On Wednessay, November 18, 2020, the TIPS Insurance Regulation Committee held a well-attended webinar entitled: Federalization of Insurance? The Federal Insurance Office. The webinar panelists weighed the growth and potential future power of the Federal Insurance Office (FIO). The FIO , a new federal agency created under the Dodd Frank Act of 2010, currently does not have regulatory authority, except in specified instances. FIO was created to supply critical information and to act as an early warning “watchdog” to Congress on the workings and financial stability of the insurance industry. FIO also acts in a representative capacity for the United States in international insurance associations, such as the International Association of Insurance Supervisors (IAIS).
The McCarran Ferguson Act of 1945 is still the controlling law for the “business of insurance”, and therefore insurance is regulated by 56 different entities (each of the 50 states and enumerated territories). Each operates independently, but all are members of the National Association Of Insurance Commissioners (NAIC). The NAIC is the U.S. regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and the five U.S. territories. The NAIC creates model laws and regulations, but, like FIO, has no statutory enforcement authority.
The webinar has been posted and is now available on the American Bar Association website. The webinar panelists were: Peter Kochenburger, Executive Director, Insurance Law LL.M Program, Deputy Director, Insurance Law Center Associate Clinical Professor of Law, University of Connecticut School of Law; and Jeffrey E. Thomas, Associate Dean for International Affairs, Daniel L. Brenner Faulty Scholar Professor of Law, University of Missouri - Kansas City School of Law. The Moderator and third panelist was Francine L. Semaya, Legal & Insurance Regulatory Consultant and past chair of the Insurance Regulation Committee and the TIPS Task Force on Federal Involvement in Insurance Regulation Modernization and Health Care Reform. The program was a dialogue amongst the three participants, with topics and issues presented in a question & answer format.
For background on the history of insurance regulation in the United States, the panelists discussed the history of state regulation of insurance;and even though the 56 regulatory jurisdictions work cooperatively with the NAIC, each state has different approaches, laws and regulations and even their own regulatory philosophy. Each licensed insurance entity - insurers, producers, and other licensees, generally must comply with the laws of each of the jurisdictions in which they conduct business.
The IRC panel presented a background of the creation of a new agency, the Federal Insurance Office (FIO), which was created under Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010. Dodd Frank was passed in large part due to the impact of the Great Recession of 2008, and its aftermath. The FIO was created because members of Congress believed that Congress was woefully uneducated on insurance and that Congress was relying too much on the state regulators and the NAIC .
The FIO operates as a section of the US Department of Treasury. It is primarily an advisory rather than a regulatory body, although it has some regulatory functions at the international level. The panelists presented a vivid description of the three(3) FIO Directors to date, a position that is appointed by the President of the United States. The first FIO Director was Michael McRaith, who served from March, 2011 – January, 2017. The second Director, Steve Dreyer, served for a short term – June, 2018 – November, 2018 . The current Director is Steven Seitz, who has been in this position since February, 2019. With the change in the Administration, it is quite possible that a new FIO Director will be appointed by the incoming President Joseph Biden after his inauguration on January 20, 2021.
Ms. Semaya gave a detailed explanation of the Covered Agreements entered into between the United States and European Union (EU) (2017) and the United States and the United Kingdom (UK) (2018). The Covered Agreements, negotiated by the FIO appeared to solve the problem that international regulators had in dealing with multiple representatives of the United States on the international stage. Professor Kochenburger and Ms. Semaya shared their memory of the NAIC meeting in 2015 when the concept of the Covered Agreement was first introduced. Ms. Semaya recalled the day when the Covered Agreement with the EU was sent to Congress, taking the NAIC, the Insurance regulators and the industry by total surprise, just days before the Presidential inauguration. The Covered Agreements addressed three areas of insurance and reinsurance prudential measures: group supervision; reinsurance, including collateral and local presence requirements; and exchange of information between supervisory authorities.
Professor Thomas and Ms. Semaya then discussed that the states have 60 months (September 22, 2022) to implement the changes to their statutes and regulations required for the states to be in compliance with the mandates of the Covered Agreements and what actions would be required to be taken by FIO to implement preemption if the majority of the states were not in compliance after forty-two months.
Professor Kochenburger then provided an explanation of Solvency II Negotiations and the impact Solvency II has had on United States regulatory system. He explained how Article 4 of the US-EU Covered Agreement permitted US insurers and reinsurers to operate within the EU without the US parent company being subject to the group level governance, solvency, capital and reporting requirements of Solvency II. Professor Kochenburger then went on to present an overview of the International Association of Insurance Supervisors (IAIS) and the role the United States has with the IAIS. FIO is a permanent member of the IAIS Executive Committee and is represented by the FIO Director. In addition, as Professor Kochenburger explained, “TEAM USA”on IAIS is comprised of the FIO, the Federal Reserve, the NAIC and the fifty-six (56) insurance regulators representing the individual sovereign jurisdictions of the United States. A discussion was held on who really represents the United States in the IAIS and depending on whether you ask the NAIC or state regulators - then they are the representatives of the United States, whereas, it is believed that IAIS sees the FIO and the Federal Reserve Board as the representatives of the United States. There have been questions whether the IAIS has been transparent and what impact that has had on the NAIC and state regulators.
Professor Thomas provided a detailed background on the Terrorism Risk Insurance Program (TRIP), which dates back to 2002. Professor Thomas clearly explained how TRIP is broadly supported by insurers, reinsurers, commercial policyholders and state regulators. In response to questions on what is the FIO role with regard to TRIP, Professor Thomas explained how the FIO conducted a TRIP data call (voluntary) in 2016 and starting in 2017, the data calls on insurers became mandatory, with limited exemptions. He discussed that FIO has issued the “Small Insurer Reports,” which analyzed the competitiveness of small insurers in the terrorism risk insurance marketplace, which reports were submitted to Congress in 2017 and 2019.
The panel then discussed the various positive supporting roles that FIO has played in assisting the federal government on programs and issues before it. In regard to the National Flood Insurance Program (NFIP), since 2016 FIO has provided FEMA with technical insurance expertise about reinsurance and alternative risk instruments. In regard to the emerging area of InsurTech, FIO has been charged by Treasury to work as a problem solver unit with federal agencies and state regulators, as well as the NAIC. FIO has identified several major barriers regarding continued state regulation of insurance in order to carry out a smooth implementation of InsurTech: Anti–rebating; cancellation and nonrenewal notice requirements; distribution and surplus lines restrictions; paper and proof of delivery requirements; rate and form requirements. The panel took extra notice that the NAIC and the states, working with FIO, have been able to sign on 14 states on the issue of anti-rebating; and the NAIC has now adopted an amendment to its Model Act regarding Unfair Trade Practices, to now permit rebating.
The panel then explained the role that FIO continues to play with regard to Cybersecurity and Insurance. It was clear that this is an ongoing project, and to date, the FIO has encouraged the states to adopt the NAIC Insurance Data Security Model Law. FIO also recently participated in the development of the IAIS’s Application Paper on Supervision of Insurer Cybersecurity and the FSB’s Cyber Lexicon.
One of the timeliest and liveliest topics was the coronavirus pandemic (Covid - 19 ) and its impact on the insurance industry. The panelists discussed the various proposals related to business interruption being considered in Washington, by state legislatures and the private sector; and the FIO’s reaction to each proposal. It was made clear that thus far, FIO has opposed proposals that some states were considering that pandemic losses would be paid. FIO’s position is that payment for such losses would “retroactively change the terms of insurance contracts and compel coverage of COVID-19 business interruption losses” FIO believes that “such proposals fundamentally conflict with the contractual nature of insurance contracts and could have troubling implications on the insurance market.” Interestingly, the FIO has been working diligently to counsel the Secretary of the Treasury on business interruption insurance. The FIO and the Treasury continue to work with the National Economic Council, Congress, the states, the NAIC and other stakeholders to determine a methodology to address losses attributable to the current and potential future pandemics. FIO is also monitoring the volatility in the equity markets and assessing the impact of the low interest rate environment on insurers writing certain products such as variable annuities with certain guarantees.
The panelists looked at the future of the FIO and concluded that in the short term, FIO would most likely continue as it has been for the next year or so - its future somewhat dependent on the next administration. In the long term, the panelists believe that there is a role for the FIO and that there is a continuing need for a federal agency with insurance expertise. How FIO will function is dependent somewhat on how the states handle new responsibilities as group regulators and whether in the future Congress will determine whether there should be a greater federal role in the regulation of insurance.
The program ended with three (3) key takeaways:
- For Professor Thomas: “The creation of the FIO has provided the federal government with an entity to monitor and advise federal agencies (Treasury, USTR, FEMA, etc.) about the insurance sector, which is the world’s largest market. In addition, FIO has encouraged state regulators to enact laws that will enhance and modernize insurance regulation, especially in the areas of consumer protection, solvency regulations, data security, and InsurTech.
- Professor Kochenburger: “FIO has given Team USA [FS1] a federal entity to lead and coordinate negotiations with other nations and the IAIS on the development of international standards for insurance regulation. The states and NAIC continue to play a large, at times dominant role at the IAIS, sometimes at odds with FIO".
- Ms. Semaya: “If the state insurance departments continue to have difficulty getting their state legislatures to enact the necessary laws to provide appropriate regulation in a timely manner in areas like reinsurance and data security, Congress may decide to give FIO regulatory authority. In the past, the threat of the federal government creating a federal insurance regulator has spurred the states to enact the NAIC model laws – or at least substantially similar laws to the Model laws. The creation of federal regulation of insurance in the past has not been a credible threat to the state regulatory system, although there was a period of time after the passage of the Dodd-Frank Act that such a threat hung in the air and resurfaced when the concept of the Covered Agreement was first introduced at an NAIC hearing in 2015. And with the rapidly expanding international insurance market, a federal insurance authority may not be so far off.”