The worldwide financial crisis and the very ambitious agenda of the Obama Administration have kept Congress extraordinarily busy. Will any of this frenetic activity have any effect on the regulation of captives? Individual states have always handled insurance regulation in the United States with multi-state issues being considered through the good offices of the National Association of Insurance Commissioners (“NAIC”). Congress is now considering the reorganization of regulation of the entire financial services industry.
Insurance is only a relatively small part of that entire industry. Commercial banks, investment banks, and non-bank financial institutions such as hedge funds are the focus of Congress’s attention. In addition, other pressing issues such as healthcare reform, the budget, the ineffectiveness of the stimulus package, etc. have taken priority over financial services reform.
Nonetheless, Congress will respond in due course to the Obama Administration’s proposals for financial regulatory reform. On June 17, 2009, the Treasury released Financial Regulatory Reform a New Foundation: Rebuilding, Financial Supervision and Regulation (“Treasury Report”), which outlined the Administration’s views. Nothing in the Treasury Report and nothing currently pending before Congress would directly affect the regulation of captive insurance companies.
However, in this overwrought legislative environment, there are numerous opportunities for mischief. The alternative risk transfer industry needs to be vigilant. Most of the potential areas of concern will have an indirect effect upon the captive industry but could, nonetheless, be significant. Here are the issues that have come to light so far: Letter From Washington
“Systemic risk” is the key focus of the Administration’s efforts. While there is no clear definition of “systemic risk,” there is the view that anything “too big to fail” qualifies. Much of the regulatory responsibility for managing “systemic risk” would fall on the Federal Reserve (“Fed”) which would supervise “tier one” financial holding companies. The most sizeable insurance holding companies would fall within this category.
Office of National Insurance
The Treasury proposal would create the Office of National Insurance (“ONI”) which would gather information, coordinate policy in the insurance sector, and identify problems in regulation which might contribute to a future financial crisis.
Financial Services Oversight Council
The Financial Services Oversight Council (“Council”) would consist of various federal agency regulators. Its purpose would be to gather information and coordinate regulation during a financial crisis. Interestingly, neither any state insurance regulator nor the NAIC is included in this important council.
Consumer Financial Protection Agency
The Consumer Financial Protection Agency (“CFPA”) would be created as an independent agency to oversee consumer protection of non-commercial financial products. While its jurisdiction would exclude most insurance products, it would have jurisdiction over credit insurance, title insurance, and mortgage insurance. Most of the insurance trade associations and the NAIC are vehemently opposed to this proposal.
The reform of healthcare is a massive undertaking which will affect health insurers dramatically. In addition to the direct economic effects on the health insurance industry, the proposals being considered by both the House and the Senate include the creation of a Health Choices Commissioner which will have the authority to regulate marketing of health plan standards, oversight of a new health insurance exchange, coordination of benefits, and other functions which have previously been handled by insurance commissioners. This is a significant threat to state insurance regulation, at least in the area of health insurance, and is being actively opposed by the NAIC.
The legislative process presents opportunities for the adoption of legislative language that can be damaging either intentionally or unintentionally. Section 551 of the Senate version of the healthcare legislation contains language addressing “insurance fraud.” Within that language is a limitation on risk retention groups (“RRGs”) providing coverage to Multiple Employer Welfare Arrangements (“MEWAs”), which would eliminate the federal preemption of state laws. This could conceivably be damaging to RRGs because it represents the first time their authority has been limited by Congressional action. While the scope of this limitation may be relatively small, it demonstrates the opportunity for mischief that the legislative process presents.
There is an ongoing effort by certain U.S. reinsurers to limit the ability of U.S. insurers to reinsure with foreign affiliates. This effort was started in the 110th Congress and will become more visible as the insurance reform efforts make progress in this Congress. Treasury is, needless to say, interested in gaining tax revenue. This legislation could limit the reinsurance markets and thereby have a negative effect upon captives.
Two pieces of insurance regulatory legislation which are likely to move in this Congress are the National Association of Registered Agents and Brokers Reform Act of 2009 (H.R. 2554) and the Non-Admitted and Reinsurance act of 2009 (H.R. 2571). Both bills died in the 110th Congress, but have been rewritten in the 111th Congress and are now on a fast track. The first bill would establish a facility for national or multi-state insurance agent licensing without preempting state agent regulatory laws. The second would facilitate multi-state operation of surplus lines programs and would restrict non-domiciliary state regulation of reinsurers. This bill (H.R. 2751) just passed the House by unanimous consent on September 9.
While captive insurance companies are not the targets of legislation in this Congress, they will be affected indirectly by the restructuring of the insurance regulatory system. Moreover, there is always the opportunity for “collateral damage.” The captive industry will need to be particularly attentive during the next several months.
This article is based upon one authored by Mr. Myers which recently appeared in Captive Review.
Robert “Skip” Myers is Co-Chairman of the firm’s Insurance and Reinsurance Practice and focuses in the areas of insurance regulation, antitrust, and trade association law. Skip received his bachelor’s degree from Princeton University and his law degree from the University of Virginia.