Devoted to exploring the progress of the modernization of the insurance industry, FIO Focus provides information and insights about the organizations and issues that are driving change and influencing the future of the industry.

Congressional Hearing on the FIO's Modernization Report

On February 4, 2014, the Housing and Insurance Subcommittee of the House Committee on Financial Services held a hearing to discuss the Federal Insurance Office's (FIO) report on "How to Modernize and Improve the System of Insurance Regulation in the United States" (Report). The hearing included two panels.

Panel 1:

  • Michael McRaith, Director, Federal Insurance Office
  • Thomas Leonardi, Commissioner, Connecticut Insurance Department

Panel 2:

  • Anthony Cimino, Interim Head of Government Affairs and Vice President for Insurance & Trade, The Financial Services Roundtable
  • Paul Ehlert, President, Germania Farm Mutual Insurance Association, on behalf of the National Association of Mutual Insurance Companies
  • Gary Hughes, Executive Vice President and General Counsel, American Council of Life Insurers
  • Jon Jensen, President, Correll Insurance Group, on behalf of the Independent Insurance Agents & Brokers of America
  • Franklin W. Nutter, President, Reinsurance Association of America
  • Robert Restrepo, Jr., President, Chairman and Chief Executive Officer, State Auto Insurance Companies, on behalf of the Property Casualty Insurers Association of America
  • Scott Sinder, Partner, Steptoe & Johnson, on behalf of The Council of Insurance Agents & Brokers
  • J. Stephen "Stef" Zielezienski, Senior Vice President and General Counsel, American Insurance Association

Rep. Randy Neugebauer (R-TX), Chair of the Housing and Insurance Subcommittee, said at the outset of the hearing that the lack of regulatory uniformity was costly for the industry, consumers and the country. He noted the Report included several recommendations to encourage states to improve uniformity and expressed optimism that it would restart debates on insurance regulation. Still, Neugebauer pointed out that the Report did not:

  • Provide clarity regarding the FIO's strategic purpose;
  • Provide formal comments on the Terrorism Risk Insurance Act (TRIA); or
  • Show that negotiations have begun on a covered agreement.

Director McRaith told the subcommittee that the U.S. should build on the "existing hybrid model" of insurance regulation, incorporating both federal and state oversight. He stated that "the question is not whether federal involvement in insurance regulation is necessary, but where and how that involvement should be calibrated." McRaith indicated that the FIO will work with members of Congress to determine when Congressional action and legislation is necessary.

Highlights from the Hearing

The Chair's first question was about the process to designate systemically important financial institutions (SIFI). He pointed out that when Prudential was designated a SIFI, members of the Financial Stability Oversight Council (FSOC), who have insurance experience, disagreed with the decision, saying the majority was applying bank-centric standards. The Chairman then asked for the witnesses' views. Commissioner Leonardi said he agreed with the dissenters. Director McRaith said the FSOC process was careful and thorough and that "smart people can disagree."

Director McRaith was asked about the timing of a "covered agreement" dealing with reinsurance collateral. He responded that the process was complicated and has not been used before and that it would take some time.

Several subcommittee members asked Director McRaith about the recommendation that the federal government take over the regulation of mortgage insurance. McRaith replied that more than half of the mortgage insurance writers had failed during the financial crisis and mortgage insurance is closely tied to the mortgage process itself, which is already federally regulated. Commissioner Leonardi said he was opposed to that recommendation.

There were several questions about unserved communities, red-lining and disparate impact. Director McRaith said those issues were high on his agenda and he was reaching out to address them. Commissioner Leonardi said that the states are currently handling those issues well.

Additional Topics Covered at the Hearing

  • The development and potential impact of international standards being developed at the International Association of Insurance Supervisors (IAIS), including Common Framework for Internationally Active Insurance Groups (ComFrame) and Global Capital Standards;
  • Coordination between the National Association of Insurance Commissioners (NAIC) and the FIO;
  • The development of interstate insurance policies for military service members;
  • Underwriting factors which might impact the availability and affordability of insurance for underserved communities;
  • The potential for the expansion of the Interstate Insurance Product Regulation Commission; and
  • Legislation including the National Association of Registered Agents and Brokers Reform Act of 2013 and the potential renewal of TRIA.

Addressing questions regarding the President's Working Group on Financial Markets (PWGFM) 2014 Report on Terrorism Risk Insurance Program, Director McRaith stated that the report will be released "soon" - possibly by the end of February.

Representative Michael E. Capuano (D-MA) asked the second panel (representatives of several trade associations) whether, if given a choice between the FIO as it exists under current law or the abolishment of the FIO, which they would prefer. Each witness indicated that, given those options, they would want to see the FIO continue to exist.

Cyber Security

Also on February 4, 2014, the Senate Judiciary Committee held a hearing on "Privacy in the Digital Age: Preserving Data Breaches and Combating Cybercrime." There were two separate panels.

Panel 1:

  • Delara Derakhshani, Policy Counsel, Consumers Union
  • Michael R. Kingston, Senior Vice President and Chief Information Officer, The Neiman Marcus Group
  • John J. Mulligan, Executive Vice President and Chief Financial Officer, Target Corporation
  • Fran Rosch, Senior Vice President, Security Product and Services, Endpoint and Mobility Symantec Corporation

Panel 2:

  • The Honorable Edith Ramirez, Chairwoman, Federal Trade Commission
  • William Noonan, Deputy Special Agent in Charge, Criminal Investigative Division, U.S. Secret Service
  • Mythili Raman, Acting Assistant Attorney General, Criminal Division, United States Department of Justice

Members of the committee questioned representatives from Target and Neiman Marcus about how the companies discovered their respective breaches, the cyber security architecture each company had in place at the time of the breach, corrective actions taken and notice provided to consumers. Both retailers indicated that they had robust and multilevel security and detection systems at the time of the breach. Both were informed by government agencies that they may have been the subject of a payment card breach.

All of the witnesses on the first panel agreed about the need for cooperation, sharing of information, flexibility in enhanced security standards and the importance of notice to consumers. The benefits of certain technologies, including chip and pin payment cards were discussed. All of the committee members who questioned the witnesses indicated a need to act in the near future. No specific plans were mentioned.

The witnesses on the second panel testified about their respective roles, successes, challenges, and the importance of coordinating efforts in combating and prosecuting cyber crime. Ms. Raman of the Department of Justice (DOJ) assured the committee that the DOJ was working on a cyber plan that her office and other agencies are to complete in 120 days from the recent budget legislation. Mr. Noonan of the Secret Service informed the committee that the agency has 33 cyber crime task forces. Some committee members criticized the agencies for not having a coordinated plan, while others questioned whether the agencies had sufficient legal authority. Ms. Ramirez, Chairwoman of the Federal Trade Commission (FTC), indicated that some of the laws the FTC enforces currently do not apply to non-profit organizations. Ms. Raman suggested that civil penalties would be a useful tool for the DOJ and mentioned the extradition of foreign nationals as a challenge.