Oversight or Overkill? Understanding the New Face of Insurance Federal Oversight Regulation
We now have three new federal regulatory agencies and advisory committees that did not exist 16 months ago. Let's get to know them better.
While insurance industry experts agree with and support effective federal oversight of financial markets, reasonable consumer protections, and appropriately strong enforcement remedies, there is concern that in the legitimate pursuit of these goals—and absent a complete grasp of the consequences—government may oversimplify and overreach. Necessary efforts may not be made to properly identify and segregate legitimate risk segments from the rest of the financial services industry, specifically in the insurance segment. In short, the federal regulatory response following the near meltdown of our financial system in 2008 may be overkill.
The potential impact of additional layers of regulation would likely go well beyond the compliance costs of excessive regulatory enthusiasm. These costs will inevitably result in higher insurance premiums and the inability of smaller insurance companies to afford the costs of such compliance. The consequent decrease in industry competition would be to the detriment of insurance consumers and investors and, ironically, to the supposed beneficiaries of the same regulatory initiatives.
But there could also be significant benefits that come of such demands in the form of supercharged industry data management expertise, more business agility, and higher transparency. In this and future articles, we will explain and discuss significant regulatory developments and issues and their potential impact—both positive and negative—on the property casualty insurance industry. This process is evolving as we speak but accelerating towards resolution and adoption.
Financial Stability Oversight Council
Signed into law July 23, 2010 by U.S. President Barack Obama, The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) represents the federal government’s comprehensive response to the financial crisis, which became clear in the fall of 2008.
Title I of Dodd-Frank created the Financial Stability Oversight Council (FSOC) to monitor the safety and stability of the nation’s financial system, identify risks to the system, and coordinate responses to any threats. The FSOC has the authority to identify financial firms; financial market utilities; and systemic payment, clearing, or settlement activities whose failure could potentially pose a risk to the financial system. Those identified entities, utilities, and activities are subject to more stringent regulatory standards under the Federal Reserve Board of Governors. The FSOC also facilitates coordination and information sharing among member agencies, departments, and functional regulators.
The FSOC is comprised of 10 voting members who each have six-year terms—nine federal financial regulatory agencies and an independent member with insurance expertise—and five non-voting members with two-year terms.
The independent voting member, Roy Woodall, was appointed by President Obama and confirmed by the Senate. He is a former Kentucky insurance commissioner, a former president of the National Association of Life Companies, has worked at the Treasury Department in both the George W. Bush and Obama administrations as an expert on insurance-related issues, and served as chief counsel for state relations at the American Council of Life Insurers. Woodall’s appointment has been applauded unanimously across the entire insurance industry.
The insurance industry’s non-voting member is John Huff, state insurance commissioner of the Missouri Department of Insurance, who was selected by the National Association of Insurance Commissioners (NAIC).
Federal Insurance Office
Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act established a Federal Insurance Office (FIO) within the Treasury Department to collect and analyze information regarding the insurance industry, assist the FSOC in identifying any systemically risky insurers, represent the federal government in international discussions relating to insurance regulation, and coordinate federal efforts to negotiate international agreements relating to insurance regulation.
Michael T. McRaith, director of the FIO, is also a non-voting member of the FSOC. McRaith is on record as being a staunch supporter of the state-based regulatory system, though that was when he was director of the Illinois Department of Insurance.
While the FIO serves an important role by providing necessary expertise and advice regarding insurance matters to the Treasury and other federal agencies, it is not a regulatory agency, and its authorities do not displace the time-tested, robust state insurance regulatory regime.
On Oct. 11, 2011, the FSOC unanimously approved a second notice of proposed rulemaking and related interpretive guidance under Dodd-Frank regarding the designation of systemically important “non-bank financial companies.” The new proposal, published in the Federal Register, describes the manner in which the council proposes to apply the relevant statutory standards and the processes and procedures it intends to employ in carrying out its authority to designate systemically important non-bank financial companies. These designated companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Board of Governors of the Federal Reserve. Comments on the council’s proposal were due by Dec. 19, 2011.
Among the non-bank financial companies potentially subject to a systemically important designation by the council are insurance companies, savings and loan holding companies, private equity firms, hedge funds, asset management companies, financial guarantors, and other U.S. and non-U.S., non-bank companies deemed to be “engaged primarily” in activities that are financial in nature.
Federal Advisory Committee on Insurance
The Treasury Department announced the establishment of the Federal Advisory Committee on Insurance (FACI) in May 2011. FACI was established to serve as an advisory committee to the FIO. Members will serve two-year terms and are expected to meet regularly in Washington, D.C.
In recognition that states are the regulators of the U.S. insurance system, nearly half of the committee is made up of state insurance regulators. The remaining members bring a diverse set of perspectives on the insurance industry with backgrounds ranging from consumer advocacy and academia to the business of insurance lines.
So to put all of this in perspective, we now have three new federal regulatory agencies and advisory committees that did not exist 16 months ago attempting to promulgate a sweeping set of regulatory requirements and guidelines—as yet not completely defined—which may have significant impact on an unknown segment of the insurance industry in an uncertain number of ways.
In our next article, we will report and comment on the positions and submissions of the myriad insurance industry associations and legislative and regulatory groups who will continue to appear before and submit position papers to these committees.
Stephen Applebaum is a senior P&C insurance industry analyst with Aite Group, an independent research and advisory firm focused on business, technology, and regulatory issues. He may be reached at email@example.com.