If 2010 taught us anything, it was that the road ahead in 2011 and beyond is one that demands close scrutiny while the regulatory landscape reforms itself. At the heart of this change is the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the key provision of its insurance section, the establishment of the Federal Insurance Office.

The objective of the FIO is to monitor the insurance industry by identifying regulatory gaps or system risk, and to recommend to the new Federal Stability Oversight Council which insurers should be deemed as “non-bank financial holding companies” subject to oversight by the Board of Governors of the Federal Reserve. Another role of the FIO is to work with the U.S. Trade Representative in cases where state law is inconsistent with negotiated international agreements, and to pre-empt state law when it is determined that the state law is inconsistent with a negotiated international agreement or treats a non-U.S. insurer less favorably than a U.S. insurer. It is important to note that the FIO’s pre-emption powers stop there, but many in the industry remain concerned about the prospect of dual state and federal requirements going forward.

One area ripe for such multi-layered requirements exists in a section of Title V that relates to information gathering. The general purpose of this provision is to allow the FIO the ability to collect data from insurance companies in order to determine systemic risk. The law also provides the FIO with the ability to enter into information-sharing agreements with others–the NAIC being a prime contender–to analyze and disseminate data. This, some in the industry fear, sets the stage for not only multi-layered information requests, but the potential compromise of proprietary company information.

Meanwhile, Dodd-Frank also calls for a study and report to Congress on how to modernize and improve insurance regulation itself. The study is due to be completed by January 2012, and the final report is widely expected to list reasons why the insurance industry should be overseen on the federal level, rather than the existing state-based form of oversight. The law specifically dictates that the study weigh the consequences of subjecting insurance companies to a federal resolution authority, including the impact the new oversight might have on the operation of state guaranty funds, policyholder protection and, in the case of life insurers, on the loss of the special status of separate account assets and separate account liabilities.

The 2010 midterm elections set the stage for massive change, with its 37 gubernatorial elections and insurance commissioner’s races in four states. When all is said and done, the NAIC will see the departure and arrival of some 25 insurance regulators. In addition, numerous senior-level regulators with vast knowledge and NAIC expertise are reaching retirement age. With many states presently facing significant budgetary constraints, some of those positions may go unfilled. This, at a time when there is no guarantee that the FIO’s yet-to-be-determined director will have any appreciable insurance expertise.

All told, the fear is that the realized and expected loss of institutional knowledge may put the NAIC at a disadvantage in dealing with the new FIO, as an activist director there might look to get involved in state regulatory affairs, and might have an easier go at doing that with such a large freshman class of state insurance regulators manning the door. We shall see.