On Oct. 26, 2017, the U.S. Treasury Department (Treasury) released the latest installment in a series of reports on financial regulation, identifying principles and policies motivated by the president’s Feb. 3 executive order on the financial system. That order lists seven “core principles” underlying all Federal regulatory efforts in the financial sector — generally, (i) empowering American customers, (ii) preventing bailouts, (iii) fostering economic growth, (iv) enabling American competitiveness, (v) advancing American interests in international negotiations, (vi) making regulation efficient and (vii) restoring accountability.
The Oct. 26 report addresses asset management and insurance. Others in the series will address banking (released June 12, 2017); capital markets (Oct. 6, 2017); and nonbank financial institutions, financial methodology and financial innovation (pending). A related executive order issued in April requires additional reports on the Orderly Liquidation Authority established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 111 P.L. 203 (Dodd-Frank), and the process set forth in Dodd-Frank for identifying so-called systemically important financial institutions, or SIFIs, for regulation by the Federal Reserve Board of Governors (the Fed). These two reports are pending.
Some of the notable insurance-related observations and recommendations in the Oct. 26 report are as follows.
- States generally should continue as the prime engines of insurance law and regulation, with the Federal Insurance Office (the FIO) and other Federal bodies consulting with the states regularly on insurance matters being addressed at the Federal level. This should mitigate the risk of duplicative mandates.
- As with asset management, entity-based systemic risk assessments are not the best approach for mitigating sector-wide risks. The U.S. should support the International Association of Insurance Supervisors (the IAIS) in its focus on an activities-based approach and should take steps to improve the IAIS’s methodology for identifying global systemically important insurers, or G-SIIs.
- The group capital standards being developed and implemented by the National Association of Insurance Commissioners (the NAIC), the states and the Fed should be harmonized to avoid unnecessary redundancy.
- The FIO’s mission should be confined to five “pillars” — (i) promoting the U.S. state-based regulatory system in international discussions, (ii) providing insurance expertise to the U.S. government, (iii) providing leadership and cooperation between the federal government and state regulators, (iv) protecting the financial system by advising the Treasury and the Financial Stability Oversight Council on insurance-related matters that may pose threats and (v) promoting insurance products and administering the Terrorist Risk Insurance Program.
- The FIO should be more transparent and should engage more regularly with state regulators.
- The Fed is called on to leverage information received by state insurance regulators and the NAIC on savings and loan holding companies that are insurance companies, in order to avoid duplicative regulatory efforts.
- The report calls on Congress to clarify what is included in the “business of insurance” for purposes of Dodd-Frank’s grant of authority to the Consumer Financial Protection Bureau, which is proscribed from regulating insurance matters.
- The Department of Housing and Urban Development should reconsider its “disparate impact” rule, pursuant to which housing practices may be deemed discriminatory as to a protected class, regardless of intent, if the practices affect access to housing unevenly. The report explains that disparate impact could adversely affect availability of homeowner’s coverage and may be inconsistent with state, rather than federal, primacy in the regulation of insurance.
- On data security and cyber risks, the Treasury endorses the NAIC’s model law on Insurance Data Security (formally adopted by the NAIC mere days before the report was released) and calls on states to adopt it promptly. If uniform state laws for insurance company data security are not in place in five years, Congress should adopt legislation, but this should be administered by the states.
- States that have not entered the Interstate Insurance Product Regulation Compact should do so in order to further the use of uniform standards in regulating life insurance products.
- States should adopt the NAIC’s Producer Licensing Model Act and should generally try to ease compliance burdens imposed on insurance agents and brokers.
- The report calls for the IAIS to postpone the next version of its capital standard for internationally active insurance groups, or IAIGs, beyond its anticipated 2019 completion date in order to accommodate further discussion and refinement.
- The IAIS should take additional steps to increase transparency and collaboration with all of the IAIS’s stakeholders (such as U.S., NAIC and state officials).
- The FIO should coordinate the efforts of the federal government, state insurance regulators and the NAIC to speak with one voice at the IAIS and advance American interests.
- The report notes approvingly the September 2017 completion of the Covered Agreement between the U.S. and the European Union (the EU) providing for reciprocal treatment in certain regulatory areas for insurers doing business across those jurisdictions, as well as the Administration’s policy statement issued in conjunction therewith, affirming the state insurance regulatory system.
- The Treasury calls for, “should the United Kingdom (U.K.) withdraw from the EU”, exploring whether a Covered Agreement between the U.S. and the U.K. would be mutually beneficial.
- States should consider a more “calibrated” approach to insurance company investments in infrastructure, including revisions to risk-based capital laws to make these investments more attractive from a regulated-capital perspective.
- The Department of Labor and the Treasury should pursue steps to encourage the use of annuities in benefit plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). The report cites ERISA compliance as a reason for the decline in defined-benefit pensions in the private sector.
- The Treasury will convene an interagency task force among interested federal agencies to develop policies to “complement reforms at the state level” in the area of long-term care insurance. The task force is called on to collaborate with the NAIC on its efforts.