On December 13, 2013, the Federal Insurance Office (“FIO”) issued its long-awaited report entitled: “How to Modernize and Improve the System of Insurance Regulation in the United States.”1 The Report sets 18 performance goals for the states, while proposing nine federal action points. It is expected that insurance regulation will evolve as a hybrid model, where state and federal oversight play complementary roles.

The FIO was created in response to the financial crisis by the Dodd-Frank Act. The Dodd-Frank Act2 also established the Financial Stability Oversight Council (“Council”), a new government department that identifies risks and responds to emerging threats to financial stability. The FIO has the following authorities:

  1. 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.
  2. Monitor the extent to which traditionally under- served communities, consumers, minorities, and low and moderate income persons have access to affordable insurance products regarding all lines of insurance, except health insurance.
  3. Recommend to the Council that it designate an insurer, including the affiliates of such insurer, as an entity subject to regulation as a nonbank financial company supervised by the Federal Reserve.
  4. Assist the Secretary of the Treasury (the “Secretary”) in administering the Terrorism Insurance Program established under the Terrorism Risk Insurance Act of 2002.
  5. Coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors and assisting the Secretary in negotiating “covered agreements.” Covered agreements are defined as bilateral or multilateral agreements regarding prudential measures with respect to the business of insurance or reinsurance that – (A) are entered into between the United States and one or more foreign governments, authorities, or regulator entities; and (B) relate to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieve a level of protection for insurance or reinsurance consumers that are substantially equivalent to the protection achieved under state insurance or reinsurance regulation.3
  6. Determine whether state insurance measures are preempted by “covered agreements.”
  7. Consult with the states (including state insurance regulators) regarding insurance matters of national importance and prudential insurance matters of international importance; and
  8. Perform such other related duties and authorities as may be assigned to the FIO by the Secretary.

In July 2013, the Council effectively designated three companies outside of the banking industry—AIG, GE, and Prudential Financial—as “systematically important financial institutions,” meaning that these insurers are put under the supervision of the Federal Reserve System and must meet enhanced prudential standards.4

The FIO Report is structured in five sections. The first section contains the recommendations for modernizing insurance regulation in the United States, represented in the table below. The additional sections cover the history of insurance regulation in the U.S. (Section II), analysis with regard to the state recommendations on prudential oversight (Section III), analysis with regard to the state recommendations on marketplace oversight (Section IV), and basic principles of regulatory reform (Section V).

The recommendations for modernizing insurance regulation are of two kinds:

  1. Recommendations regarding areas that need to be reformed by the states in the near term;
  2. Recommendations regarding areas that need direct federal involvement.

Click here to view table.

The FIO Report points to the inefficiencies of the state- based insurance regulatory system for consumers and insurers, the need for uniformity, and the international dimension of the insurance market in support of its recommendations.

Importantly, at the end of Section I, the FIO Report addresses the fact that many of the state recommendations relate to issues that the states have been addressing, but that progress has been uneven “despite the absence of any dispute about the need for change.” The FIO Report states: “As a result, should the states fail to accomplish necessary modernization reforms in the near term, Congress should strongly consider direct federal involvement.” The final paragraphs address two options in this regard: the development of federal standards implemented by the states and direct federal regulation. In other words, in the short term, the FIO Report proposes to modernize the U.S. system of insurance regulation through a combination of state action—the bigger part—and federal action. In the long term, additional federal involvement may depend on the success of state reform.