Be wary. While there is disagreement amongst advocates of continued state regulation of insurance, there is considerable evidence that as federal regulators start to implement the Dodd-Frank financial services reform act, they will have the authority to more than merely look over the shoulder of state regulators within several years–regardless of whom is in power.
As federal regulators start to turn the law into regulations, their initiatives show that they have the power to ensure that they won't ever be caught off-guard again by a crisis on the magnitude of AIG.
Just check the fine print. The request for comment on implementation of a provision of the law creating the Financial Stability Oversight Council, and the powers granted to an arm of the agency, the Office of Financial Research, puts out in boldface the authority of federal regulators to monitor insurance companies and holding companies.
"It does provide authority for the OFR to look into the insurance companies, not only the holding companies, and therefore get around state regulators," said Fred Bellamy, a partner at Sutherland, Asbill & Brennan LLP in Washington, D.C. "It will allow the FSOC to get information about insurance companies."
Mary-Jane Wilson-Bilick, another Sutherland partner, agrees. "The definition of financial institution in the Dodd-Frank bill explicitly includes insurance companies," she said.
And, she said, the OFR has "strong rule-making power to standardize all the types and formats of data that has to be collected–and it also has subpoena power."
Moreover, the OFR, which will be an arm of the Treasury Department, has authority under the law to develop tools for risk management and monitoring and developing best practices. It will also be charged with collecting and maintaining a database on all financial companies, including insurance companies, she said.
And, the Treasury's new research and analysis unit has the authority to develop the metrics for reporting risks on financial stability. "These are considerable powers," Wilson-Bilick said.
Francine L. Semaya, a New York Insurance regulatory attorney who chairs the Federal Involvement in Insurance Regulation Modernization Task Force of the Tort Trial and Insurance Practice Section of the American Bar Association, however, disagrees.
