Presented November 12 by Leon Huffman, NAILBA Government Affairs Committee Co-Chairman, during NAILBA 28

Never in a million years did I think when I stood up here last year, we would now be facing ominous threats to our livelihood.   Last fall, we saw changes in the American economy and investment mindset that hadn’t been seen since the great depression.  In the year since we have witnessed a rise of skepticism unlike anything we have experienced. 

The financial crisis caused a breach of trust between the American people and the financial services industry.  When people think of us, they are not seeing companies acting in the public interest.  They see an industry portrayed as the epitome of everything that is wrong with corporate America.   Add to that an administration and congress that in the battle over health care reform has created a toxic legislative environment and you get the opportunity for sweeping partisan policies to be enacted. What does this mean?  It means that, while it’s hard to get things done, what does get done can be very, very bad with little or no balance. 

The financial crisis, combined with unemployment over 10% has exacerbated the “us versus them” mentality.  And, furor over these issues makes us vulnerable to one-sided legislation created under the guise of “consumer protection”. 

In that vein, there is an overarching and aggressive move to regulate our business—our products, our fiduciary role, our suitability role, and even our supervisory responsibilities over our agents.  Our industry is facing a battle on multiple fronts.  Let’s take these issues one at a time.

First, a key committee in Congress has passed legislation that proposes a “harmonized” fiduciary standard subjecting commission-based broker dealers to the same rules as fee-based RIAs.  This is like forcing a square peg into a circle.  This legislation would allow the sec to restrict or prohibit compensation structures they find objectionable and further directs the sec to require financial advisors and representatives to act in the best interest of their clients without regard to their own financial interest.  How this alignment of interest would be determined is unclear.  What is clear is this bill seems to have a bias against commission based compensation.  It is most likely this bill will pass the house. Chairman Chris Dodd (D-CT) has indicated that he may mark up a bill as early as the week of November 16.

Second, Congress wants to create a brand new federal agency solely focused on consumer protection in the financial services industry.  While insurance products have been exempted from oversight, congress is currently weighing proposals that would create a national office of insurance information.  Could this bring insurance under the consumer financial protection agency umbrella?  Could this be the stepping-stone to federal or worse dual regulation for insurance agents and products?  The answers are uncertain. 

By the way, exactly what is an insurance product and what makes it different from an investment product?  FINRA, the SEC, a few insurance companies and some members of congress believe fixed annuities should be regulated as “investment” products.  Hopefully you are already part of the effort to pass HR 2733 and Senate 1389 that would end the twisted logic SEC 151A.  If investment risk is allowed to be defined as the uncertainty of the amount of guaranteed gain it is easy to argue that products we market other than annuities should be re-classified as investments.  This has the potential to lead to a re-organization of independent distribution that would shake NAILBA to its core. 

On the NAIC front, we have the suitability in annuity transactions model regulation, which would substantially add to the supervisory oversight independent agencies must exercise over agents.  While insurers have historically performed these duties, the NAIC model attempts to impose the responsibilities on both insurers and brokerage general agents.

Additionally, the NAIC model attempts to enforce accountability on BGAs for the actions of their agents.  In effect the regulation could re-classify independent contractor brokers as employees of your agency.  Exposing BGAs to this entirely new level of accountability would have significant impact on distribution and market conduct not to mention the E&O liability implications for both NAILBA members and producers.

Congress is under incredible pressure to find new sources of revenue so where will they look?   After this contentious healthcare debate the insurance industry will be the last place many in congress will be looking to protect.  So will congress preserve the favorable tax treatment our products enjoy or will they become a new source of revenue?

The foremost distinction our business has is its fundamental value as a social good, codified in three internal revenue codes—Sections 7702, 101 and 72. 

7702 provides a clear definition of what constitutes a life insurance product.  There is clarity and certainty here, meaning that hundreds of variations of life insurance products can be designed and allowed to prosper with the absolute certainty they are life insurance products and afforded the benefits as such under the code.  No such clarity of definition exists with other financial media. 

Section 101 is the extraordinary core benefit of our products—death proceeds are received tax-free by the beneficiary.  No other product has this protection.  It differentiates our offerings from all others and it is an explicit acknowledgment that our products generally promote social good by providing for families, businesses and estates. 

Finally, Section 72 secures the notion that cash values grow in life insurance and annuity products with no current, year-by-year recognition of gain for tax purposes.  This so-called inside build up is critical to use of our products as attractive accumulation vehicles.

These core benefits are undergoing intense scrutiny.  Competing financial services eagerly argue this differentiation our industry enjoys is an unfair advantage, and point specifically to Sections 72 and 101 as potential areas to enhance federal revenue. 

Budget and revenue committees in both houses of congress, and on both sides of the aisle are keenly aware of the revenue potential that could be derived from overturning these protections.  In the Executive branch, certainly no friend to the insurance industry, Treasury staffers clearly salivate over changing the rules and creating federal revenues from less-protective inside buildup and tax free death benefit guidelines. 

Imagine a world where the notion of tax free death proceeds are “means tested” with policy benefits above certain amounts, or from insureds in certain tax brackets exposed to federal income taxation.  Or imagine a world where life or annuity clients receive 1099’s each and every year their accumulated values grow.  The threats to these essential attributes of our products have never been so grave.

Another distinction our industry enjoys is exemption from certain federal anti-trust laws under the McCarran-Ferguson act.  McCarran-Ferguson also defers regulation of insurance to the states.

This state-by-state approach to regulation is comberson, confusing and badly in need of repair.  NAILBA members, our carriers and brokers face multiple regulators, product approvals, forms, continuing education and multi-state liscensing as a result of this patchwork regulatory model.  As a solution NAILBA has been supportive of efforts to create a federal regulator. However, in light of the rush to regulate in the tense atmosphere that currently exists, NAILBA has not continued to aggressively push for a federal regulator.

Various committee activities in both the house and the senate have proposed some level of a federal office for certain insurance activities, which we continue to monitor.  In October, a visibly angry president Obama mentioned McCarran-Ferguson by name and threatened to overturn it after the health insurance industry at last became critical of the healthcare proposal put forth by the senate finance committee.

Our business is protected and has thrived under the unique confluence of federal law in the form of McCarran-Ferguson, and favorable federal tax policy. We are arguably in the most delicate position we’ve ever been in relative to preserving these attributes of our business. 

NAILBA is actively fighting for independent distribution.  We have engaged our industry partners in strategic alliances.  We are working to educate life insurance professionals on the importance of grassroots advocacy.  We have significant relationships on both the hill and within federal agencies to stay abreast of changes as they come.  But we can’t do it alone.  We need your help.

Before I close I’d like to take a minute and thank the government affairs team for their efforts on your behalf.  Your NAILBA staff and your committee is working daily to address the issues I just referenced, to ensure that our industry is heard.  Specifically, I’d like to thank Chris Greis and Barbara Crowley for their tireless support this year.

As you know, power is in numbers.  We need you to fight too, on behalf of your industry.  Stay up-to-date with events in Washington, DC and at the state level.  Get involved with grassroots efforts; write, call or better yet visit your congressman or senator.  Silence is simply not an option. The more vocal we are, the more they will hear us.

Thank you for your time.