Vital Issues For Life Insurers Are On The Table In Congress

By Arthur D. Postal

August 10, 2005 at 08:00 PM

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When Congress returns to work on Sept. 6 after a recess, it will have a full plate of issues important to the life insurance industry to consider.

Indeed, the Senate is expected consider an issue of paramount importance to the insurance industry right off the bat as Senate Majority Leader William Frist, R-Tenn., has promised to put Democrats on the spot by asking the Senate to vote on legislation that would fully repeal the estate tax.

Besides estate tax repeal, issues of critical importance to the industry that are tucked into legislation expected to be considered this fall include reform of rules concerning defined benefit pension plans; retirement security, including changes in the Social Security program; and extension of tax cuts and extension of the Terrorism Risk Insurance Act that the life insurance industry wants revised to include support for group life insurance.

Moreover, insurance industry regulation is also on the agenda, with many anticipating that the House Financial Services Committee might consider federal standards legislation through the State Modernization and Regulatory Transparency Act. The life insurance industry is lobbying the panel to include in such legislation an optional federal charter for life insurers, but signs are emerging that because of its controversy and the lack of time, even introduction of the bill might be delayed until next year.

Data security, too, is an emerging issue. Kimberly Olson Dorgan, senior vice president of government relations for the American Council of Life Insurers, says the Senate Commerce Committee already has passed legislation dealing with data security. The Senate Finance Committee might take up such legislation as part of Social Security number privacy that is part of a privacy bill, Dorgan says, and the Senate Judiciary Committee might take it up at some point this year. The Senate Banking Committee might also consider the issue, she says. "Action might come in the Senate next year," she concludes, and the issue "does concern insurers."

The industry also supports adding group life to TRIA, which is must-do legislation this fall. Dorgan says, "I'm confident that group life will be included in any legislation extending TRIA. There is great momentum for doing this."

Michael Kerley, senior vice president of the National Association of Insurance and Financial Advisors, says NAIFA supports this as well.

Regarding the estate tax, analysts and industry lobbyists say Frist doesn't have the votes to force the Senate to consider the repeal measure. But life insurers and trade groups, including the ACLI, NAIFA and the Association for Advanced Life Underwriting, have all worked hard to ensure that members of the Senate know that repeal would hurt the industry and what the industry can support is reform, such as a moderate increase in the threshold level for the tax, and some decrease in the maximum tax on large estates, currently 45%. At present, the estate tax ceases in 2010 but returns in 2011 at rates and exclusion levels from 2000.

ACLI's Dorgan says, "We do not support full repeal, but we do support sustainable reform. Congress needs to determine what it can afford in the long term."

NAIFA's Kerley agrees. "We support reasonable, sustainable reform," Kerley says. "Budget implications and other considerations lead us to that conclusion as the better solution," he adds. "We have been consistent on this for several years."

In an Aug. 17 analysis of what will be on Congress's plate when it returns to work, Washington Analysis, an analyst for buy-side brokerages, observed, "The expected Senate vote is good news for life insurers selling so-called 'second-to-die' policies."

The vote is designed by the Republicans to put pressure on potentially vulnerable Sen. Max Baucus, D-Mont., ranking minority member of the Senate Finance Committee. But Baucus is said to be indicating privately that he sees no urgency in dealing with the issue–especially because of its potentially huge ongoing impact on the budget deficit–and is inclined to put action on the back burner.

The implication is that the insurance industry and its customers will have to deal with the uncertainty of this issue for perhaps several more years.

Regarding retirement security and pension reform, Congress will be dealing with these issues in two parts.

One piece of legislation, introduced as the Growing Real Ownership for Workers Act of 2005, HR 3304, or GROW, by Rep. Jim McCreary, R-La., chairman of the House Ways and Means Committee subcommittee that deals with Social Security, would create private accounts in Social Security by allowing workers to designate part of their contributions to the Social Security fund to go into private accounts. The chairman of the full committee, Rep. Bill Thomas, R-Calif., hopes to make this legislation more acceptable to Democrats by including sweeteners dealing with retirement security.

Legislation reforming the defined pension benefit system will also be considered.

Regarding retirement security, as part of Thomas' effort to enlist the support of a wary insurance industry, he has asked the industry to devise a product that would provide inside buildup as an incentive for individuals to purchase long term care insurance. The insurance industry has done so and also has made other suggestions for retirement savings incentives that could be included in such legislation as a means of broadening its support in Congress.

"This is the biggest issue in the House," says Dorgan. She believes the GROW bill and the retirement savings package will be introduced this fall by Thomas as separate bills and then combined. Regarding the LTC with inside buildup provision, Dorgan says the industry refers to it as a "hybrid product proposal." She says ACLI members, as well as Thomas, are interested in LTC combination products. "We have been examining ways to develop such products–merge policies together, such as a long term care policy with an annuity, for example," Dorgan says. "Of course, there are difficulties to this approach–policies are underwritten differently, and combining qualified long term care insurance with annuities is not currently permitted by the tax law–and these are being ironed out."

Other provisions the insurance industry is asking the committee to support are tax incentives for people to purchase both qualified and nonqualified annuities. "So many individuals have put their savings into homes," Dorgan says, and they count on the equity in their homes to finance their retirement. "But look at New Orleans," she says. "In this case, the equity will be needed to put into rebuilding.

"Our products offer security to people as they retire," Dorgan says. "So, we see the hurricane as another example of Congress needing to deal with the issue of providing more incentives for people to save for retirement. Americans need security. We all understand that Social Security is not enough. We need to have more than just Social Security to help through retirement."

The product the industry is promoting would provide lifetime payments in retirement through a fixed annuity where 50% up to a $20,000 payment annually would be tax-free. Bills providing such a tax advantage have been introduced in both the House and the Senate.

NAIFA is supporting bills introduced in both the House and the Senate that would allow owners of 401(k)s to roll over some of their funds into annuities when they retire. The industry is also supporting a provision that would allow employers to provide an automatic signup in a 401(k) upon employment.

But both the ACLI and NAIFA remain opposed to a Lifetime Savings Account, an annual Bush administration proposal close to the hearts of conservatives.

"We continue to oppose LSAs," Dorgan says. "We think they are short-term checking accounts." But she says she believes interest in these accounts has faded. "My guess is that members of Congress aren't that excited about the product; they weren't embracing this concept of an LSA. There hearts weren't into it."

Dorgan did confirm that ACLI members have been educating members about the pitfalls of the LSAs. She notes a recent Congressional Research Service report that said, "Neither theory nor empirical evidence seems to present much of a case for a significant [or even positive] effect on private savings of these provisions–particularly the back-loaded form." The report explained that the change would tend to "redistribute after-tax income on both a relative and absolute basis from lower to higher income groups in part because lower and moderate income individuals tend to have little or no savings–although benefits to the highest income individuals would be constrained by the contributions limit."

NAIFA's Kerley says his group "is vitally interested in retirement security, particularly as it would be done through life insurance, annuities and qualified retirement plans." Kerley says NAIFA supports long-term savings through those vehicles as "compatible with the basic Social Security system."

He says, "We are happy that Congress, through its attention to long-term Social Security solvency issues, has focused the spotlight on life insurance, annuities, qualified retire plans and individual savings."

The effort to reform the troubled defined benefit retirement program is of interest to the insurance industry in several ways. First, insurers administer these programs and also sell Guaranteed Insurance Contracts and other products as funding instruments. Second, legislation on this issue passed by the Senate Finance Committee and the House Education and Workforce Committee contains provisions allowing insurers and other sellers of financial products to provide investment advice to plan members. The insurance industry prefers the language in the House bill.

The Senate bill contains a provision codifying the corporate-owned life insurance product and codifying into federal law current "best practices" on the product. The provision would effectively limit COLI to coverage of highly compensated employees and require the consent of insured individuals.

A similar bill has been introduced in the House, but no action has been taken so far.

Dorgan says the COLI bill has the support of a majority of the House Ways and Means Committee, which implies that it has cleared a key hurdle and could win support both as a separate bill or House support of the Senate bill in the case a conference committee is created to reconcile differing House/Senate bills.

Regarding the investment advisory language, which has been debated for several years, Dorgan says the ACLI feels strongly "that Americans need guidance in making wise decisions in investment decisions. We would like employees to have access at the workplace to advice, for example, access to answers to such questions as, "What do I do with my money? How should I divide it in investment vehicles?"

Dorgan adds that ACLI wants to make sure employees have access to that information. Insurers administer these programs, provide the educational materials, and have long-term relationships with the employees. "Our members can get to a certain line, but we can go no further. That is what we're aiming for," she says.

The industry supports the House language rather than the Senate language because the Senate bill imposes a standard of fiduciary responsibility on investment advisors, a liability concern for the industry.

Kerley says NAIFA prefers the House language because it amends the prohibited transaction provision of ERISA, while the Senate bill does not. "The bottom line is that if the prohibited transaction language is not amended, there will be no increase in the number of advisors that are made available to rank and file employees," Kerley says.

Regarding the core pension benefit reform proposals, the Bush administration proposal has been modified to win industry support in bills passed by the House Education and Workforce Committee and the Senate Finance Committee. The reason industry opposes the administration proposal is that it will likely impose such mandated costs that most companies would have incentives to junk the entire program, something many companies, as well as unions, don't want done. Another Senate committee will take up the issue this month.

Regarding insurance regulatory reform proposals, it is looking increasingly likely that the most the insurance industry will get this year will be another hearing in the House Financial Services Committee.

The property-casualty insurance industry appears more supportive of SMART than the life insurance industry. ACLI says it "supports the SMART process," and is focusing on provisions that address speed-to-market, market conduct examination reform, and producer licensing. However, Dorgan says, "ACLI has made it clear to the committee that the SMART proposal does not go far enough for life insurers in reforming insurance regulation." For example, Dorgan says, ACLI advocates a federal enforcement mechanism to guarantee uniformity in the laws and regulations governing the industry. "The SMART proposal currently does not include such a provision," she notes.

But what the life industry really wants is an optional federal charter for life, she says. "ACLI believes the best way to help life insurers better address the needs of its customers is through the creation of an optional federal charter for life insurers."

Kerley says, "We are open to all opportunities to improve insurance regulation. We oppose no bills and we support no bills. We are ready to entertain all proposals, whether they be SMART or an OFC, or improved state regulation. We believe something needs to be done. The state of insurance regulation cries out for improvement."

Dorgan is part of the growing majority that believes SMART is likely not to be introduced this year, and believes that is a positive. "This will gives us some more time to work on our life OFC proposal," she says.

Caption

Senate Majority Leader William Frist has promised to put Democrats on the spot by asking the Senate to vote on legislation that would fully repeal the estate tax shortly after it returns from its August recess.

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