Federal Insurance Office Modernization Report Released

Report sends mixed message on state regulation versus federal regulation.

Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act required that the newly established Federal Insur­ance Office (FIO) of the U.S. Department of Treasury “conduct a study and submit a report to Congress on how to modernize and improve the system of insurance regulation in the United States.” There had been quite a number of members of Congress interested in seeing the adminis­tration review the option of the federal regulation of insurance.

Then Rep. Melissa Bean (D-Ill.) and Rep. Ed Royce (R-Calif.) had offered legislation and support for the federal regulation of insurance. The creation of the FIO was a first step to federal insurance regulation. As part of this mandatory report, the FIO was required to review:

• The costs and benefits of potential federal regulation of insurance across various lines of insurance (except health insurance).
• The feasibility of regulating only certain lines of insurance at the federal level, while leaving other lines of insurance to be regulated at the state level.
• The ability of any potential federal regulation or federal regulators to eliminate or minimize regulatory arbitrage.

• The impact that developments in the regulation of insurance in foreign jurisdictions might have on the potential federal regulation of insurance.
• The ability of any potential federal regulation or federal regulator to provide robust consumer protection for policyholders.

• The potential consequences of subjecting companies to a federal resolution authority, including the effects of any federal resolution authority:
– On the operation of state insurance guaranty fund systems, including the loss of guaranty fund coverage if an insurance company is subject to a federal resolution authority;

– On policyholder protection, including the loss of the priority status of policyholder claims over other unsecured general creditor claims;
– In the case of life insurance companies, on the loss of the special status of separate account assets and separate account liabilities; and
– On the international competitiveness of insurance companies.
– Such other factors as the director determines necessary or appropriate, consistent with the principles set forth in the prior paragraph.

The report attempted to encourage some form of hybrid state-federal system and failed to address head-on the much-needed debate of federal versus state regulation of the insurance industry. Collision repairers have seen firsthand the necessity of federal intervention to assure any substantive reform in the current state-based system of regulation. One of the more public changes has been with Most Favored Nation (MFN) clauses. Without the U.S. Department of Justice pursuing the elimination of MFNs relative to health insurers, it is unlikely changes in the MFN would have been initiated by the Michigan Department of Insurance.

The FIO’s recommendations are interesting and clearly avoid any short-term resolution of the federal versus state regulation debate. In summary, as to a short-term fix, the report punts on full-born federal regulation and opts for a state-based system with some federal involvement: “In light of these considerations, this report concludes that the proper formulation of the debate at present is not whether insurance regulation should be state or federal, but whether there are areas in which federal involvement in regulation under the state-based system is warranted.”

The report does encourage direct federal involvement in regulation for the following:
• Federal standards and oversight for mortgage insurers should be developed and implemented.
• To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the United States Trade Representative pursue a covered agreement for reinsurance collateral requirements based on the National Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation.
• The FIO should engage in supervisory colleges to monitor financial stability and identify issues or gaps in the regulation of large national and internationally active insurers.
• The National Association of Registered Agents and Brokers Reform Act of 2013 should be adopted and its implementation monitored by FIO.
• FIO will convene and work with federal agencies, state regulators and other interested parties to develop personal auto insurance policies for U.S. military personnel enforceable across state lines.
• FIO will work with state regulators to establish pilot programs for rate regulation that seek to maximize the number of insurers offering personal lines products.
• FIO will study and report on the manner in which personal information is used for insurance pricing and coverage purposes.
• FIO will consult with Tribal leaders to identify alternatives to improve the accessibility and affordability of insurance on sovereign Native American and Tribal lands.
• FIO will continue to monitor state progress on implementation of Subtitle B of Title V of the Dodd-Frank Act, which requires states to simplify the collection of surplus lines taxes, and determine whether federal action may be warranted in the near term.

The report put much back on the U.S. Congress. Specifically, the FIO noted that should states fail to accomplish necessary modernization reforms in the near term, Congress should strongly consider direct federal involvement. To this end, the report offered two paradigms: “The federal government serving as a coordinating body that also adopts national rules and standards that would preempt state law, but that would leave direct enforcement of the rules and standards to the states; and direct federal regulation of selected areas or aspects of the insurance industry, whether it be oversight of one element of the distribution chain (e.g., multi-state producer licensing) or a particular line of insurance.”

One option mentioned in the report was the federal charter concept proposed in previous legislation whereby insurers could opt for a federal charter and be regulated by the federal government. The Automotive Service Association had supported similar federal legislation in the past.

Clearly, the federal versus state regulation of insurance has quite a journey before it’s resolved. It is unlikely Congress will jump back into this debate until after the 2014 mid-term elections. To view the entire report visit ASA’s legislative website, www.TakingThe Hill.com.