Dear Mr. Secretary:
As the Administration finalizes its proposal for reforming this country’s financial regulatory structure, I wanted to take this opportunity to reiterate the ACLI’s strong belief that an optional federal charter must be included to assure that the resulting regulatory structure operates effectively with respect to all segments of the U.S. financial services industry.
Without question, the life insurance business is systemically important both to consumers and to the economy. Life insurers are the single largest source of corporate bond financing, hold over 22% of all private employer-provided retirement assets, have over $20 trillion of life insurance coverage in force, hold approximately $2.6 trillion in annuity reserves, and hold some $5 trillion in total assets. Moreover, recent events have demonstrated that our business is not immune from the types of problems that have affected other segments of the financial services industry. In short, Congress can ill-afford to ignore life insurers as it revamps the regulatory landscape.
A major concern in this regard is the inability to effectively implement emerging federal financial
regulatory policy. This Administration working with Congress will reach a number of important national policy decisions regarding how to improve the regulation of the U.S. financial markets and minimize the chances of a similar crisis occurring in the future. Implementation of these policy decisions will be carried out by federal financial regulatory bodies. However, absent a federal insurance regulatory agency, there will be no federal agency with the necessary expertise on insurance to either advise Congress on relevant policy matters or to implement policy with respect to life insurance companies. Understanding and implementing critical federal policy solely through reliance on hoped for cooperation on the part of 51 state regulators rather than through enforceable federal statute is not a model this Administration should embrace.
In the same vein, effective systemic risk regulation relative to life insurers, whether conducted by a single federal agency or a group of federal agencies, will be difficult absent any in-depth regulatory knowledge or understanding of the business at the federal level. Treasury’s experience with life insurers applying for Capital Purchase Program funds bears out this fact. Having the systemic risk regulator rely on the states in this regard is certainly an option, but it will never be as effective as being able to partner with a knowledgeable federal regulatory counterpart.
Even in the current legislative environment, we continue to believe that making a federal insurance
charter available to life insurers on an optional basis is realistic and appropriate. Two issues need to be addressed in this regard, the first being regulatory arbitrage and the second being mandatory federal chartering for an industry that is systemically important.
Concerns over regulatory arbitrage, which have been raised principally by state insurance regulators opposing an optional federal charter, are without merit. The life insurance business is not seeking, nor would this Congress ever consider enacting, a federal insurance regulatory system that is weak in terms of consumer protections and solvency oversight. Indeed, the ACLI has consistently advocated for a federal alternative that is as strong as, if not stronger than, the best state regulatory systems. If anything, a properly constructed optional federal charter would result in the states being challenged to raise their standards to meet those of the federal regime. And it should be kept in mind that regulatory arbitrage can occur today given the fact that insurers have the right to redomesticate, and regulation from state-to-state is anything but uniform. The creation of an additional but strong federal option can only encourage a flight to quality.
As we note above, the life insurance business as a whole is systemically important, although it is
questionable whether any individual life insurer could be similarly categorized. Prior to the financial meltdown, life insurers had made a persuasive case to Congress that the inefficiencies of the state regulatory system, plus the fact that the states have no constitutional authority to bind the U.S. with respect to trade negotiations or global regulatory matters, justified the establishment of a federal functional insurance regulator with the ability to charter companies on an optional basis. Not a single aspect of our pre-crisis rationale in support of an optional federal charter has diminished.
Consequently, if a federal insurance charter were made available on an optional basis, and assuming it provided for a strong and effective regulatory alternative for those companies doing business in multiple jurisdictions as well as globally, there is no question that life insurers representing a significant portion of the industry would elect the federal option. That, in turn, would mean that the federal functional regulator would have direct jurisdiction over a critical mass of the industry – whether measured by assets or otherwise – and would be able to implement national regulatory policy in a meaningful manner, partner effectively with the new federal systemic risk regulator and effectively represent the U.S. internationally on trade and regulatory matters.
In conclusion, Mr. Secretary, we urge you to include an optional federal charter for life insurers as an integral part of this Administration’s regulatory reform package, and we pledge to work diligently with you and with Congress to see that effective regulatory reform becomes a reality.