Last year ended with the Federal Insurance Office issuing its report on insurance regulatory reform, a report that had been supposed to be released nearly two years earlier. It received mixed reviews, with defenders of the current state-based system of insurance regulation expressing concerns that the report's recommendations could lead to federal encroachment on the state system and proponents of a greater federal regulatory role welcoming it.
These reactions came as no surprise — battle lines have been drawn for decades in the state vs. federal insurance regulation debate, and no one expected a single report to change that.
It's worth noting, however, what the FIO had to say about its own report in light of the long-running debate.
“This report concludes that the proper formulation of the debate at present is not whether insurance regulation should be state or federal, but whether there are areas in which federal involvement in regulation under the state-based system is warranted,” according to the FIO report. “Reframed in this manner, the basic question with respect to reforming any aspect of insurance should be whether federal involvement is warranted at this time and, if so, in what area.”
It's also worth noting that under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 — which created the FIO — the office has extremely limited regulatory powers. It can advise federal authorities and it can represent the United States in international regulatory matters, but it can't trump state regulation except under tightly defined circumstances.
Only Congress could extend the FIO's regulatory powers at the expense of state regulators. Given Congress' general nonreaction to the report, coming as it did at the beginning of the holiday season, lawmakers appear unlikely to rush to give the FIO more regulatory power anytime soon unless some totally unforeseen catastrophe hits the insurance industry.
But the report certainly leaves the door open for federal involvement in insurance regulation. The federal government already plays a significant role in the terrorism insurance market with its reinsurance backstop and acts as the sole provider of flood insurance for millions of policyholders.
In the realm of international insurance regulation, the FIO can act as an advocate for the domestic insurance industry. Such advocacy could prove to be crucial as international regulatory bodies consider transnational capital standards and similar efforts, bearing with those the threat of a bank-centric regulatory approach being imposed on the property/casualty insurance industry.
As the report says, the question facing regulators isn't state vs. federal regulation, but rather whether the federal government should be involved in particular aspects of insurance regulation. The question cannot be answered “at this time.''