On December 12, 2013, the Federal Insurance Office issued its Dodd-Frank mandated report How to Modernize and Improve the System of Insurance Regulation in the United States. The Report principally advocates closer coordination between states and a harmonization of state insurance laws across a number of insurance regulatory issues and responsibilities. Like Dodd-Frank itself, the Report generally endorses the preservation of the current state regulatory framework, while at the same time suggesting that more robust federal involvement in insurance regulation may be appropriate “should the states fail to accomplish necessary modernization reforms in the near term.” The Report also, not surprisingly, calls for further federal action in two areas where Dodd-Frank itself imposes greater uniformity – credit for reinsurance and surplus lines.
Initial reaction by state regulators suggests that changes could be in store for regulated insurance companies to the extent needed to forestall a more active federal role. In statements responding to the Report, the National Association of Insurance Commissioners (“NAIC”) applauded the FIO’s “embrace” of state regulation while noting its “suggestions for improvement.” Citing the FIO’s limited powers under Dodd-Frank, however, the NAIC pointedly concluded that “the states have the ultimate responsibility for implementing regulatory changes.”
The Report’s principal areas of focus for insurance regulatory reform comprise “prudential” regulation (that is, financial and solvency regulation) and marketplace regulation.
Regarding financial and solvency regulation, the FIO’s recommendations include
- more consultation among relevant states in financial oversight of insurers;
- “independent, third party” review of the NAIC’s program for “accrediting” state insurance departments;
- federal oversight of mortgage guaranty insurers;
- uniformity and transparency in regulating the transfer of risk to captive insurers;
- uniform standards for insurance company capital requirements;
- “caution” in implementing principles-based reserving (that is, the more discretionary, less quantitative actuarial rules being developed for life insurers);
- reciprocity arrangements between the U.S. and other countries, as contemplated by Dodd-Frank (“covered agreements”), concerning credit for reinsurance;
- use by state regulators of “supervisory colleges” (ad-hoc consortia of regulators across jurisdictions that share responsibility for a single group of companies);
- reforms in insolvency proceedings (“resolution”) for internationally active insurers;
- more uniformity in the disposition of derivatives in insurance insolvency proceedings; and
- harmonization of state guaranty fund benefits across states.
As for marketplace regulation, the Report urges
- additional uniformity across states in agent and broker licensing;
- expanded use of the “interstate compact” for new product filings;
- reforms in market conduct examinations, including uniformity, heightened standards and interstate consultation
- more competition among insurance carriers by premium rate;
- further study on the appropriate use of personal data in pricing insurance;
- progress in the harmonization of state regulation and taxation of surplus lines, as prescribed by Dodd-Frank; and
- loss mitigation techniques for natural catastrophes.
The Report concludes with a brief overview of six broad categories of regulatory reform – “systemic risk,” capital standards, consumer protection, national uniformity (including federal chartering), group supervision and international coordination.
These issues have historically been the subject of much debate, some for up to two decades, in the insurance community and will no doubt continue to be important parts of the insurance regulatory conversation going forward.