Federal Regulation of Insurance May Be Necessary if States Do Not Modernize, Warns Long-Overdue FIO Report
December 13, 2013 by Jeff Jeffrey
WASHINGTON – The Federal Insurance Office’s much-anticipated report warns that federal regulation of the insurance industry may be necessary if states do not take appropriate steps to modernize their regulatory systems.
The report, released Dec. 12, does not call for a broad federal role in the regulation of insurance, noting many of the areas where FIO recommended reforms are areas where states have already been working to make changes. However, it called for a larger federal role in the regulation of mortgage insurers.“For a variety of reasons, however, progress has been uneven despite the absence of any dispute about the need for change,” the report said. “As a result, should the states fail to accomplish necessary modernization reforms in the near term, Congress should strongly consider direct federal involvement.”
The report also said state insurance regulators should take steps to instill more uniformity and transparency in their supervisory regimes.
The mortgage insurance industry is of “acute national interest” to the national economy, warranting a federal supervisor, a Treasury official said during a conference call with reporters.
The report said the federal government should lead U.S. efforts on the international stage. FIO also came out in support of congressional efforts to pass the National Association of Registered Agents and Brokers Reform Act, which would create a nonprofit board for insurance agents and brokers to obtain approval to operate on a multi-state basis (Best’s News Service, Sept. 10, 2013).
In the near term, state insurance commissioners should develop and implement a process that requires an insurer’s lead regulators to obtain the consent of regulators from other states in which the insurer operates when making decisions that pertain to discretionary solvency oversight matters.
States should improve the consistency of solvency oversight by establishing an independent third-party review mechanism for the National Association of Insurance Commissioners Financial Regulation Standards Accreditation Program. They should also develop a “uniform and transparent” solvency oversight regime for the transfer of risk to reinsurance captives, the report said.
State-based solvency oversight and capital adequacy standards should be based on best practices and uniform standards, the report said.
But the report cautioned state regulators to move “cautiously” with the implementation of principles-based reserving. FIO said regulators should ensure it is based on “consistent, binding guidelines” to ensure insurers are meeting accounting and solvency requirements. They should also develop uniform guidelines to monitor supervisory review of principles-based reserving.
Other recommendations in the report included:
— States should develop standards for the appropriate use of data for the pricing of personal lines insurance.
— States should assess whether or in what manner marital status is an appropriate underwriting or rating consideration.
— State-based insurance product approval processes should be improved by securing the participation of every state in the Interstate Insurance Product Regulation Commission and by expanding the products subject to approval by the IIPRC.
— In order to protect consumers in all parts of the United States, every state should adopt and enforce the National Association of Insurance Commissioners Suitability in Annuities model act.
— States should reform market conduct examination and oversight practices.
— States should identify, adopt, and implement best practices to mitigate losses from natural catastrophes.
The FIO report was perhaps the most anticipated of several long overdue reports the agency was supposed to submit to Congress under the Dodd-Frank financial reform act.
It was supposed to be submitted by Jan. 1, 2012. Another report on the ability of state regulators to obtain reinsurance information was submitted last month. That report was supposed to be issued by Jan. 1. The industry is still waiting on FIO to release the findings of a third report focusing on the breadth and scope of the global reinsurance market. It was due by Sept. 30, 2012.
The missed deadlines have prompted U.S. Rep. Randy Neugebauer, R-Texas, who chairs the U.S. House subcommittee on housing and insurance, to order FIO Director Michael McRaith to explain the delays.
Neugebauer said in an Oct. 7 letter to McRaith he found it “puzzling” FIO has failed to comply with clear mandates laid out by the Dodd-Frank Act.
During the Dec. 12 conference call, a Treasury official said the report on regulatory modernization was issued today because that was when it was ready. The official said FIO has spent the past two years meeting with interested parties from the industry, state regulators and international regulators to ensure the report’s findings took all concerns into account.
(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)
