President Barack Obama’s signing of the Restoring American Financial Stability Act of 2010, also known as the Dodd-Frank Act, was an act of closure on a period of intense debate about the shape of financial services regulation in the wake of the financial crisis. Some months before Senate approval of the legislation on July 16 it had become clear that no major duplicative federal insurance would be established, but as with other financial services industry sectors, the exact impact of the law on the insurance industry is yet to be seen, particularly with regard to how the Federal Office of Insurance (FOI) within the U.S. Dept. of Treasury will function.
Passage of the bill is a “milestone” in the history of insurance regulation, says Howard Mills, chief adviser for Deloitte's national insurance group and former New York Superintendent of Insurance. “The law will bring significant change, though not as significant as it could have been, which is largely to the benefit of the insurance industry,” he says.
Mills notes that the insurance industry will not fall under the authority of a new Bureau of Consumer Financial Protection within the Federal Reserve. “This will be a very aggressive new agency,” Mills says. “The insurance industry made the case that every state regulator has a consumer function. If there had been a duplicative layer, that would have been very troublesome for the industry.”
The American Council of Life Insurers (ACLI) greeted the legislation generally and the advent of the FIO in particular with cautious enthusiasm.
“The nation must rely on the expertise and professionalism of the agencies to implement [Dodd-Frank] in a way that honors its underlying spirit of reform, but does not hamper well-functioning markets and the services we provide our policy owners through inappropriate or excessive regulation,” commented Frank Keating, president and CEO, ACLI, in an official statement.
“In that spirit, we welcome the creation of the Federal Insurance Office, the first federal agency with responsibility for understanding and advising policymakers on a broad range of insurance issues,” Keating continued. “While the federal government has long monitored discrete aspects of insurance, we hope the new FIO will provide policymakers with expert advice on the full spectrum of industry much as federal banking and securities regulators do for their industries.”
The Property Casualty Insurers Association of America, through a statement by president and CEO David A. Sampson, characterized the President’s signing of Dodd-Frank as “half time” in the overall financial reform process. “The rule development stage will be just as important for identifying and minimizing overly broad regulation that will result in negative consequences for consumers,” he said.
Sampson expressed satisfaction with the limited scope of the FIO provided for in the Act but noted that federal regulators within the FIO would have “vast discretion” in how they exercise the oversight provided by Dodd-Frank.
While the description of the FIO in Dodd-Frank limits the new body to monitoring the industry and advising Congress and federal agencies on insurance issues, it remains unclear how the FIO will function, though has the potential to do considerable good, suggests Deloitte’s Mills. The FIO has the potential to help streamline inefficient aspects of the state regulatory process, such as rate and form filing and the issuance of product approval. The FIO can also provide a single voice on international issues, relieving insurance companies of dealing with the 50-plus regulators of the state system on such matters, Mills notes.
“The downside of the FIO will depend on how activist the body will be under its first director,” Mills cautions. “If you get a person in there who seeks to expand jurisdiction and comes into conflict with the state regulators, then you have an industry caught in the middle, which would be vexing.”
While observers speak about the Dodd-Frank legislation as a standalone bill, Mills says that its impact must be assessed in conjunction with health reform legislation. “With the healthcare bill the federal government has established health insurance exchanges through the Department of Health and Human Services [HHS] which have their foot in the door in every state insurance department,” he explains. “You can’t tell me that the feds at the HHS aren’t, at some point, going to talk to the Treasury Department through the FIO.”
Financial reform also raises questions about the possibility of the establishment of an optional federal charter, Mills notes. Speaking at the 2010 summer meeting of the National Conference of Insurance Legislators (NCOIL), Sen. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, said that the committee would debate optional federal charter (OFC) during 2011.
The concept of the OFC in earlier debates is one whereby insurers would be able to choose between existing state regulators or a new federal regulator created for the purpose. Frank’s support of a new push for OFC raises questions about the nature of the FIO, according to Mills. “Now we have federal regulator — the FIO — and your primary regulator is on the state level. How does OFC work in that construct? Do you have the option to leave states for FIO? If so, you’re going to have to change the FIO, and that opens a whole new can of worms.”