The federal government’s new role in insurance regulation poses significant challenges and opportunities for the insurance industry, according to insurer trade group executives.
The establishment of the Federal Insurance Office (FIO) is one of the few provisions under the Dodd-Frank Act that could affect insurers, although exactly what the impact will be is uncertain.
“We are sailing into uncharted waters” in terms of insurance regulation,” said Steve Broadie, vice president for financial policy, Property Casualty Insurers Association of America (PCI). He was among the speakers at at the annual meeting of the Casualty Actuarial Society.
Broadie said that for the most part insurers have been spared many of the regulations in the Dodd-Frank Act which reformed regulation of financial services. Insurers are unlikely to be subjected to systemic risk regulations or liquidation provisions contained in the law. “Our sense is that the impact of the Dodd-Frank Act on most insurers will be limited,” he said.
The functions of the FIO include data collection and analysis, systemic risk monitoring, advising on the Terrorism Risk and Insurance Act (TRIA), monitoring the affordability and availability of insurance in under-served areas, recommending insurers for systemic risk supervision, advising on insurance policy issues and coordinating the development of federal policy on international prudential insurance issues.
“The creation of the FIO was an adjunct to much broader reform legislation triggered by the greatest financial panic since the Great Depression,” said Broadie. “We knew financial reform would be extensive and believed the industry was under severe peril of duplicative regulation by people who did not understand the insurance industry.”
Broadie said the industry told Congress and federal agencies that the core business of property/casualty insurers did not cause the financial panic and, as a result, the country didn’t “need duplicative regulation to fix something that isn’t broke.”
He expressed concern about the “unintended consequences” that the new regulatory regime could have on insurers, such as “mission creep” by the FIO that could result in duplicative regulation.
At the same time, Broadie acknowledged that the FIO’s designated role in the international arena – an area where state regulators cannot play a major role – offers an opportunity.
While PCI members are happy to avoid heavy federal regulation overall, reinsurers see the introduction of some federal regulation and the FIO’s involvement in international matters under Dodd-Frank as positive developments, even if they fall short of what reinsurers hoped.
Throughout the debate on financial services reform, reinsurers argued that the reinsurance industry needed a federal presence.
“We saw this as an opportunity to improve the way reinsurers are regulated,” said Mary Seidel, vice president and director of federal affairs for the Reinsurance Association of America (RAA).
Seidel said the reinsurance industry reminded Congress of the global nature of reinsurance and argued that a lack of a “federal voice on the international stage” meant that reinsurers were in danger of losing their competitive edge abroad.
Also, foreign reinsurers were frustrated by the redundancies of the 50-state regulatory system here, according to Seidel.
She expressed disappointment that the more “robust international presence” originally envisioned for the FIO was not included in the final law.
“The FIO has very limited authority to enter into international agreements and pre-empt state law,” Seidel said. However, “the fact that there are international provisions is a positive,” she said.
“There is still a long way to go,” she said. “We are looking at the implementation of the office and looking for opportunities.”
Another P/C trade lobbyist agrees that the FIO could be a positive development.
“While there are those who fear the potential authority of the office, we think it may potentially have a very positive impact,” said David Snyder, vice president and associate general counsel, American Insurance Association, which, unlike PCI, has advocated in support of an optional federal charter for insurers.
For example, the FIO may bring a national perspective to politically motivated developments in the states that could undermine the solvency of a particular company or the insurance system as a whole, according to Snyder.
He also cited the mandated study of insurance regulation by the FIO as “a tremendous opportunity to talk about what’s right and what’s wrong with the current U.S. regulatory system.”
Snyder cited the “politicization” of rate regulation in some states which he said makes it difficult for insurers to obtain adequate rates, especially in coastal areas.
Also, regulatory delays in the approval of new forms for certain commercial lines of insurance have caused commercial customers to move to alternative risk mechanisms, according to Snyder.
“A bright light needs to be shown on the inefficiencies of the state regulatory system,” Snyder said of the FIO study.
Calling the Dodd-Frank Act “truly historic,” Snyder said that “while there are some who view it as a threat,” he views it “as a significant opportunity to shape the world that all of us will be engaged in in the future. If we miss this opportunity, others will shape it for us.”