The regulation debate: it was state vs. federal at a conference for the life insurance industry, and debaters found little common ground. (Regulation: Life/Health).

The issue of who Should regulate insurance--the states or the federal government--was a topic of debate at PricewaterhouseCooper's 12th Annual Executive Conference for the Life Insurance Industry.

Analysts, legislators, regulators, consumer advocates and insurance executives each had a voice in the debate during the two-day conference held in May in New York City. A pair of panel discussions focused, in part, on the pros and cons of an optional federal charter.

The American Council of Life Insurers has drafted a proposal to create an optional federal charter for insurers, using the best aspects of state insurance regulation as the model where appropriate, and the best aspects of the banking regulatory model in other areas.

Gary Hughes, ACLI counsel, called the alternative to state-based regulation "a top-priority issue" for insurers, saying that companies need to have "a voice in Washington in the regulatory fraternity."

Race to the Bottom

But J. Robert Hunter, insurance director at the Consumer Federation of America, said the bill could pressure states to gut consumer protections and that it could create a "race to the bottom" as federal regulators try to define a system that is acceptable nationwide. Hunter charged that the industry wants a federal scheme that, as the Office of the Comptroller of the Currency is for banks, would be a "lap-dog regulator."

Hughes disputed Hunter's race-to-the-bottom remark, saying the ACLI's initiative was intended to create uniformity and consistency for insurers doing business on a nationwide scale. He said insurers already have the option of redomesticating to another state jurisdiction and that with 51 options already--including the District of Columbia--the federal option would represent a 52nd.

Hunter said that if insurers redomesticate to another state jurisdiction, policyholders in New York don't lose the protections of their state insurance department, but they would under a federal regulatory scheme.

Gregory V Serio, superintendent of the New York Insurance Department, said Congress' interest in the matter lies in two areas. One is its concern about a variety of regulatory schemes, the deviations they produce, and what a regulatory scheme for the life industry would look like. Second, Congress would want to consider the existing regulatory structures in the largest market-share states.

Any bill that Congress passes would probably have something in it the industry doesn't want, Hughes said, such as a community-reinvestment provision. "It won't create a scheme that's lax," he said.

Hughes said state regulation might be able to handle an industry that must now compete in a global marketplace.

Terri Vaughan, president of the National Association of Insurance Commissioners, said in a luncheon address at the conference that there was a drive by the NAIC to work with state legislatures to form interstate cooperative agreements to get a single procedure for filing and reviewing life insurance products, rather than going state by state to get a system in place.

"If state regulators give speeches like the one Tern gave, I'd feel better," Hughes said.

Support for Federal

New York State Sen. William J. Larkin, president of the National Conference of Insurance Legislators, surveyed conference attendees on the topic of an optional federal charter, and he was dismayed to see that a majority supported it.

The previous day, Vaughan presented the conference with the case for retaming state regulation. Every day, she said, her department in Iowa, where she is commissioner, fields complaints from consumers about companies not paying claims or not treating them fairly. She said that while big life insurance companies selling the same policies across the United States might fare better with some centralized system for gaining product approvals, property/casualty and health insurers still operate in local markets that are served better by state regulation.

The ACLI, which is pushing for a federal charter, says the current state regulatory system is anti-competitive for life insurers.

"If they were successful--that is, having a federal charter in New York, for example--taxes would go through the ceiling," Larkin said. He estimated that NewYork State government would lose about $925 million.

Wall Street View

A panel of stock analysts at the conference concluded that state regulation is costly for life insurers and should be eliminated, particularly if life insurers want to participate in the consolidation of the financial-services industry.

Joan H. Zief, managing director at Goldman, Sachs & Co., acknowledged that the regulatory system exists to protect the consumer, but regulators employ too many layers of protection. "Aren't state guaranty plans enough?" she asked. "Why do they also judge policy forms and price?" She added that if regulators would allow it, the free market would do a better job.

Conference host John S. Sheid, chairman of PricewaterhouseCoopers' Americas Insurance Group, saw some merit to eliminating state guaranty funds. "Consumers may be lazy, but they're not stupid," he said after noting that most consumers do not have the incentive to compare policies' terms. Eliminate the guaranty funds, and consumers will seek out companies rated A++, and the weak companies will disappear, he said.

Zief said the real reason the industry won't give up state regulation is that it provides protection to individual companies in an industry that badly needs to consolidate. Too many small companies exist that do not provide anything different from their competitors, and the regulatory system is "one of the biggest obstacles" to companies like those merging with or acquiring the others.

The high cost of investing in technology is beyond the ability of these companies, added George N. Cochran, co-founder and managing director of Cochran, Caronia & Co., which provides investment banking services. In the meantime, the industry becomes "less relevant" in the financial-services world, Zief said.

State regulation also survives because state regulators are "profit centers" for the state through the revenue they generate, said Michael Weinstein, senior equity analyst at Putnam Investments.

Results of an audience poll of executives revealed that 42% of participants expect to improve shareholder/policyholder value in coming years at their companies through acquisitions, 16% by mergers and 21% through strategic alliances. Only 16% planned to stay the course, and only 5% predicted a demutualization. Zief urged small companies to choose the merger option.

Compared with banks, securities firms and other publicly traded industries, life insurers have lower returns on equity, with percentages often in the single digits or low teens.

RELATED ARTICLE: American General Gets "Gung Ho' After Acquisition by AIG.

American International Group Inc. is ahead of budget in reorganizing newly acquired American General Corp., with expectations that final expense cuts at the Houston-based life insurance and financial-services company could reach $450 million to $500 million by the end of 2003. But it wasn't clear at first that the life company had any handle on its profitability--or whether management was on top of things.

That was the assessment of Maurice R. "Hank" Greenberg, AIG's chairman and chief exective officer, who discussed AIG's growth strategy at the 12th Annual PricewaterhouseCoopers Executive Conference for the Life Insurance Industry.

AIG, principally a property/casualty company 10 years ago, has grown its life insurance segment to roughly 50% of its business today. As this segment grew, the company acquired American General at the end of 2001, Greenberg said. It was the largest acquisition in AIG's history, and it provided the global financial-services giant with a strong leadership position in the U.S. life insurance and retirement-savings markets.

"When we acquired American General, it was a different structure than we're used to managing," Greenberg said. "American General had made a number of acquisitions over the years and used the distribution of the acquisitions but never really consolidated anything in the systems. You really couldn't tell, from any of the companies they acquired, whether these companies were profitable or not. There was allocation of expense, but it was run as a whole. If the whole was profitable, there was not as much concern whether the pieces were all what they should be."

AIG has restructured American General to fit its own way of doing business, with a profit-center orientation, Greenberg said. Heads of each company now have profit-loss statements that they live by, he added.

"When we took it over, we asked the company presidents, 'What's your bottom line?' "Greenberg said. "They just shook their heads--they knew what the top-line growth was, but they had no idea what the bottom line was. They do now. And that has taken out considerable expense."

Persistency in half of American General's business was reasonably good, but in the other half persistency "was terrible," indicating a management problem, he said. "That's been addressed very quickly, and persistency is not only stabilized but beginning to pick up," Greenberg said.

In the process, American General has developed into a much more "gung ho" organization, with people who "want to know if they're winning or losing, and to me, that was very critical," Greenberg said.