The Federal Insurance Office (FIO) report, "How to Modernize and Improve the System of Insurance Regulation in the United States" (the "Report"), was released on December 12, 2013, nearly two years after it was due under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The Report identifies several areas for "near-term" state reforms, many of which the Report acknowledges the states have been working to address. FIO argues, however, that "[f]or a variety of reasons…progress has been uneven despite the absence of any dispute about the need for change. As a result, should the states fail to accomplish the necessary modernization reforms in the near term, Congress should strongly consider direct federal involvement."

FIO sets the stage for its recommendations by positing that the debate should not be whether regulation should be state or federal, but whether federal involvement in certain areas is warranted. From this vantage point, the basic question becomes whether federal involvement is warranted at this time and, if so, in what areas. The Report goes on to state that “[t]he necessity for federal involvement should depend on assessment of questions such as whether states can take measures to regulate effectively and with uniformity, the degree of the national or federal interest, and the nexus of the issues and the firms with the global marketplace.” FIO’s approach effectively continues to support the current state-based regulatory regime while opening the door to federal regulation more widely should the states fail to take steps to greater uniformity.

However, it should be noted that the Report appears to signal greater activity by the federal government on the international front in dealing with non-U.S. regulators and regulatory regimes, using the authority expressly given by Dodd-Frank to Treasury and the United States Trade Representative to negotiate “covered agreements” with foreign authorities. Also of note, while the Report does not support federal licensing of insurers at this time, it is mentioned as one possible avenue for federal regulation in the future should the states fail to implement reforms.

The primary recommendations can be found on pages 5 through 8 of the Report. The recommendations are broken out into areas of near-term state reform and areas for direct federal involvement. Some of the highlights include:

  • States should develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives.
  • States should adopt and implement uniform policyholder recovery rules so that policyholders, irrespective of where they reside, receive the same maximum benefits from guaranty funds.
  • State-based insurance product approval processes should be improved by every state’s participation in the Interstate Insurance Product Regulation Commission (IIPRC), expanding the products subject to approval by the IIPRC, and the development of nationally standardized forms and terms.
  • States should reform market conduct examination and oversight practices to achieve uniformity.
  • Federal standards and oversight for mortgage insurers should be developed and implemented.
  • Treasury and the United States Trade Representative should pursue a covered agreement for reinsurance collateral requirements based on the National Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation.
  • 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.
  • 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.

For a copy of the Report, click here. We will continue to monitor these developments and provide updates and analysis at InsureReinsure.com.