Why the life insurance industry needs a watchdog.

• Author: Fitzpatrick, Philip A.
• Position: Viewpoint

In recent years, state regulators for the life insurance industry have come under considerable fire from Congress and consumer groups for their seeming inability to effectively regulate and for their slow responses to public concerns about their practices. It's only logical to wonder where state insurance regulation has gone wrong in establishing sound financial oversight and whether the federal government should step in.

The life insurance industry changed significantly in the early 1980s with the advent of universal life insurance, single-premium deferred annuities and guaranteed investment contracts. These new products attracted investors instead of traditional insurance buyers, a development that altered the thrust of the industry's activities. The National Association of Insurance Commissioners, the umbrella regulatory body for the state insurance departments, has tried to respond to these changes, but it's a cumbersome framework of 50 state regulatory authorities, each of which can enact its own rules. Plus, life insurance companies have two different ownership forms, mutual and stock, which further complicates the regulatory process. Finally, the industry has far too much influence on the NAIC. As a result, regulators have failed to provide insurance investors with uniform and comprehensive financial information.

Life insurance is unique among American industries in that eight of the 12 largest companies are mutual companies, which means they aren't owned by public stockholders. These eight, along with other mutual life insurers, control about 43 percent of all life insurance industry assets, according to Townsend and Schupp Co., an insurance research firm.

This is not to say that mutual companies are in private hands. In fact, their ownership may be among the most public in the nation, because their policyholders own them directly. While policyholders at mutual life insurers can't buy and sell their ownership positions the way public stockholders do, they make stockholder-like decisions in deciding whether to purchase new policies, surrender the ones they have or, in some cases, add to their policies' investment funds.

The insurance regulatory body of each state prescribes life insurance accounting for the insurers licensed to do business there. Generally, the regulations of the company's home state take precedence. Statutory accounting practices, or SAP, aren't formally codified, but the NAIC guides the industry on statutory accounting, to which all insurers must conform.

In addition, stock life insurers must conform with generally accepted accounting principles and with federal securities laws. GAAP for stock life insurers...