Deficit Reduction Initiatives Concern Life Insurers

Deficit-reduction initiatives in Washington have the U.S. life insurance industry worried that sales life insurance and annuities could drop if they become a reality, according to the chief executive officer of Ohio National Financial Services.

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Gary “Doc” Huffman, president and CEO Ohio National Financial, spoke April 11 at the life insurance and retirement industry conferences being held this week in Las Vegas.

Companies such as Ohio National, a life and annuity business, should be regulated differently from companies in the banking, investment banking and insurance business, he said. Such companies need “a heightened regulator” with more scrutiny because of their more complex nature, said Huffman, who spoke on a panel with other industry CEOs at the life insurance conference’s general session April 12.

The following are excerpts from Huffman’s interview with BestWire:

Climate in Washington, D.C.: The biggest concern is the uncertainty of what will happen in the regulatory world and about what the deficit-reduction initiative in Congress and the president will do to the industry’s products.

Tax treatment: They’ve created a list called tax expenditures and on that list are two big things related to the life insurance industry. One is the tax-deferred treatment of the inside cash-value build up in life insurance and annuities, and the deductibility of 401(k) plans, which are big products for the life insurance industry. If the tax treatment changes, more than likely, sales would go down in all of those products — life insurance, annuities and 401(k) plans… What Congress has on their list — the deficit reduction commission — is they want to tax.

Who this would impact: Everyone receives the tax benefits of life insurance, annuities and 401(k) plans equally. Whole life, universal life, variable universal life and second-to-die. What the cash value is in a whole life insurance policy, for example, is the reserve building up in the policy to pay the ultimate death claim. Over the years, the life insurance industry has allowed policyholders to have access to those reserves that build up through policy loans, if they surrender, they get the cash surrender value, and all of that money accumulates tax deferred.

Tax drawback: People will continue to buy life insurance for the pure tax benefits of the death benefit but it takes away some of the attractiveness of these products from the accumulation perspective.

Cutting costs: Everyone agrees — Democrats, Republicans and the president — that we have to reduce spending and we have to look for more revenue. But the facts are, everything’s on the table today so if they’re talking about cutting social programs, then life insurance, annuities and 401(k)s also are going to be on the table.

Financial services reform law Dodd-Frank: Dodd-Frank was written in such a way that they’re going to figure it out as they go along. Any time you insert uncertainty in any industry, it paralyzes people because whether it’s an individual or a corporation, how do you make long-term plans if you don’t know what the deal is going to be? Dodd-Frank has inserted a lot of uncertainty into who’s going to be regulating what.

The Optional Federal Charter, which is now off the table with the current Congress: We were in favor of the Optional Federal Charter but that’s different than what we have today. I don’t know that we are in favor of the federal office of insurance because we don’t know what it means yet. If you elected an optional federal charter as a company, then you were going to be regulated by the federal government only and the states would not regulate you anymore. Today, we still have state regulation in all 50 states plus now who have this new federal regulator that has power. Before it was an either-or, you could choose, and it was based on a company’s strategy which one it thought would be best in terms of ease of doing business and efficiency.

Differentiating from banks: The insurance business is different from the banking business — commercial banking or investment banking. The life insurance business is in the long-term risk management business — we are not in the demand deposit business like a bank, we are not in the commercial loan business like a bank, we’re not into taking companies public like investment bankers do and we don’t broker merger and acquisition deals like investment bankers do. Life insurance, the core product, on average, can be a 30-year risk before a policy settles or pays a death claim.

The conferences, sponsored by LIMRA, LOMA, the Society of Actuaries and the American Council of Life Insurers, continues through April 15 at Caesar’s Palace.

To listen to another interview with Huffman, where he discusses his long-term strategy for Ohio National, as well as the estate tax and the industry’s struggle with recruiting agents, go to http://www.ambest.com/media/media.asp?RC=185346

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)