NFI: Federal Regulation of Annuities ‘Conceivable’

By Linda Koco

By Linda Koco
Contributing Editor, AnnuityNews

A federal regulator could eventually become the principal regulator for life and annuities or reinsurance or monoline bond carriers, according to a report released today by Networks Financial Institute (NFI).

It is “conceivable” that this could happen while states continue to regulate health, property and casualty insurance, the 60-page document says. In fact, the federal office should consider whether particular products should remain under state purview, according to the report.

NFI, a researcher and think tank at Indiana State University, Terre Haute, Ind., is delivering the report to the Federal Insurance Office today.

The report contains numerous recommendations that NFI researchers think the new federal agency should consider as it prepares its first major report for Congress. The FIO report is due by the end of January 2012.

Although the NFI recommendations address multiple topics — ranging from systemic risk and capital strategy to state regulation and potential federal regulation — some touch, directly or indirectly, on the annuity business.

One such area is the discussion of possible federal regulation of annuities and life products.

Why do the NFI researchers believe federal regulation “conceivable” for these products?

“The efficiency gains from a federal regulator, or preemption of market conduct rules, are greater, according to some large insurers, than the gains from providing such arrangements for small property and casualty insurers,” they write in the report.

“On the other hand, the gains from eliminating a multiplicity of state regulators remain, even if one insurance sector is smaller and likely to operate in only a few of the 50 states. The gains are smaller but remain substantial, even if the reduction is from two regulators to one.”

Still, in one of NFI’s recommendations, the researchers suggest a product-by-product analysis. They suggest that the FIO should “examine the characteristics of the various products under each line of business and consider the relative importance of maintaining state consumer protection.”

Other matters

Where state guaranty funds are concerned, however, it is another matter. The researchers foresee these funds functioning in a similar fashion to the way they do now.

“The current state-based guaranty system is not inextricably linked to state regulation,” they point out, but is “could (and should) continue to protect policyholders under a federal or dual regulatory scheme.”

The researchers suggest that the system could operate much as it does today, “without requiring some kind of new federal plan with attendant federal expense. … In other words, the current state-based safety net could be adapted to cover insurance consumers in a federally chartered entity, just as those consumers are protected today, and that is what most optional federal charter proposals have suggested.”

Annuity companies would factor into that possible future. The researchers write at length about how the funds work in the life, annuity and health insurance sector and then point out that the continuation of coverage the funds provide is “especially important for life/annuity/health insurance consumers.”

In Appendix 2 of the report, the researchers point out yet another annuity issue of relevance to the FIO. This is an underlying concern among insurers about the view of insurance among federal policymakers and also the new institutions (such as the FIO) created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

At NFI focus groups earlier this year, insurer representatives voiced concern that these federal bodies are “are biased against insurance products, especially insurance products that can help with retirement goals, including annuities,” the researchers write.

In the focus groups, the authors continue, insurers pointed out that “insurance products can help with state pension system underfunding and that guaranteed income annuity products can supplement Social Security, yet federal leaders often look upon these products with grave apprehension.”

Role of NAIC

Appendix 2 also peers into the future role of the National Association of Insurance Commissioners (NAIC), and annuity insurers’ views on that.

“Many insurers, especially on the life and annuity side, regard the role of the NAIC as requiring clarification,” the researchers write. They indicate the comments came from March focus groups sponsored earlier this year by NFI.

The writers say they believe it will be the FIO’s job to determine what the appropriate role for NAIC will be.

“The NAIC currently participates in international policy discussions and addresses issues arising at the state level, but it is unclear whether industry interests are represented in either international or domestic policy discussions at the NAIC,” they continue. “The FIO should consider whether the existing structure of the NAIC can be used to unify and nationalize the state-based regulatory system to achieve minimum national/federal standards.”

Dodd-Frank does not provide clarity on this or on NAIC’s role, “but the FIO will have to address both,” they maintain.

Then the researchers turn to a sensitive issue in the industry — about NAIC’s role right now.

Several participants at NFI-sponsored conferences have expressed “frustration that the NAIC views itself erroneously as an umbrella organization for state regulation instead of essentially a trade organization for the state insurance commissioners,” they write.

The researchers explain the concern this way: “The NAIC is a major provider of trade information for the insurance industry, but it has fashioned a role for itself in research and promotion of state-of-the-art regulation for the members, through the dissemination of model legislation on regulatory issues.”

This has led some to conclude that NAIC is a trade association that is “trying to take on a de facto regulatory role. It is doing this through model legislation, attempts to become a data warehouse and acting as a supervisory college, but with “no political accountability,” according to the writers’ assessment of focus group participant concerns.

“Twenty-seven of the last 87 NAIC meetings have been closed, according to one participant,” the researchers point out.

What is the recommendation? “The FIO could be the instrument for greater uniformity and efficiency, such as uniform broker licensing,” they say.

In addition, in the view of many insurers, the FIO “could meticulously define and explain the role of the NAIC and how well it communicates with the states and the industry, so as to identify gaps in regulation and communication, especially for life and annuity firms,” the researchers write.

They add that many insurers also believe that, for the FIO to move forward in an active regulatory role, there should be a finding of real state inadequacy in regulation. “Many believe that there will be such a finding and the NAIC should be prepared for it,” the authors say. (But others also contend that NAIC inaction has some advantages — i.e., “not getting things done reflects the advantages of slow deliberate action sometimes attributed to the Congress.”)

Some NFI focus group participants favor a more focused regulatory role for the NAIC, however, according to the report. Their position is, the 50 states under the NAIC should be the center of regulation and the provider of insurance expertise to the federal authorities, with their role being development and dissemination of the best accounting practices and procedures and creation of policy for insurance regulation.

The NFI report

NFI says it is submitting its new report to the Federal Insurance Office (FIO) because NFI “wants to be a resource” for the agency as it discharges the mission laid out for it in Dodd-Frank.

That mission is to track the insurance sector and probe possibilities for insurance regulation in the 21st century. Part of this work will include the FIO’s January report to Congress on recommendations for modernizing and improving insurance regulation. NFI hopes its comments will affect that report.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].