[December 14, 2013] |
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FIO's Modernization Report: What Does It Really Mean for the Insurance Industry?
NEW YORK --(Business Wire)--
The Federal Insurance Office (FIO) has released its highly-anticipated
report on how to modernize and improve insurance regulation in the
United States. Mandated under the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank), the FIO's modernization report
provides practical guidance for Congress regarding federal involvement
in the regulation of the insurance industry.
Mike Nelson, chairman of law firm Nelson Levine, represents insurers and
reinsurers in regulatory matters as well as in complex litigation in
multiple jurisdictions throughout the country. His firm publishes FIO
Focus, a newsletter covering the latest developments on what many refer
to as "insurance modernization" and the FIO's activities. Below Mike
answers the most pressing questions about the FIO and its long-awaited
report.
The Federal Insurance Office has released its highly-anticipated
report on how to modernize and improve insurance regulation in the
United States. Can you explain what the Federal Insurance Office is and
the purpose it serves? What did you think of the report?
The FIO was created under the Dodd-Frank Act to provide the federal
government with a center for insurance expertise. It has several
responsibilities which include monitoring the insurance industry and the
extent to which underserved communities have access to affordable
insurance, coordinating federal involvement and policymaking on
prudential aspects of international insurance matters, and of course,
preparing reports for Congress.
The insurance industry has been eagerly awaiting the release of this
report, and its contents are going to lead to a lot of discussion. In 65
pages the FIO managed to touch on many aspects of insurance regulation.
The topics in the report are vast, ranging from international regulatory
activity and details of insurance rating regulation to state solvency
laws. Although federal involvement in health insurance is a hot topic of
late, the FIO's authority does not extend to health insurance and it is
not at issue in the report.
The focus of the report is not whether there should be federal or state
regulation of insurance, but whether federal involvement in the current
state based system is warranted. The FIO concludes that the state based
system of insurance regulation can be modernized and improved in the
near term through a combination of steps by both the states and the
federal government.
The report contains a balanced discussion of the strengths and
weaknesses of the current state based system and encourages
implementation of many current regulatoy initiatives. The industry and
many regulators have previously advocated for many of the initiatives,
such as a better system of agent licensing, market conduct reform and
speed to market reform initiatives. But one of the main concerns for the
FIO is the lack of uniformity in our current system. The report suggests
that the nature and structure of the state based system presents
inherent difficulties in achieving uniformity. The FIO goes beyond mere
uniformity and points to areas where the laws are uniform, but the
application of those laws by regulators is not.
The FIO outlines an active role for itself, indicating that it will
monitor whether and how states implement FIO's recommendations. The
report does not recommend federal regulation of insurance, but it does
suggest that Congress should strongly consider direct federal
involvement if states do not implement the FIO's recommendations.
It will take time for the insurance industry and regulators to digest
all of the implications of this report. The FIO is clear that states
should address its recommendations in the short term, but no exact
timeframe is suggested.
There has been a lot of speculation regarding what the report would
contain. Were you surprised by any of the topics discussed in the report?
I was surprised by the breadth of the report as it touches on all
aspects of insurance regulation and, in some cases, at a granular level.
I was also struck by the amount of monitoring of states' activities that
the FIO intends to do. One recommendation that seemed to insert the FIO
directly into the regulatory process, despite not having any regulatory
authority, was the FIO's recommendation that it participate in
supervisory colleges for large national insurers and internationally
active insurers. The FIO apparently wants information from those
supervisory colleges to assist it in its role as monitor of financial
stability for the insurance industry.
State regulators will have to decide how cooperative they will be with
respect to the monitoring and the colleges. I think that the failure to
cooperate would not be a positive thing for state regulation. Some
regulators may welcome the oversight as a mechanism for promoting
uniformity.
Perhaps most surprising was the FIO's statement that if states do not
reform their laws and processes to meet the recommendations of the
report, they could face federal action. The FIO did not shy away from
controversial topics. The report includes discussions of the
implementation of principles-based reserving (PBR) and the use of
reinsurance captives, both of which have been the subject of
considerable debate among state regulators.
Some of the FIO's suggestions may raise concerns among state regulators
and others about the FIO's longer term intentions. For instance,
regulatory supervision and rate and form regulation are both at the
heart of state regulation. While the FIO says it is simply going to
monitor some issues related to those topics, many may worry that this
could be the first step towards broader federal involvement.
Now that the report has been released, what do you anticipate will
happen next? Will the report lead to any immediate changes in the
regulation of the insurance industry?
The modernization report may foreshadow a potentially active FIO, but it
is not going to lead to any immediate changes in the way insurance is
regulated. The FIO does not have regulatory authority, and the
recommendations in its report could be viewed as advisory in nature.
Most suggestions for federal standards and involvement would require
Congressional action. However, the report will undoubtedly influence the
discussions and actions of state insurance commissioners. We can also
expect to see the FIO asking more questions of state regulators on
substantive issues as it monitors the progress of regulatory reforms and
modernization initiatives.
Perhaps the suggestion that will have the most immediate effect is the
recommendation that the Treasury and the United States Trade
Representative pursue a covered agreement for collateral requirements
for foreign reinsurers. Negotiating and implementing such an agreement,
however, will be complicated and time consuming.
It is important to keep in mind that this report is just one of many the
FIO will prepare. FIO Director Michael McRaith previously indicated that
after the release of the modernization report, other overdue reports
will not be far behind. The modernization report includes a reference to
a forthcoming report on natural catastrophes. The FIO is also currently
preparing a report on the Terrorism Risk Insurance Program. The
reinsurance industry is awaiting the release of the global reinsurance
report.
This weekend, state insurance commissioners are meeting in Washington,
DC for the Fall National Meeting of the National Association of
Insurance Commissioners. The FIO's modernization report is going to be a
central topic of conversation. It will be interesting to see how state
regulators, legislators, the industry and Congress will respond to the
FIO's recommendations.
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