Optional Federal Chartering Would Increase Competitiveness Of Life Insurance Industry
October 27, 2007
A well-structured optional federal regulatory system would increase competitiveness, efficiency and innovation in the life insurance industry, according to a new study.
The study found that an optional federal chartering system (OFC) such as the one proposed in S. 40 and H.R. 3200 would reduce regulatory barriers that inhibit life insurers from achieving their full potential.
“While state regulators have sought to increase the efficiency of their policies and processes, the state system may still be hampering life insurers’ ability to compete on an even playing field with other financial institutions (that are federally regulated) and offer an optimal array of products at the lowest possible cost to better serve consumers,” the study says.
The study—“The Effects of an Optional Federal Charter on Competition in the Life Insurance Industry”—was conducted by Professors Martin F. Grace and Robert W. Klein of Georgia State University’s Center for Risk Management and Insurance Research. The study was commissioned by the American Council of Life Insurers (ACLI).
“The Grace-Klein study is a welcome addition to the growing body of evidence supporting OFC,” said Frank Keating, president and CEO of ACLI. “Its detailed analysis shows clearly that consumers would reap substantial benefits from greater competition among financial service providers that would be fostered by an OFC system.
“Just as important, the study demonstrates that the horror stories presented by the opponents of OFC have no economic or historical justification. While there would be some increased consolidation in the life insurance industry following OFC, there would still be an ample number of competitors, thus ensuring a vibrant marketplace.
“And the notion that OFC would spark a regulatory ‘race-to-the-bottom’ is thoroughly debunked. As the study says, an overly lax regulatory system would in fact devalue a life insurer in the eyes of shareholders, employees and customers. Life insurers would not seek the weakest regulatory jurisdiction. They would seek the regulatory jurisdiction, whether state or federal, that inspires the most confidence in consumers and investors.”
Key findings of the study are:
- The life insurance industry is structurally competitive, but has not fully achieved its potential efficiency due, at least in part, to the barriers and costs caused by state regulation.
- While product innovation does occur under the current system, it is at a much slower rate to what would be expected under a more uniform and efficient framework.
- Life insurers’ returns have been substantially lower than those of other financial institutions, due to the inefficiencies imposed on insurers by the current regulatory system.
- The reduction of state regulatory restrictions would likely increase direct competition among insurers and between insurers and other financial institutions. Just as bank regulatory reform led to new products, new firms, more competition and innovation, insurance regulatory reform would achieve the same benefits.
- While life insurers would seek to achieve some efficiencies through mergers and acquisitions following enactment of OFC, there is very little chance that the market would become highly concentrated or that competition would be diminished. The Herfendahl-Hirschman Index, a statistical tool which measures market concentration, shows that the life insurance marketplace is not concentrated today. Given the number of competitors and the ease of entry and exit, competition will remain intense under an OFC system.
- OFC would spark a healthy regulatory competition between the states and the federal government, with life insurers seeking the regulatory jurisdiction most likely to maximize the value of the firm. Since confidence in the ability of a life insurer to meet its obligations is critical to its success, insurers would not gravitate to the weakest regulator, but to the regulator that inspires the most confidence among investors and consumers.
To see the full study (148 pages) or the expanded summary with page references click here.