurers next spring.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 19, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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