Yesterday, Senate Banking Committee Chairman Chris Dodd (D-CT) released a revised draft of comprehensive financial regulatory reform legislation. Although Chairman Dodd had engaged in wide ranging negotiations with Senator Bob Corker (R-TN) over the past several weeks, the revised legislation was introduced without Republican support. The revised Dodd draft differs in many critical respects from the bill that Chairman Dodd released in November 2009 and is substantially different from legislation passed by the House of Representatives on December 11, 2009 (H.R. 4173, the Wall Street Reform and Consumer Protection Act).

Most of the insurance provisions in Senator Dodd’s bill released March 15, 2010, however, are similar to his November 2009 discussion draft; mirror the insurance provisions in H.R. 4173; and track closely with the insurance aspects of the Obama Administration’s June 2009 plan.

Chairman Dodd plans to have the Committee begin its markup of his revised bill on March 22 at 4:00 p.m., and to continue as necessary with the goal of completing the markup by the end of the week. To view Chairman Dodd's revised bill, click here. To view the Banking Committee staff's summary of Chairman Dodd's revised bill, click here.

Key insurance aspects of Chairman Dodd’s revised bill

Senator Dodd’s bill includes the following provisions affecting the insurance industry, though the legislation does not alter the current state-based insurance regulatory scheme: (1) creation of a federal insurance office or Office of National Insurance (ONI) within the Treasury Department; (2) streamlined regulation of reinsurance and surplus lines insurance; and (3) the commissioning of studies addressing (a) the current state regulatory system; (b) the viability and utility of federal regulatory intervention; and (c) the state of the surplus lines marketplace.

Other insurance related provisions or exclusions in the bill concern the Consumer Financial Protection Bureau, Financial Stability Oversight Council, and Resolution Authority.

More details on the key insurance provisions in the Dodd draft are below.

Office of National Insurance (ONI)

Sen. Dodd’s draft creates a federal insurance office within the Department of the Treasury, and explicitly states the ONI is designed as a consultative and advisory office, not a regulatory agency. Led by a Director, ONI’s primary role will be to gather and disseminate information in conjunction with state regulators, the NAIC, and insurers. Before soliciting information from individual insurers, ONI would be required to coordinate with state regulators to determine if information were available from regulators themselves or other public sources. Additionally, an exception is made for small insurers, as determined by the Director, from the information collection provisions. ONI would have limited subpoena power enforceable by district courts, and would have preemption power, as specifically limited in the draft legislation.

The legislation requires ONI to, within 18 months of passage, conduct a study and to report to Congress on modernization and improvements to the insurance regulatory system, and to make legislative and/or regulatory recommendations. The Senate study will be based on and guided by the various considerations including systemic risk, capital standards, consumer protection, national uniformity, consolidated insurance company regulation, international coordination, and numerous other identified factors.

Surplus Lines

The Dodd draft also includes the Nonadmitted and Reinsurance Reform Act of 2009, which streamlines licensing and regulation of surplus lines and reinsurance. Similar legislation (H.R. 2571) passed the House of Representatives in September by a voice vote. The Dodd provisions:

  • Prohibit any state other than the home state of an insured from requiring a premium tax payment for nonadmitted insurance and authorize (but does not require) states to establish procedures to allocate among themselves the premium taxes paid to an insured's home state. Nonadmitted insurance is subject solely to the regulatory requirements of the insured's home state;
  • Prohibits a state from collecting fees relating to licensure of a surplus lines broker unless it participates in the national insurance producer database of the NAIC, or any other equivalent uniform national database;
  • Prohibits a state from establishing eligibility criteria for nonadmitted insurers domiciled in a U.S. jurisdiction except in conformance with the Non-Admitted Insurance Model Act or any other nationwide uniform system consistent with the legislation;
  • Prohibits a state from prohibiting a surplus lines broker from placing nonadmitted insurance with, or procuring nonadmitted insurance from, a nonadmitted insurer domiciled outside the U.S. and listed on the NAIC International Insurers Department Quarterly Listing of Alien Insurers;
  • Exempts placements with large commercial purchasers from the due diligence search requirements;
  • Requires the U.S. Comptroller General to study and report to Congress on the nonadmitted insurance market to determine the effect of this legislation on the size and market share of the nonadmitted insurance market for providing coverage typically provided by the admitted insurance market; and
  • Excludes Risk Retention Groups from the definition of nonadmitted insurer.

Reinsurance

Regarding reinsurance, the Dodd bill:

  • Prohibits a state from denying credit for reinsurance if (1) the domicile of a ceding insurer recognizes credit for reinsurance for the insurer's ceded risk, and (2)(a) is an NAIC-accredited state or (b) has financial solvency requirements substantially similar to NAIC accreditation requirements;
  • Gives a reinsurer's state of domicile the sole responsibility for regulating the reinsurer's financial solvency if such state (1) is NAIC-accredited or (2) has financial solvency requirements substantially similar to NAIC; and
  • Prohibits states from requiring a reinsurer to provide financial information other than that required to be filed with its NAIC-compliant domiciliary state.

Consumer Financial Protection Bureau

The revised legislation would establish the Consumer Financial Protection Bureau as an independent entity housed within the Federal Reserve. The Bureau would have the authority to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products. The bill includes various exclusions from the Bureau’s authority, including exclusions for insurance, attorneys, persons regulated by a state insurance regulator, and others. The bill generally prohibits the Bureau from defining the business of insurance as a financial product or service. The Bureau would be led by an independent Director who would be appointed by the President and confirmed by the Senate, and it would have an independent budget not subject to alteration by the Federal Reserve Board.

Financial Stability Oversight Council

The bill would create the Financial Stability Oversight Council to identify, monitor, and address systemic risk. The Treasury Secretary would chair the council, which would consist of representatives from various government entities, the Consumer Financial Protection Bureau, and an independent member with expertise in insurance. Nonbank financial firms deemed to pose a risk to the financial stability of the U.S. would be subject to regulation by the Federal Reserve upon a 2/3 vote by the Oversight Council. Similarly, by a 2/3 vote, the Oversight Council would have the authority, as a last resort, to require a large company to divest some of its holdings if it poses a grave threat to the financial stability of the U.S. Large bank holding companies that have received TARP funds would remain subject to Federal Reserve supervision and could not avoid such supervision by divesting their banks.

Resolution Authority

The Financial Stability Oversight Council will monitor systemic risk and make recommendations to the Federal Reserve for heightened capital, leverage, liquidity, and risk management standards as companies grow in size and complexity. The bill also would require large, complex companies to periodically submit “funeral plans” for their rapid and orderly shutdown/wind-down in the event of economic failure. Companies that fail to submit acceptable funeral plans would be subjected to higher capital requirements along with activity and growth restrictions as outlined by the Oversight Council. The Treasury Department, the FDIC, and the Federal Reserve all must agree before a company could be placed into the liquidation process, and a panel of three bankruptcy judges must convene within 24 hours and agree that a company is insolvent for the resolution process to move forward. The bill would establish a $50 billion resolution authority fund to be used if needed for any liquidation. This fund would be paid for over time through assessments on the largest financial firms (bank holding companies with more than $50 billion in assets and any nonbank financial firms supervised by the Federal Reserve).  

For other provisions in the Dodd revised legislation, please click here.