January 10, 2012

Download - FIO Focus, Issue No. 2 [.pdf]

FIO Focus is a periodic newsletter providing information about, and updates related to, the Federal Insurance Office. Prior issues of the FIO Focus have included summaries of public comments submitted in connection with the FIO's study of the insurance industry and discussions concerning the FIO's responsibilities.

Interested Party Comments

As part of its study of the insurance industry, the Federal Insurance Office (FIO) requested comments from interested parties on twelve different subjects. The comment period closed on December 16, 2011, although comments are still being accepted. A total of 143 comments were submitted during the comment period. Below is a brief summary of comments made available on Regulations.gov between December 14, 2011, and January 1, 2012, pertaining to the following subjects: systemic risk, capital standards, consumer protection provided by state regulation and the potential for federal consumer protection regulation. The next issue of "FIO Focus" will summarize comments submitted during this period relating to national uniformity, regulation of insurance companies on a consolidated basis, international coordination, regulations of certain lines at a federal level, regulatory arbitrage, international developments impacting federal regulation and resolution authority.

• Large interconnected insurers that sell derivatives and have large books of credit default swaps (CDS) are systemically risky and the FIO should work with the Financial Stability Oversight Council (FSOC) to develop additional regulations for these companies.
• Insurance and reinsurance do not present systemic risk to the financial system.
• Standards being used to evaluate systemic risks in banks should not be applied to insurers without accounting for the differences in business models.
• Methods used to determine systemic risk are not transparent.
• Insurers determined to be systemically important should not face multiple layers of supervision.
• Insurers selling annuity products may present a systemic risk.

• Support for the NAIC's Solvency Modernization Initiative.
• Federal responsibility for capital supervision may result in state regulators not having access to the solvency information they need to determine if rates are sufficient.
• Life insurers should include a confidential report of the modeling methods they use with their annual statements.
• Support for an Own Risk and Solvency Assessment (ORSA) requirement.
• Financial regulation should embrace voluntary internal assessments.
• A principles-based approach should be used for the evaluation of the reserves of life insurers.
• Uniform standards should be developed to determine insolvency.
• Credit should be granted to a group for capital held at the entity level.

• The FIO should study whether underwriting requirements may be proxies for either discriminatory practices or practices which affect underserved communities' access to the insurance market.
• The FIO should encourage states to elect commissioners and model regulations after California which, for example, requires prior approval for rate increases and limits the information that may be used in underwriting.

• A federal regulator should be directly involved in the oversight of the insurance industry.
• The FIO should hire regulatory staff or the Consumer Financial Protection Board (CFPB) should be given responsibility for regulating insurance products.
• Federal regulation of insurance may result in regulators being less accessible to consumers than under the current state system.

Preemption Authority

The Dodd-Frank Act grants the FIO Director the power to, in limited circumstances, preempt state laws. The preempted law must provide less favorable treatment to foreign insurers than US companies and must be inconsistent with a "covered agreement."

The Dodd-Frank Act defines a "covered agreement" as a "written bilateral or multi lateral agreement regarding prudential measures with respect to the business of insurance or reinsurance that: (A) is entered into between the United States and one or more foreign governments, authorities, or regulatory entities; and (B) relates to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under State insurance or reinsurance regulation."

To exercise the preemption authority, the FIO Director must inform the United States Trade Representative and the appropriate state representatives regarding the potential inconsistency. Additionally, the FIO Director must publish a notice regarding the potential inconsistency in the Federal Register, allowing a reasonable opportunity for comments. The FIO Director cannot preempt state antitrust laws governing rate making, underwriting, sales practices or coverage requirements.

If after reviewing the comments, the FIO Director determines that an inconsistency remains, the Director must then:

• Notify state representatives of the "determination and extent of the inconsistency";
• Establish a reasonable period of time, not less than 30 days, before the preemption will be effective; and
• Notify the Committee on Financial Services and the Ways and Means Committee of the House of Representatives as well as the Banking, Housing and Urban Affairs Committee and Committee on Finance of the Senate.

After the allotted "reasonable period of time," if the basis for the preemption continues, the FIO Director is to inform the appropriate state representatives and publish a notice in the Federal Register that the preemption will become effective on a specific date.

No later than September 30th of each year, the FIO Director must submit an annual report to Congress explaining any use of the preemption authority during the prior year.

FIO Resource Team