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Federal Insurance Office Recommends Increased Federal Monitoring and Regulation for Insurance Industry

Blogs, Legislation

In a recent report, the Federal Insurance Office of the Department of Treasury (“FIO”), evaluated the present, largely state-based system of insurance regulation, and provided its recommendations for where increased federal monitoring and regulations would be most beneficial. 

The report, entitled How to Modernize and Improve the System of Insurance Regulation in the United States, hereinafter the “Report,” was mandated under Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and was submitted to Congress on December 12, 2013 (nearly two years late). The Report is the culmination of an extensive study of the United States insurance sector which included consultation with consumer advocates, market participants, and state officials and regulators. Ultimately, the Report recommends a hybrid approach to insurance regulation in which state and federal oversight play complementary parts.

In particular, the Report addresses regulatory problems in what it describes as the two broad areas of insurance regulation – (i) prudential regulation covering an insurer’s financial condition and its ability to satisfy policyholder claims; and (ii) marketplace regulation involving an insurer’s business conduct, such as the pricing of premiums, advertising, minimum standards governing the terms of insurance policies, licensing of insurance agents and brokers, plus general issues of consumer protection and access to insurance.

With respect to prudential regulation, the Report concludes that the states need to improve oversight of insurers, and indicates that the FIO will more closely monitor state regulatory developments and will present options for federal involvement as it becomes necessary. The Report also recommends that states take the following steps: (i) develop and implement a process for a state regulator to first obtain the consent of regulators from other states regarding solvency oversight decisions; (ii) establish an independent third-party review mechanism to improve the consistency of solvency oversight (in conjunction with the National Association of Insurance Commissioners Financial Regulation Standards Accreditation Program); (iii) develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives; and (iv) move forward with the implementation of principles-based reserving conditioned upon consistent, binding guidelines to govern regulatory practices that determine.

With respect to marketplace regulation, the Report finds that marketplace oversight varies greatly state-by-state. The Report makes a number of recommendations in an attempt to alleviate the perceived lack of uniformity and absence of coordination among regulators, including: (i) given the recent legal and policy developments in the treatment of same-sex spouses, states should assess whether or in what manner marital status is an appropriate underwriting or rating consideration; (ii) every state should participate in the Interstate Insurance Product Regulation Commission which develops nationally standardized forms and terms and provides central electronic filing for certain insurance products, including life insurance, annuities, disability income and long-term care insurance to develop uniform product standards (43 states are members; notably, Connecticut and New York are not presently members); (iii) the FIO should convene and work with federal agencies, state regulators, and other interested parties to develop personal auto insurance policies for U.S. military personnel enforceable across state lines (given that active duty members may transfer to a different base every 24 to 36 months, varied product approval requirements disproportionately impact members of armed forces); and (iv) states should reform market conduct examination and oversight practices.

In sum, the Report recognizes that any system with 56 independent jurisdictions is inherently limited in its ability to regulate uniformly and efficiently. Nonetheless, the Report takes the position that increased federal involvement – when and where necessary – to implement the FIO’s recommendations will improve the issues of inefficiency, redundancy, and lack of uniformity.

A complete copy of the FIO Report is available here.