Our May bulletin included an analysis of the National Insurance Consumer Protection Act (H.R. 1880) (“NICPA”), which was introduced in the U.S. House of Representatives by Representatives Melissa Bean (D-Ill.) and Ed Royce (R-CA) in April. NICPA would create an optional federal charter for insurance companies, agencies, and insurance producers and would apply to life insurance, property and casualty insurance and reinsurance. Although NICPA garnered considerable attention when it was first introduced, it has not made progress in any of the House committees to which it was referred, nor has companion legislation been introduced in the U.S. Senate. It is fair to say that NICPA has been eclipsed by the federal insurance regulatory initiatives that were announced as part of the Obama Administration’s “Financial Regulatory Reform” (“FRR”) proposals in June and embodied in a draft “Office of National Insurance Act of 2009” (the “Act”) that was released by the U.S. Department of the Treasury (“Treasury”) on July 22.
The Administration’s FRR proposals would establish an Office of National Insurance (“ONI”) within Treasury. At first glance, the role of the ONI envisioned by the FRR proposals seems modest: “to gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector.” On closer examination, however, the FRR proposals are replete with explicit and implicit criticisms of the existing state-based system of insurance regulation in the United States, which suggests a broader agenda. For example, the FRR document asserts that the state-based system “has led to a lack of uniformity and reduced competition across state and international boundaries, resulting in inefficiency, reduced product innovation, and higher costs to consumers.” It also calls for “a modern regulatory framework for insurance,” implying that the existing regulatory framework is not modern, i.e., outmoded. So it is too early to tell whether the ONI, once established, would be merely an information gathering and coordinating agency, or a step toward federalization of insurance regulation in the United States.
The FRR proposals outline the following six principles for insurance regulation:
- Effective systemic risk regulation with respect to insurance
The ONI would have the authority to “monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system.” In particular, the ONI could recommend to the Federal Reserve that it designate an insurer, including its affiliates, as an entity subject to regulation as a Tier 1 financial holding company (“FHC”) under the Bank Holding Company Act of 1956. FHCs and their subsidiaries would be subject to supervision and regulation by the Federal Reserve and to a federal resolution regime, similar to that of the Federal Deposit Insurance Corporation, that could take control of an FHC and its subsidiaries in a crisis situation.
- Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies
The FRR proposals state that any insurance regulatory regime “should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.” Initially the ONI’s role in furthering that objective would be informational and consultative: receiving and collecting data and information on and from the insurance industry and individual insurers, analyzing and disseminating data and information, issuing reports regarding all lines of insurance (except health insurance) and consulting with state regulatory authorities.
- Meaningful and consistent consumer protection for insurance products and practices
The FRR proposals assert that consumer protections currently vary widely among states, creating a need to “enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of producers of insurance.” It is unclear how the ONI intends to go about this task. Significantly, the proposed Consumer Financial Protection Agency (“CFPA”) Act of 2009 (another component of the Administration’s FRR initiatives) would exclude from the scope of the CFPA’s authority all insurance activities except for credit, mortgage and title insurance.
- Increased national uniformity through either a federal charter or effective action by the states
The FRR proposals declare: “Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient.” The Act (in contrast to NICPA) does not include provisions for a federal charter, so it appears that, once again, the ONI’s role initially will be limited to gathering and analyzing data and formulating recommendations. The question is: where will that process lead?
- Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business
The FRR proposals cite AIG as an example of how the problems of an insurance company’s affiliates “can grow to threaten the solvency of the underlying insurance company and the economy” and concludes that any new regulatory regime “must address the current gaps in insurance holding company regulation.” The FRR proposals assume that federal regulation of insurance holding companies would be more robust than current state regulation. One wonders, however – since in the early stages of the AIG crisis, it was the federal authorities who were encouraging state insurance regulators to override state insurance holding company restrictions to allow the extraction of insurance company assets to bail out AIG’s troubled financial products segment.
- International coordination
The FRR proposals note: “The United States is the only country in the International Association of Insurance Supervisors (IAIS – whose membership includes insurance regulators and supervisors of over 190 jurisdictions) that is not represented by a federal insurance regulatory entity able to speak with one voice.” The Act would grant the ONI specific powers to remedy this deficiency. The ONI would represent the United States in the IAIS and assist the Treasury in negotiating International Insurance Agreements on Prudential Measures. The ONI would also be authorized to determine that specific state insurance measures are pre-empted if they treat a non-US insurer that is subject to an International Insurance Agreement on Prudential Measures less favourably than a US-domiciled insurer or are otherwise inconsistent with an International Agreement on Prudential Measures.
As of this writing, the Act stands a high likelihood of being enacted into law by the current Congress. While the most immediate results of the creation of the ONI would be in the area of systemic risk regulation and international coordination, the Act may also have a longer-term impact in terms of increasing the federalization of insurance regulation in the United States.