Industry sees the Fed as part of its future

If the purpose of the Republican leadership of the House Financial Services Committee was to use a hearing held last month to undermine the Obama administration and drum up opposition to any sort of federal regulation of insurance in particular, the results were startling.

Effectively, instead of serving as a call to arms against the federal government, the hearing served as a seminal event in the evolution of insurance regulation in the digital age, where insurance industry officials are changing their position from outright opposition to federal regulation to one of seeking to shape the dialogue to their advantage.

The hearing was held to discuss the report on insurance modernization that the Treasury Department was mandated to provide under a provision of the Dodd-Frank financial services reform law

Rep. Michael Capuano, D-Mass., ranking minority member of the FSC's Housing & Insurance subcommittee, which held the hearing, appropriately summed up what most observers believed was the negative purpose of the hearing when he asked all industry officials testifying to state whether they supported the FIO or wanted it repealed.

"There are some of my colleagues here who hate the concept that FIO even exists. They hate the concept of them even asking questions and trying to put a focus on this discussion."

But, the response was an eye-opener.

Representatives of all major life insurance and property/casualty insurance trade groups testifying at such an event respond unequivocally in the affirmative when asked if they supported the FIO and a federal role in insurance, as did an official of the Independent Insurance Agents and Brokers of America.

Taking the lead on the issue was Gary Hughes, executive vice president of the American Council of Life Insurance and its general counsel. Directly in response to Capuano's question, Hughes said, "We absolutely support FIO."

And, in his opening remarks, Hughes set the tone for the entire hearing when he said that the regulatory landscape for U.S. life insurers is "changing dramatically."

He said the Dodd-Frank Act now gives the Federal Reserve a significant regulatory role with respect to those insurers that are designated as systemically important. Hughes noted that two of the ACLI's member companies have received that designation, and one additional company is under review for possible designation. Dodd-Frank also gives the Federal Reserve jurisdiction over another 12 member companies that control savings and loan institutions, Hughes said.

"In the very near future, a major segment of the U.S. insurance business will have material aspects of its capital structure dictated or influenced by someone other than a state insurance regulator."

The point here is that life insurance regulation in the U.S. can no longer be viewed as a purely domestic matter.

In his remarks, FIO Director Michael McRaith defended FIO's role in the international insurance market, saying that FIO is unlikely to sit back and be a spectator, and that it will do what it believes is in the "national interest" for such a critical component of the economy and consumers' lives.

In dealing with specifics, Hughes said that on holding company standards, any holding company capital requirements made applicable to a life insurer must be compatible with the company's basic business model. "Unfortunately, the scenario we face due to the Federal Reserve's interpretation of Dodd-Frank is one of applying bank-centric regulatory regime to a life insurer," he said.

That won't do, Hughes noted. "The life insurance business is fundamentally different than the business of banking," he said. "The issue here is not whether these life insurers should be subject to holding company capital standards. They have accepted the fact they will be. The issue is making certain those standards actually work for a life insurer."

Effectively, in a very diplomatic way, Hughes set out how experienced practitioners see insurance regulation evolving. It should be duly noted by everyone in the industry.

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