By most accounts, the Federal Insurance Office's report on opportunities for modernization in the insurance industry did not portend the end of the current state-based system of insurance regulation. But the definition of effective, efficient regulation of the industry varies based on the size or line of business of each particular company, says Michael Nelson, chairman of law firm Nelson Levine de Luca & Hamilton.
"One of the key concepts woven into the discussion around regulation is that insurers will be eventually, for efficiency, be grouped into three tiers," Nelson says. At the top will be the biggest internationally active insurers who might qualify as "too big to fail." Then, the middle tier consists of those large insurers that aren't quite on "giant" level, and at the bottom will be smaller insurers right down to those who operate in one state only.
The conversation around insurance regulation in the US is informed by the conversation globally, Nelson adds -- and the FIO report shows that the US is joining other bodies in pressing forward for needed reforms that can increase efficiency in the industry. In short, though the FIO has been chided for the massive delay in releasing this report, now that it's here, insurers can expect real attempts at action.
"There's an equally large debate on a global level, and you have to look at this in that context," Nelson says. "The International Association of Insurance Supervisors discussion [around COMFRAME] is moving ahead and they have suggested that they will be putting very specific steps each of the next three years."
What will stand in the way of getting to a new regulatory environment? The FIO report calls for state and federal legislation, and as Nelson notes, "getting the insurance industry to accept certain aspects of these processes is going to take some time." And, there's a natural predilection to cynicism that any large regulatory body -- in this case, the IAIS -- will stick to its timelines.
But it's clear the federal government wants to see some changes in the insurance regulatory process, Nelson says. Specifically, the document talks about participation in supervisory colleges, for example. And so, "if the state-based system is not unifying or modernizing quick enough, we may [see the FIO] resort to some sort of federal regulation," he explains.
Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio