Title V of the Wall Street and Consumer Protection Reform Act (commonly known as “Dodd-Frank”) includes the creation of the Federal Insurance Office (“FIO”). Headed by former Illinois Insurance Commissioner Michael McRaith, the FIO is located in the U.S. Treasury. In the two years since passage of Dodd-Frank, the FIO has begun hiring staff and working on an examination of the regulation of insurance.
A reasonable question for observers of the insurance industry is: does the FIO matter? Its stated authority in Title V is very limited. It is authorized to “monitor all aspects of the insurance industry,” to collect data concerning the industry (including the use of subpoenas), to represent the U.S. in international insurance regulatory and prudential negotiations, and to provide annual reports to Congress. It also has the authority to preempt state law but only after a determination that the state law in question “results in less favorable treatment of a non-United States insurer ... that is subject to a covered agreement.” A “covered agreement” is an agreement regarding insurance prudential matters between the U.S. and another country (or countries) or its regulatory authority. The FIO can exercise its right of preemption only after an elaborate procedure including notice to the relevant state, the relevant committees of Congress and notice in the Federal Register.
Most importantly, the FIO is directed to prepare a report on “how to modernize and improve the system of insurance regulation in the United States” including an examination of “the costs and benefits of potential Federal regulation of insurance across various lines of insurance....” This study was due January 21, 2013 (18 months after the Dodd-Frank enactment date of July 21, 2012). Needless to say, we are almost a year past that date and no study is in sight. We are told the study is in the process of review within Treasury and could be published at “any time.”
The importance of the FIO, and the role it will play in the insurance industry, should not be underestimated. In order to understand why, one has to examine how the regulation of the insurance business actually operates and what forces are driving the U.S. regulatory agenda. First, the structure of U.S. insurance regulation has been cobbled together over the years. While the McCarran-Ferguson Act established the primacy of the states in insurance regulation, the federal government has always had a role in taxation (Internal Revenue Service), healthcare (Health and Human Services) and securities (Securities and Exchange Commission). Second, the solvency crisis of 2008 put domestic and international pressure on the U.S. to improve its financial solvency regulation, including insurance. Two laws were passed by Congress which interrupted the dominance of state law over insurance: Dodd-Frank and the Patient Protection and Affordable Care Act.
These new influences have resulted in both regulatory uncertainty and competition among regulators. The key to understanding this new regulatory environment is the National Association of Insurance Commissioners (“NAIC”). The states are the regulators of insurance. However, the states (or more correctly the Commissioners of the states) belong to the NAIC, the purpose of which is to gather information and provide the opportunity for states to establish a common understanding of insurance regulatory issues and to promulgate rules and regulations which the states voluntarily can adopt. However, the NAIC has evolved into more than just an association for the benefit of regulators. The NAIC has things that the states do not have. It has both a sizeable staff and a substantial budget and, more importantly, it has the only database of insurance information. This places it in the position to drive the insurance regulatory agenda and to participate in activities that arguably are the province of the states.
The NAIC has been described as a tax-exempt organization, a trade association and a “standard setting” organization. In fact, it carries real power in the insurance regulatory world for two reasons: (1) the state accreditation process and (2) there is no other organization with the funding, staff and information to fulfill the role of a national regulator. While the NAIC does not have the legal authority to regulate, it does have the money, staff and history of having done so, and it has the accreditation process as its enforcement mechanism. No state wants to lose its accreditation.
So, why is the FIO important? Even though its stated authority is quite limited, the Dodd-Frank Act establishes in law that the FIO has the authority to: (1) represent the U.S. in international matters, (2) collect insurance industry information and (3) study U.S. insurance regulation. It also has a budget and a staff. In other words, it has the legal authority to influence the regulation of insurance, which is what the NAIC has been doing for decades without any authority in the law but unchallenged because there is a need for such a national organization.
So far, the NAIC and the FIO have been getting along quite well. The two entities are cooperating on international regulatory matters such as the International Association of Insurance Superintendents and in other international gatherings. The FIO has diplomatically become a force in the international insurance regulatory world, an area previously dominated by the NAIC.
How will this entente cordiale be affected by the publication of the FIO study of domestic U.S. insurance regulation? The FIO has the ability and the legal authority to promote its own agenda; however, it does not have the legal authority to implement it domestically. By contrast, the NAIC has the ability to promote its own agenda and effectively implement it without legal authority. This puts these two organizations on a collision course. We cannot predict the outcome but, without a doubt, the FIO matters.