1. The Effects of an Optional Federal Charter on Competition in the Life Insurance Industry Martin F. Grace Robert W. Klein Georgia State University Presentation ARIA 2007 Meeting August 6, 2007

2. Outline Motivation and Issues State versus OFC Framework Structure & Performance of Life Insurance Industry Likely Effects of OFC on Competition

3. Motivation Many Life & PC insurers now advocate the creation of an optional federal charter (OFC). Some insurers, independent agents and the states oppose OFC. OFC legislation has been introduced in Congress. The OFC proposal has sparked a strong debate involving several issues, including its likely effects on market competition.

4. Evolution of Insurance Industry Insurance markets have become increasingly national & international in scope. Under state framework, each state licenses insurers to operate in its jurisdiction & approves life insurance/annuity products sold and other aspects of market conduct. Many multi-state insurers contend that state regulation has become an increasing drag on its efficiency and competitiveness. Life insurers increasingly compete with other financial institutions that are federal-regulated & international insurers governed by more efficient regulatory systems.

5. Issues To what extent does current state framework create barriers, raise costs and impede competition. –Pottier (2007) finds significant inefficiency in life insurance industry attributed to state regulation. How would OFC affect life insurance markets? –Effects on structure, conduct and performance. –Effects on competition, efficiency, prices, product innovation, market conduct and consumer welfare. –Implications for competition in financial services. –Implications for competition in international markets.

6. OFC Proposal/Legislation National Insurance Act (NIA) would allow insurers and agents to submit to federal regulation. OFC insurers and agents would not be subject to state regulation. Federal insurance regulator would operate much like the OCC. States would continue to collect premium taxes on all insurance written. State guaranty associations would handle insolvency costs if they met federal standards; federal regulator would manage receiverships of “national” insurers. Insurance contracts would be interpreted under one set of laws.

7. Life Insurance Industry Structure

8. State Market Concentration

10. Firm Value

11. Insurers Losing Ground to Other FIs

12. Mergers and Acquisitions

13. Observations Life industry relatively un-concentrated at national & state levels. “Natural” entry/exit barriers are low. Regulatory barriers could be more significant. Profits, firm value and efficiency sub-optimal. Industry consolidation continues: –Effort to increase scale economies –Market access and penetration –Other reasons?

14. Motives to Opt for OFC Incentives to opt for OFC increase with size & geographic scope of operations. Competition with other FI’s & internationally also increase incentives for OFC charter. Product mix may or may not be a big factor. OFC option increases potential returns from and value of M&A’s. State progress (or lack of it).

15. Characteristics of ACLI Members

16. “Nationally Significant” Insurers

17. Expectations Many insurers, accounting for most of the industry’s output, would opt for OFC. OFC would facilitate/promote: –Increased competition. –Industry (market) expansion. –Further consolidation. –Lower regulatory costs, greater efficiency, lower prices, better products, consumer benefits. –Healthy competition between state/federal regulators –Industry competitiveness w/ other FIs, internationally. State-regulated insurers should remain viable if they offer comparative value that exceeds federal regulation efficiencies.