Treasury's Inspector General Releases Audit Report for the Federal Insurance Office
On May 14, 2014, the Office of the Inspector General (OIG) of the U.S. Department of the Treasury released its audit report of the Federal Insurance Office (FIO). The report is titled "Treasury Made Progress to Stand Up the Federal Insurance Office, But Missed Reporting Deadlines."
The report noted that the FIO's primary operational focus has been on representing U.S. interests in international insurance matters and working to establish strategic relationships within the insurance industry. This includes the FIO's work with the International Association of Insurance Supervisors (IAIS), contributions to the EU-U.S. Insurance Regulatory Dialogue, coordination with the National Association of Insurance Commissioners (NAIC), participation in the U.S.-China Strategic Insurance Regulatory Commission, interactions with the Federal Advisory Committee on Insurance (FACI), serving on a Department of Veterans Affairs advisory committee related to servicemember life insurance and involvement with the Financial Stability Oversight Council (FSOC). However, the OIG stated that "FIO was unable to provide formal documentation to support the extent of its involvement in these activities" and that the FIO should maintain a "more complete record of the material activities performed by the office and their results to provide for greater transparency and to conform to Treasury's record policy."
According to the report, Treasury management told the OIG that the FIO's budget is not a separate line item and, thus, no formal performance measures have been developed to evaluate the effectiveness of its operations. In fiscal year 2013, the FIO's expenditures were approximately $2.1 million, with 88% of that attributed to personnel costs for its 13 full-time equivalents (FTE). As of November 2013, the FIO had approval for up to 15 FTEs.
The OIG expressed concern that the FIO does not have a formal planning process and implementation methodology to assist management in guiding the performance of its functions. Further, the OIG noted that the FIO "has not documented a strategy for achieving its mission or developed a comprehensive implementation plan to control the development of the key deliverables and operational processes."
The report notes that the Dodd-Frank Act required the FIO to issue five reports, but "[f]our of the required reports, including both initial annual reports, were completed well after their due dates." Still outstanding is the report on the breadth and scope of the global reinsurance market, which was due on September 30, 2012. FIO Focus Issue 16 addresses the Global Reinsurance Report. During the audit, the FIO management said the Modernization Report, which was nearly two years late, was "highly anticipated by the insurance industry" and "underwent an extensive review process to ensure that the information and recommendations contained in the report were not misinterpreted." The FIO also reported to the OIG that "the delays were due in large part to the considerable amount of time required to identify, attract, and hire staff with the knowledge and experience in several areas of insurance regulation needed to perform its work relating to the reports."
The report includes the following recommendations:
- Ensure that the legislatively required report that is past due is issued with deliberate speed. In addition, FIO should develop and implement processes to ensure the timely completion and submission of future reports.
- Develop a written document detailing FIO's strategy for achieving its functions. To facilitate the execution of this strategy, we recommend that FIO also develop a comprehensive implementation plan defining priorities, critical work streams, deliverables, milestones, due dates for efficiently and effectively developing FIO's organizational structure and business processes. FIO should also develop processes to assign accountability for the completion of tasks and measure progress against the plan.
- Provide for maintaining a record of all significant activities performed, decisions made, and actions taken.
- Determine appropriate performance measures to communicate/demonstrate its accomplishments.
In a written response to the draft audit report, FIO Director Michael McRaith stated that "We agree with the recommendations and are taking steps to implement them by working to complete with deliberate speed our report on the global reinsurance market"..."and to improve our timely submission of future reports." McRaith also agreed to "document FIO's priorities and implementation plan, to provide for recordkeeping, and to develop performance measures to communicate FIO's accomplishments."
FSOC Releases its 2014 Annual Report
On May 7, 2014, the Financial Stability Oversight Council (FSOC) released its 2014 Annual Report. The report outlines the activities of the FSOC, significant financial market and regulatory developments, and potential threats to U.S. financial stability.
The report recommends that the FIO and state insurance regulators continue to monitor and assess interest rate risk resulting from severe interest rate shocks. The report also outlines concerns regarding the use of captive reinsurance and notes that the FIO is monitoring both the role and impact of captives and the potential for regulatory improvements at the state level.
Secretary Lew's Congressional Testimony
Secretary Jacob Lew testified before the House Financial Services Committee in a hearing entitled "The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System." At the hearing, Rep. Bill Huizenga (R-MI) asked whether the International Association of Insurance Supervisors (IAIS) should be developing global capital standards and whether such standards will be compatible with U.S. insurance regulation. Secretary Lew responded that it is important for there to be a global discussion to develop high standards, and that IAIS capital standards are "a model code" and not law. He went on to explain that implementation of the standards or other regulatory changes will be based upon considerations of the U.S. state based insurance regulatory system.