Nearly two years after the financial crisis hit, US Congress has passed sweeping financial services reform. The good news is that the insurance industry has not been anywhere near as badly swept up in the backlash as some initially feared. The bad news is – at the least – it will still be a pain for the industry.
Although banks were the main target of reform, the Dodd-Frank Wall Street Reform and Consumer Protection Act contain some direct insurance implications. These are the creation of a Federal Insurance Office (FIO), to be housed within the Department of Treasury, and the streamlining of surplus lines and reinsurance regulation.
Given the fears about how bad the reform could be, the US property/casualty industry seemed pleased with the outcome of the act. The FIO’s authority falls well short of a regulatory role. And the surplus reform has been long-awaited and is a welcome development.
For example, David Sampson, chief executive officer of the Property Casualty Insurers Association of America, commented: “We are pleased that Congress ultimately limited the scope of the Federal Insurance Office and recognized that it should not be a duplicative federal insurance regulator.
The office is restricted primarily to monitoring the industry and advising Congress and federal agencies on insurance issues.” PCI noted that the office is required to seek data from state regulators fist before imposing costly and burdensome data demands on insurance companies, a sensible idea.
Raters were also positive. Standard & Poor’s (S&P) does not expect the legislation to have an immediate credit impact onthe ratings of US insurance and reinsurance companies. “Indeed, we believe several aspects of the reform bill could help US insurance/reinsurance companies maintain their competitive positions in the global marketplace,” it gushed.
It believes the industry will benefit from the creation of a central point for insurance industry information in the form of the FIO, which will be headed by a director appointed by the Treasury Secretary.
The FIO will represent the US in the International Association of Insurance Supervisors and will assist in negotiating covered agreements. This could help greatly in efforts for the US regulatory system to achieve equivalency with others. Right now, the state system leaves outsiders confused. For example, the complexity of state regulation led to it being left out of the first wave of equivalency testing by the European Union.
S&P warned that US reinsurers would be particularly vulnerable to increased operational costs and lower profit margins if the US regulatory system were to fail to gain full equivalency recognition. Having just one voice to speak with on the equivalency issue should help a lot, then.
But most domestic US insurance companies wouldn’t care too much about that. I can’t help thinking that for the majority of the US insurance market this reform will come as a bit of a drag. For the most part, this just adds another layer of compliance, and one more body to answer to, on top of 50 state regulators, hardly any of which already can agree on much.
Although it does not have regulatory powers, the FIO does have authority to pre-empt state law if it is determined that state law is inconsistent with an international agreement and treats a non-US insurer less favourably than a US insurer. However, determinations by the FIO that a state law is inconsistent are subject to de novo review, according to a client briefing from law firm Dewey & LeBoeuf – which means the FIO’s determinations will not be accorded deference by the courts.
But the industry should be concerned that the FIO could be an indication that the federal government intends to play a larger role in the regulation of the US insurance industry. The exact role the FIO will play, and the extent to which it will meddle in insurers’ and state regulators’ affairs, is unclear.
The FIO will monitor all aspects of the insurance industry and have an advisory voice on the Financial Stability Oversight Council. The FIO can also recommend that an insurer be subject to regulation as a non-bank financial company supervised by the Federal Reserve System.
This is not a good thing to be. Under the act, diversified insurance groups with more than $50bn in consolidated assets and non-bank financial companies or bank holding companies become subject to an assessment on large financial firms.
“Expectations are that these assessments will raise up to $19bn, which will offset some of the costs and expenses of the bill’s measures,” S&P said. “In our view, no insurance company (excluding American International Group) poses a systemic risk to the financial system. As such, the insurance groups subject to this assessment will likely make disbursements that are not specifically related to the risk borne by the insurance-reinsurance industry and will generally decrease absolute capital levels.”
The FIO will also produce a plethora of reports. And no less than 18 months after enactment, the FIO director must submit to Congress a report on how to modernise and improve the system of insurance regulation in the US. All of this means there could be further changes – and an expansion of federal involvement in insurance regulation – to come.