On 24 September 2014, the Federal Insurance Office (FIO) of the US Department of  the Treasury issued its second “Annual Report on the Insurance Industry” (the FIO Report). FIO was established within the Treasury Department under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). FIO is tasked with monitoring all aspects of the US insurance industry, including identifying issues contributing to systemic risk in the industry and the US financial system: FIO’s responsibilities include assessing the availability and affordability of insurance in the United States, advising the US Treasury Secretary on significant domestic insurance policy matters, and representing the United States on international insurance matters.

Under the Dodd-Frank Act, FIO must report annually to the President and the US Congress on the state of the US insurance industry and any other relevant or requested information. The Report provides an overview of the US insurance industry’s recent financial performance including details with respect to particular lines of business. It includes analysis of the industry’s capital markets activities, importance of non-US reinsurers, expanding role of alternative risk transfer mechanisms, including insurance- linked securities, and consumer protection and access to insurance issues. Finally, the Report considers various important regulatory developments for the US insurance industry at the state, federal and international levels. In several areas, the Report recounts recommendations and discussions that were included in FIO’s December 2013 report on modernisation of insurance regulation in the United States.

Set forth below are some highlights from the Report.

US insurance market

As the Report notes, the United States remains the world’s largest insurance market by premium volume. The Report discusses the promising results of the US insurance  industry in the last year, with US insurers continuing to demonstrate financial health and most lines having record levels of net income and surplus. One of the points that the Report highlights is that the sustained period of low interest rates globally has been a drag on insurers’ net income, especially for life insurers: FIO cautions about portfolio risks due to movement into longer duration and lower quality assets in the life and health sector.

In connection with the state of the US insurance market, the Report notes the continued importance of the global reinsurance market for the US insurance industry – about 62% of US reinsurance premiums are ceded to non-US reinsurers. With respect to reinsurance, FIO seeks the establishment of “uniform prudential standards applicable to the supervisory treatment in the US of the global reinsurance industry”. Towards this end, FIO would like a “covered agreement” on reinsurance collateral that would implement a nationally uniform treatment of reinsurers  by preempting non-compliant state laws. A covered agreement would be entered into with foreign insurance regulatory authorities with respect to prudential measures regarding the business of insurance or reinsurance; according to the Report, FIO will likely seek congressional permission to negotiate this sometime in early 2015.

US regulatory developments

The Report considers several important recent regulatory developments at the US federal and state level, including:

  • Designation by the US Financial Stability Oversight Council of American International Group, Inc. and Prudential Financial, Inc. as systemically important,   as a result of which those companies have become subject to US Federal Reserve supervision and enhanced prudential   standards
  • Licensing of insurance producers and related issues of access to insurance and retirement products, including non-uniform state licensing requirements for insurance producers presenting redundant or inconsistent obligations and exacerbating barriers to entry
  • Acquisition of annuity companies by private equity firms, for which several states have used heightened scrutiny due to concerns about private equity firms having relatively short investment horizons, which is an issue that the Private Equity Working Group of the US National Association of Insurance Commissioners (NAIC) is considering for potential regulatory changes
  • Terrorism risk insurance, especially with respect to  the Terrorism Risk Insurance Program established under the Terrorism Risk Insurance Act of 2002 (TRIA) - TRIA will expire at the end of 2014 unless it is renewed (which FIO strongly supports based on the view that the cost for terrorism insurance will increase tremendously  without TRIA)
  • Regulatory developments with respect to the National Flood Insurance Program
  • Use of captive reinsurers by life insurance companies, for which FIO previously recommended development of  a uniform and transparent solvency oversight regime for cessions of risk to reinsurance captives and which has been the subject of intense scrutiny at the NAIC and by several states’ insurance regulators (especially the New York Department of Financial Services)

International regulatory developments

The Report also considers important international regulatory developments that are relevant for the US insurance industry, such as:

  • EU-US Insurance Project, which is intended to improve mutual understanding and increase cooperation between the European Union and the United States on prudential insurance matters and which has engaged in various efforts such as the Supervisory Colleges Best Practices Forum that was held in December 2013 in Washington, DC
  • International developments concerning resolution of troubled or failing insurers
  • Process for designation of Global Systemically Important Insurers (G-SIIs) and Internationally Active Insurance Groups (IAIGs) by the Financial Stability Board, with G-SIIs becoming subject in the future to requirements regarding group-wide supervision, recovery and resolution planning, and Higher Loss Absorbency (HLA) capital requirements
  • Development by the International Association of Insurance Supervisors (IAIS) of international capital standards for IAIGs

The development of international capital standards by IAIS will include a basic capital requirement (BCR) (which IAIS has completed in October 2014), HLA requirements to be developed by the end of 2015 (for implementation  in January 2019), and a quantitative insurance capital standard (ICS) to be developed by 2018 (for implementation in 2019) for all IAIGs including G-SIIs. The ICS will be a  part of the Common Framework for the Supervision of IAIGs (ComFrame) being developed by the IAIS. The Report notes that the international standards being developed by IAIS would not be automatically applicable to US insurers and instead any such standards would have to be adopted by states (or by the Federal Reserve for US systemically important insurers subject to its supervision).

FIO’s role going forward

Although insurance is regulated at the state level in the United States, since the Dodd-Frank Act has come into effect, FIO is developing a role for itself within insurance regulation in the United States. The Report is a part of FIO’s increasing – albeit still limited – role within the US insurance regulatory framework.