Author: Kent Hannon


The American Council of Life Insurers recently contracted with Steven Pottier, a Terry College professor of risk management and insurance, to conduct a research study related to the proposed Optional Federal Charter, which is an offshoot of the National Insurance Act of 2006. If implemented, OFC would issue federal charters and licenses to insurers that currently must obtain a license for each state where they do business — or form a separate company that is domiciled and licensed in each state where they do business.

Pottier's assignment was to determine whether the proposed federal system would be more efficient and cost effective than the current system wherein multi-state insurers face multiple regulatory bodies and multiple sets of regulations. Under the proposed OFC, an Office of National Insurance would be established to issue federal charters and licenses to insurers, with the goal of providing financial relief from the multi-state licensing scenario that currently exists.

The study provides results on 284 life insurance entities with combined assets of $3.8 trillion. Of those 284, 74 are national insurers licensed in every state and the District of Columbia.

"The principal findings suggest that a life insurer's cost efficiency declines significantly as the number of states licensed or domiciled increases — but increases with the insurer's size," says Pottier. "Based on parameter estimates from cost efficiency regressions, the potential savings related to a 'single regulator' — similar to what would be the case under the proposed Optional Federal Charter — exceed $5.7 billion, about 1.25 percent of net premiums annually."

Pottier notes that the current regulatory financial reporting system does not specifically identify or separate regulatory compliance costs from other costs that might be inherent to expansion into new states. He also notes that this study did not attempt to estimate other potential benefits of the Optional Federal Charter, such as increased competition and improved speed bringing new products to market.

In an interview with Dow Jones Newswire, Pottier echoed industry claims that cost savings would be passed along to customers. "Just like they are passing the additional (regulatory) costs along (now)," said Pottier, "in a competitive environment they would be able to pass along cost savings to consumers."

Not surprisingly, given Pottier's $5.7 billion savings figure, large multi-state insurers hailed the study's findings. "Dr. Pottier's thorough analysis reinforces what we have said all along, which is that consumers would be the true beneficiaries of an optional federal charter system for insurers," said Frank Keating of the American Council of Life Insurers, which represents national companies like Prudential and State Farm. OFC was included as part of the National Insurance Act of 2007 co-sponsored this past May by Sen. John Sununu (R-N.H.) and Sen. Tim Johnson (D-S.D.).

"If approved by Congress," says Pottier, "OFC will probably be the most substantive change in insurer regulation in more than 60 years."