The release of a report — one that was due more than a year ago — on how the insurance industry should be modernized has taken on new urgency.
The Federal Insurance Office (FIO) report is seen as the hinge on the door of establishing a blueprint for how state, federal and international regulators can work together to reshape insurance in the wake of the 2007–2010 worldwide economic crisis.
The report, which was mandated by the Dodd-Frank financial services reform law, was due Jan. 21, 2012. It required the FIO, directed by former Illinois insurance commissioner Michael McRaith, to prepare a report on the gaps that exist in an insurance regulatory system devised by the states and mainly unchanged for 150 years, and suggest how it should be modernized.
The need for greater central oversight was illustrated in September 2008 when the federal government was forced to provide a lifeline — in the form of billions in cash — to help the world's largest insurer, American International Group (AIG), remain afloat.
Many hands in the pot
A key concern for Congress is the ongoing role of the politically powerful state regulators and the National Association of Insurance Commissioners (NAIC). And, the Federal Reserve Board, which has been developing a system to understand and regulate insurance companies and their holding companies over the last several years, has made it clear that, as the operational component of the federal regulatory system, it wants a strong voice in the domestic and international efforts to devise rules and establish monitoring systems that work to ensure a crisis similar to the AIG debacle doesn't happen again. That could impact the role Congress envisioned for the FIO.
Furthermore, just before its annual meeting in Taipei the week of Oct. 14, the International Association of Insurance Supervisors (IAIS) unveiled a memo that laid out plans to develop a first-ever risk-based global insurance capital standard by 2016.
"It is undeniable that the business of insurance is global, and global issues demand global responses," said Peter Braumüller, chair of the IAIS Executive Committee, in the announcement.
At a global finance meeting in Washington, Daniel Tarullo, a Federal Reserve Board governor, made statements seemingly questioning whether those who have no authority at home should be leading regulation. Tarullo is the Fed governor primarily overseeing implementation of the Dodd-Frank Act. In that role, he has overseen the Fed's efforts to develop insurance regulatory expertise. He asked the same thing about the FIO and brought up the same issues at a regulator conference in February.
His comments were against the background of the fact that Elise Liebers, an NAIC staff member, is now acting chair of the IAIS Financial Stability Committee and that McRaith chairs the IAIS Technical Committee.
"It's important to have someone who has [supervisory] responsibilities chairing the committees," Tarullo stated at the conference. "You don't want someone whose full-time job is chairing an international committee but doesn't have any authority at home."
And, in a memo prepared for the Taipei meeting, IAIS officials reorganized its committee structure. The new structure is seen by U.S. industry players as cutting out "observers" — that is, non-regulators who are usually industry officials, their lawyers, consultants and even consumer advocates — from the process that will be used to establish international insurance regulatory guidelines.
"Observers and other stakeholders will have additional opportunities to provide timely, high quality input to IAIS work," said IAIS spokesperson Andrew Stolfi. "In whole, our package of measures is meant to bring the IAIS' processes and procedures up to date to meet the increased role the IAIS has taken within the international financial community over the last several years and better enable us to meet our objectives."
The IAIS is just one of many agencies emerging as players in the regulatory structure that will govern insurance going forward. The Financial Stability Oversight Council (FSOC) is another. The FSOC has already designated AIG as a systemically important financial institution (SIFI), which means it will be subject to federal as well as state oversight. And, Prudential Financial must tell the FSOC by Oct. 23 whether it will accept its designation as systemically important or challenge it in court. The company said it is weighing its options.
That means that, in addition to state regulation, the Federal Reserve Board will have consolidated oversight of these companies and can establish greater capital standards. It can also evaluate management and do whatever it must to ensure that the company does not present a systemic risk to the global financial system. Other life insurance and property and casualty insurers are under the microscope, as are large hedge funds and asset managers.
State vs. Federal
A key reason the FIO report is crucial is that the current state-based insurance regulatory system is at a crossroads, as acknowledged in comments early last month by Larry Mirel, a former state commissioner and now a partner in the Washington, D.C., office of Nelson Levine de Luca & Hamilton. Mirel is fully aware that the G-20, the group of large industrialized nations, is going to the U.S. government as representatives of the U.S., not the NAIC, as it tries to set standards to prevent future economic crises.
According to Mirel, the NAIC is going to have to clarify what it is. Mirel said that the recent international economic crisis pointed out that the NAIC lacked the authority to regulate complex insurance companies with international operations, especially those whose operations run outside of insurance.
"The states are making a claim that they can be the regulator of all insurance companies, including those who operate on a worldwide basis, but I think less and less that is going to be the case," he said. "A state insurance regulator has authority only within its own, and has no authority to regulate insurance companies that are doing business outside the state and outside the country," he said.
Congressional officials are also aware that changes in insurance regulatory structures are underway, that the FIO report is urgently needed, and that the NAIC's ongoing role in insurance regulation should be clarified.
