The Federal Insurance Office's long-awaited comprehensive report on how to improve insurance regulation suggests a partnership between state and federal regulators, a recommendation that not surprisingly got a cool reception from certain key industry leaders.
Perhaps the biggest question now that the FIO finally released the report, is whether any of the national insurance office's many recommendations, particularly the hybrid model of regulation, will be adopted by the industry and enforced by regulators. Congress would have to act to make any of these recommendations stick.
The prompt, often contradictory reactions by insurance industry organizations foretell the report's uncertain effect on the industry.
Released last week, the 71-page report, “How to Modernize and Improve the System of Insurance Regulation in the United States,” is short on detail but sketches out a national model of insurance regulation, in which both state and federal regulators play complementary roles to improve solvency and market conduct regulation, while leaving the state-based insurance regulatory system largely intact.
“While not beyond reproach, and in need of specific reforms identified in this report, state regulators have developed a system of entity-specific financial oversight that satisfies this most fundamental regulatory objective,” according to the report. “Any system with 56 independent jurisdictions is inherently limited in its ability to regulate uniformly and efficiently. The status quo, or a state-only solution, will not resolve the problems of inefficiency, redundancy, or lack of uniformity, or adequately address issues of national interest.”
Mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which created the FIO itself, the report was originally due in January 2012. The reaction to the report is predictable given the broad range of insurance issues it addresses and the positions various industry trade groups long ago adopted on the state vs. federal insurance regulation debate.
For example, Frank Nutter, president of the Reinsurance Association of America in Washington, welcomed the recommendation for the Treasury Department to pursue an agreement to force a more nationally uniform treatment of reinsurers, “I am particularly pleased to see Treasury endorse the use of its authority under Dodd-Frank to negotiate covered agreements,” Mr. Nutter said.
Proponents of the state-based regulatory system were skeptical of the report.
“We respectfully disagree that federal involvement is necessarily the default answer to existing regulatory concerns,” said Charles M. Chamness, president and CEO of the National Association of Mutual Insurance Cos. “There is much room for improvement at the level of state insurance regulation, but recent experience has not proven that a one-size-fits-all nationally designed and operated program will remedy deficiencies and add real value.”
However, Joel Wood, senior vice president of the Washington-based Council of Insurance Agents & Brokers, called the report “authoritative and compelling” and said it struck the right balance between federal and state regulation of insurance. “As the report says, it's not so much the question of federal versus state, but whether there are areas in which federal involvement in regulation under the state-based system is warranted,” he said.
Leigh Ann Pusey, CEO and president of the American Insurance Association, thought the report will help chart the direction for the industry.”The report provides a valuable guidepost for collectively working toward improvements that lead to greater regulatory effectiveness, efficiency, and marketplace competition,” she said in a statement.
A longtime congressional critic of state-based insurance regulation said the report “should reignite the debate'' on how best to serve insurance consumers in this country. “State insurance regulators have been put on the clock to address the inefficiencies and burdens for consumers, insurers, and the international community in the current regulatory apparatus,” said Rep. Ed Royce, R-Calif. “Time is running out.”
David Sampson, president of the Property Casualty Insurers Association of America, said the group was concerned the report did not adequately reflect the strengths and historical success of state-based insurance regulation.
“There is little, if any objective proof, that there are critical gaps in state regulation or that it has failed to produce a beneficial market,” Mr. Sampson said.
Howard Mills, New York-based director and chief adviser of the insurance industry group at Deloitte L.L.P and former superintendent of the New York State Insurance Department said it remains to be seen how the report might lead to changes in insurance regulation in the near term.
“Nothing in this report threatens the primacy of state regulators, but it is a challenge to them to do a better job,” Mr. Mills said.
Moreover, he said the FIO is limited in what it can do from a regulatory perspective.
“The FIO can't broaden its own power absent action from Congress and nobody expects that to happen,” he said. “There's just no appetite in Washington right now for going back and revisiting financial services reform.”