Industry Panel Discusses How the FIO Report on Regulatory Modernization Affected the Fall NAIC Meeting
January 6, 2014 by Best's News Service
OLDWICK, N.J. – The U.S. Treasury’s Federal Insurance Office released its long-awaited report on regulatory modernization prior to the start of the National Association of Insurance Commissioners’ fall national meeting, held Dec. 15-18 in Washington, D.C. Following the meeting, a panel of industry observers participated in a Best’s Review webinar wrapping up the NAIC meeting. The first topic was the report’s impact. The following is an edited excerpt from that discussion.
LEE McDONALD (A.M. Best Co.): We’ll start with the event that I know was part of the meeting but wasn’t originally scheduled, which is the release of the FIO report. It came out of Treasury. Quite a far-reaching report, covers a lot of ground, a lot of topics. Could you give us a quick overview of how that played out at the NAIC and how you see it affecting a lot of the issues we’re about to talk about?HOWARD MILLS (chief adviser, insurance industry group, Deloitte): Obviously, the FIO report was the big news at the NAIC. It provided kind of a backdrop to almost everything that occurred. I wouldn’t say that the commissioners and the industry in attendance were terribly surprised by too much in the report. A lot of it was pretty much what we expected. The FIO made its case for a more vigorous federal involvement, outlining certain areas, specifically mortgage insurance and reinsurance collateral as two examples where it would like to get more involved. CEO of the NAIC, Ben Nelson, issued a statement thanking them for the input and they look forward to engaging with them. But I think in the back of everyone’s mind is an acknowledgment that the FIO report in and of itself will not give the FIO any more power over the state regulatory system. That of course will require an action of Congress to expand its scope beyond what is outlined in the Dodd-Frank Act. I don’t think anyone expects that, at least not any time in the foreseeable future.
So FIO director [Michael] McRaith… has a challenging job. He’s got a broad mandate by Dodd-Frank to get very involved in getting the states to act in better coordination. Maybe we’ll talk about the various ways in which I think most everyone on this call would agree the states can and should do things better. Most state insurance commissioners agreed that there’s a lot the NAIC could do better. The NAIC also has a pretty good story to tell with regard to how the insurance industry weathered the financial crisis of 2008. So Director McRaith has a tough job in that he’s got a broad mandate but no real statutory authority to compel the states to act. He’s really got to do a lot of cajoling and use persuasive powers to get the NAIC to move in the direction the FIO report tries to outline.
McDONALD: Neil Alldredge, what parts of the report does NAMIC pay closest attention to and where do you see that playing out at NAIC?
NEIL ALLDREDGE (senior vice president, state and policy affairs, National Association of Mutual Insurance Companies): Good question. I generally agree with Howard and to many people’s reaction to this report. It took the shape that many of us thought it would, I guess is the best way to say it. I do think it’s a little noteworthy and perhaps FIO deserves a bit of credit for at least not having the old standard debate of federal regulation versus state regulation. I do think the report tries to change that dialog a bit and identify areas where perhaps some more federal involvement might help things. I think that’s debatable. I do think that it’s noteworthy in the sense that it’s not just a rehash of the old optional federal charter versus state regulation debate.
For us at NAMIC, there were a couple of areas that got our attention. It’s noteworthy, and this is something that’s not getting much attention at the NAIC and we would like it to get more — that is the sections of the report that talk about the need for rate regulation reform. The language in the report that supports the notion that price controls harm markets and states need to do more to reform in this area. We thought it was welcome to the debate. That’s something that used to be in the quaint old days when we were trying to reform state regulation that was something that we were making a lot of progress on. Right now it’s not on the radar screen of many regulators around the country. We’d like to see that change. That section for us was one that’s tempered against the kind of warning signals in the FIO report about insurers’ increasing use of underwriting technologies and data driven underwriting technologies, whether that be the old debate about insurance scoring or new issues around telematics or new issues around other data-driven underwriting tools. The question is, does FIO contemplate a rate-modernization system that includes a competition-based system for rates as we know it today or is their idea that states ought to perhaps ban underwriting tools and also to modernize the rate regulation system? We would say those two thoughts are kind of incompatible with one another. At any rate those areas got our attention.
Otherwise, I think many of the areas, whether it’s the capital standards of the international insurance world, is about what we thought it would be. I’m not sure it plowed much new ground in that regard.
McDONALD: Deirdre, what would PCI’s take on the FIO report be at this point?
DEIRDRE MANNA (vice president, political engagement and regulatory affairs, Property Casualty Insurers Association of America): I agree with everyone else that there were no big surprises. PCI was pleased that the report raised the need for reforms, in uniformity and a number of important areas. We do believe that any discussion about reform has to start with the fact that the state-based system is a competitive one that creates competitive markets and protects consumers. There wasn’t a lot of discussion in the public forums at the NAIC regarding the report. PCI did push to have it put on the industry liaison committee, which was canceled. The NAIC staff felt that they needed more time to work with the regulators before they had a public forum on the report. We did talk to a lot of the regulators who came to meet with our members and again the NAIC’s reaction was similar to everyone else’s, that there were no big surprises.
What we have done is we’re still obviously working with our members, trying to identify areas that we can work together not only with FIO but with the state regulators to identify areas where we can work together to resolve some of these issues. A couple of the areas we’ve already identified would be the commercial lines dereg, the NatCat reforms, that’s an area we’ve been working on for a few years. I know that Neil just mentioned rate regulation. Coming from Illinois obviously we believe in the Illinois model. I’m not sure if that will ever happen. But again there were some areas within the report where we have a different view. I put the risk classification factors, some of that in that category. I think the best news coming out of the report was that it did not offer any evidence that state-based systems had failed to protect consumers. I think that was one of the biggest takeaways.
McDONALD: Wes Bissett, I know there are references in there to NARAB and some products. What is it in the report that is of most concern to producers and members of ‘Big I’?
WES BISSETT (outside senior counsel — government affairs, Independent Insurance Agents and Brokers of America): I agree with the other observations that others have made. It’s interesting to put it when you look at the context of this where we come from. Six years ago in March 2008, Treasury issued a regulatory blueprint that called for direct and extensive regulation of our industry. So when you look at that document released only a few years ago to what we recently saw released by FIO we’ve certainly come a long way. I think anyone that was looking for a call for a robust federal involvement was probably fairly disappointed. The report is balanced and fairly modest.
We agree strongly with the assertion that regulation can be improved and modernized. That’s certainly true. But there really were not many surprises. I guess from the agent/broker perspective the report had two main sections, one focusing on prudential/other oversight, the other on marketplace oversight. That second area was where our focus was. That portion of the report looked at issues like producer licensing, product approval, surplus lines, NatCat issues. For us from an IIABA-specific-centric perspective we were most interested that in that marketplace section the very first issue that was discussed was the need for further producer licensing reform. I think the report accurately noted that there continues to be undue and unjustifiable burdens and costs imposed on the agent/broker community because of the way in which the licensing panel today is talked about, the inconsistencies and inefficiencies that persist.
It talks about the adverse impact on consumers as well because of the absence of uniformity and reciprocity. One of the things that we’ve always been frustrated about is there are a number of states that purport to be reciprocal and efficient when it comes to licensing but really are not in real world effect. The report calls some of those states out, even if not by name. The most notable part of this section is that it recommends enactment of the NARAB II legislation, which the ‘Big I’ strongly supports. That’s a bill that has already passed in the House and the Senate Banking Committee. So we were very pleased that one of the specific recommendations in this report was the call for the enactment of the much needed NARAB II bill.
McDONALD: Steve Kinion, can you take a look at FIO from the point of view of the captive sector?
STEVE KINION (director, Bureau of Captive and Financial Insurance Products, Delaware Insurance Department): Absolutely, Lee. As a matter of fact I want to make three points on the FIO’s report regarding captive insurers. Specifically those are the kinds of captives that are owned by life insurance companies, otherwise known as life insurer-owned captives, that reinsure what is known as XXX or AXXX redundant reserves. The FIO report made two points. One being the transparency of the process regarding how these types of captives report on the financial statement. Well, I can tell you in Delaware it’s been Commissioner [Karen Weldin] Stewart’s position that these type of life insurer-owned reinsurance captives should be filing and do file what is called the NAIC Blue Book. So we are addressing that particular topic in Delaware. We believe that we’re really leading other domiciles in that area.
Second, in regard to the uniformity of regulation, Delaware today is the world’s 10th-largest captive domicile and ranks third in terms of being third largest in the United States. We certainly have a lot knowledge in regard to how to regulate these kinds of captives and we can help address the uniformity aspects.
But now let me go to point No. 3, what the FIO report did not do. It did not address a very critical question, which is how life insurer-owned captives help keep the costs of term and universal life products affordable. Commissioner Stewart believes that insurance, really all forms but in this case specifically term and universal life insurance products, should be less costly and more affordable for consumers. That’s an important topic obviously that was not addressed in the FIO report and really not addressed by the NAIC yet, though we in Delaware are striving to make that point and bring it to the forefront of the conversation.
To view the webcast, visit: http://www.ambest.com/webinars/naic13.
