On June 12, 2013, the Treasury’s Federal Insurance Office (“FIO”) released its first annual report on the insurance industry to the President and Congress, as mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Report discusses in more detail a number of the items covered in the Financial Stability Oversight Council’s (“FSOC”) last annual report, issued this past May.[1] Several topics are addressed, including:

  • the financial performance and condition of the principal sectors within the industry;
  • recent insurer insolvencies;
  • risk management and portfolio investment activities;
  • key legal and regulatory developments affecting the insurance industry in the U.S. and abroad; and
  • current and emerging trends that may have a significant impact on the industry and the stability of the U.S. financial system.

Among the observations made, the Report highlights that life and health insurer insolvency levels are at the lowest point in 40 years, and property and casualty insurer levels are at relative lows compared to the last few decades. However, it acknowledges that certain segments of the industry, most particularly financial guarantors, had high failure levels recently, due in large part to the effects of the financial crisis.

The Report also discusses how, under the Act, the FDIC has authority with respect to the liquidation or rehabilitation of a “covered financial company” or a subsidiary thereof that is an insurer if the state regulator fails to file the appropriate judicial action within 60 days. This is known as “Orderly Liquidation Authority.” The FDIC issued its final rule for orderly liquidation in mid-2011.

On the legal and regulatory development front, the Report discusses the status of:

  • significant nonbank financial company designations by FSOC;
  • methodology set forth by the International Association of Insurance Supervisors (“IAIS”) to designate global systemically important insurers;
  • Solvency Modernization Initiative;
  • continued work and reform of the Solvency II Directive in Europe; and
  • IAIS’s progress on the Common Framework for the Supervision of Internationally Active Insurance Groups.

Under current and emerging trends, the Report touches on the low interest rate environment and the particularly harsh effects that these low rates may have on life insurers offering annuities with guaranteed benefits, and also the adverse effect of these rates with respect to the present value of life insurer contract obligations. This section also discusses the impact of recent natural catastrophes and the changing demographic in the U.S.

To see the full report, click here.