Insurance regulation: a time for change; can the states fix the age-old system of insurance regulation to meet the needs of the modern economy, or will a federal takeover leave consumers to fend for themselves?

• Author: Calvo, Cheye

A bride and groom stand before a majestic view as the Beatles song plays, "When I get old and losing my hair, many years from now..." The commercial moves through images of the couple's life together: having children, paying for college and then, as seniors, embracing as they look blissfully into the distance.

"When you spend your Life in Good Hands," it reads across a black background, "you end up in a good place." It then reveals the sponsor, Allstate, flashing the company's lines of service--auto, home and life insurance--before leaving "Allstate Retirement" on the screen to linger.

"Will you still need me, will you still feed me ... when I'm 64?"

The television ad is a clever signal of a new era in financial services. The federal Financial Modernization Act of 1999--also called Gramm-Leach-Bliley--tore down Depression-era barriers to permit affiliations and integration among insurance companies, banks and securities firms. Now, with a backdrop of scandal among top brokerage firms like Merrill Lynch and Morgan Stanley, companies like Allstate, State Farm and Nationwide are looking to capitalize on strong reputations as household insurance names to gain ground in the new market. They're no longer "insurance" but "financial" companies.

Although these new firms offer banking and investment services, too, the rubber meets the road for states when it comes to insurance products--specifically long-term, investment-oriented insurance policies known as "asset-based" insurance. These include life insurance, annuities, disability income and long-term care insurance.

Whereas banks are regulated under a dual chartering system where the institution picks its regulator, state or federal, and the Securities and Exchange Commission (SEC) is responsible for securities oversight, the states regulate insurance--and have for 152 years.

"Insurance is a different kind of financial service," says Representative Frank Mautino, who chairs the insurance committee in the Illinois House. "Where banks and securities are about access to capital and risk-taking, insurance is about guarantees--a promise to pay benefits, if and when certain things happen."

Because they are more accessible, accountable and sensitive to local economic and social conditions than the federal government, states can provide the higher degree of consumer protection that insurance requires, he says.

But the 50-state regulatory system also can cause problems for some insurance companies as they try to market asset-based insurance policies nationally to compete with the products of federally regulated banks and securities firms, like money market accounts and mutual funds.

At a June 2002 hearing before the U.S. House Committee on Financial Services, Joseph Gasper, the president and CEO of Nationwide Financial, made the case for federal regulation on behalf of the American Council of Life Insurers.

"The current state of the insurance regulatory system is lacking in uniformity and efficiency," he said. "These lapses diminish the ability of insurers to compete effectively in a changed financial services marketplace or to serve our customers' needs in the most productive and efficient manner."

Gasper told Congress that, where banks can roll out an innovative credit instrument like a certificate of deposit within 30 days and the SEC might take 60 days to approve a securities product, getting approval in all states for a new life insurance policy or annuity product can take up to two years. And the company could wind up with 35 to 40 versions to satisfy myriad state standards.

"The competitive implications of this disparity in regulatory efficiency are enormous," he said.

State officials acknowledge the need for reforms to meet the needs of the modern economy, particularly to address the speed to market issues raised by Gasper. However, they emphasize that consumer protection--and not commercial competition--is what insurance regulation is all about.

"We don't want to throw the baby out with the bath water," Iowa Insurance Commissioner Tern Vaughan told the same U.S. House committee on behalf of the National Association of Insurance Commissioners (NAIC).

"You cannot create a federal regulatory system in Washington without affecting the important consumer protections that we have in place," said Vaughan. "So the...