On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Title V of the massive bill includes two subtitles relating to the insurance industry. The first creates the Federal Insurance Office (the “Office”), which could signal a dramatic change in the federal government’s role in regulating the insurance industry. For now the Office will serve as a monitor and advisor with limited enforcement authority. Whether the Office’s enforcement role expands in the future will be a significant issue for the industry going forward. The second attempts to impose some uniformity for state regulation of non-admitted insurers and for reinsurance.
Summary of Title V
Subtitle A of Title Five, entitled the Federal Insurance Office Act of 2010 (the “FIOA”), establishes the Office within the Department of the Treasury and directs the Secretary of the Treasury to appoint a Director to head the Office. The Office has authority over all lines of insurance, except health insurance, most long term care insurance and crop insurance. Title V specifically empowers the Office:
- to monitor all aspects of the insurance industry, including identifying issues that could contribute to a systemic crisis in the insurance industry or the United States financial system;
- to monitor the extent to which traditionally underserved communities and consumers have access to affordable insurance products (other than health insurance);
- to recommend to the Financial Stability Oversight Council that it designate an insurer as an entity subject to regulation as a nonbank financial company supervised by the Board of Governors of the Federal Reserve pursuant to Title I of the Act;
- to assist the Secretary in administering the Terrorism Insurance Program established under the Terrorism Risk Insurance Act;
- to coordinate Federal efforts and develop Federal policy on prudential aspects of international insurance matters;
- to determine, through rule-making procedures, whether State insurance measures are preempted because they improperly discriminate against non-United States insurers;
- to consult with the States regarding insurance matters of national importance and prudential insurance matters of international importance; and
- to perform any other related duties the Secretary assigns.
To carry out its assigned responsibilities, the Office is authorized to require insurers to provide any necessary data or information. If necessary, the Office may issue subpoenas to compel production of information. However, the FIOA does have provisions to ease this new reporting burden. First, the Office is directed to promulgate an order or rule exempting “small” insurers from providing information. The size of “small” insurers will be determined by the rule. Second, the Office must coordinate with state regulators to determine whether the needed information is already available. Third, the FIOA preserves the privileged or confidential status of information submitted to the Office. The Office is expected to use the information it gathers to issue annual reports to Congress on the insurance industry.
Subtitle B of Title V, the Non-admitted and Reinsurance Reform Act of 2010 (the “NRRA”), does affirmatively seek to regulate insurance by imposing some uniformity with respect to state regulation of non-admitted insurance and reinsurance.
The NRRA defines non-admitted insurance as any property and casualty insurance permitted to be placed directly or through a surplus lines broker with an insurer not licensed to engage in the business of insurance. The NRRA gives the insured’s home state primary responsibility to regulate non-admitted insurance. Only that state may require payment of premium taxes for non-admitted insurance, and only that state may regulate the placement of non-admitted insurance. The NRRA does encourage the states to enter into a compact to allocate premium taxes for non-admitted insurance, but if no agreement is reached, the default position is that all taxes go to the insured’s home state.
With respect to reinsurance, the NRRA provides that if the domiciliary state of the ceding insurer (the insurer purchasing reinsurance) is NAIC accredited, or has similar solvency requirements, no other state may deny that insurer credit for reinsurance. Moreover, if the reinsurer’s domiciliary state is NAIC accredited, or has similar solvency requirements, the reinsurer’s domiciliary state will be solely responsible for regulating the reinsurer’s solvency.
While Title V of the financial reform legislation represents a federal “foot in the door” to regulating the insurance industry, it is by no means anything approaching a federal takeover of insurance regulation. The new legislation leaves the McCarran-Ferguson Act in place and the legislation expressly provides that nothing in FIOA preempts any state solvency regulation, state antitrust law or any state insurance measure that governs coverage requirements, rates, premiums, underwriting or sales practices. The industry will, however, want to monitor closely the extent of further federal regulatory “creep” into the insurance business.