WASHINGTON BUREAU — The Financial Stability Oversight Council (FSOC) provisions in the Dodd-Frank Wall Street Reform and Consumer Protect Act may be conflicting with the Federal Insurance Office (FIO) provisions.
Insurance industry lawyers are talking about the potential collision as FSOC begins to form plans for monitoring large insurers.
The FSOC is responsible for helping federal regulators track risks that could pose a threat to the U.S. financial system, and it is working on a proposal describing the criteria it will use to determine whether an insurer presents enough of a potential threat to economic stability to be monitored by the Federal Reserve Board.
The FIO is supposed to conduct a thorough review of insurance regulation this year and deliver a report that includes recommendations for ways to improve the insurance regulatory system in early 2012, according to Sam Caligiuri, a partner at Day Pitney L.L.P., Hartford.
Depending on how broadly the FSOC defines federal power in its final regulations, the FSOC regulations could have the effect of pre-empting the recommendations that the FIO is supposed to make to Congress in early 2012, Caligiuri says.
“In a sense, you have two facets of Dodd-Frank arguably working in conflict with one another,” Caligiuri says. “What remains to be seen is how effective the federal government will be in recognizing how different insurance is from banking and, as a result, have the regulations reflect those differences as well as an actual functional respect for the ongoing role of state insurance regulators.”
The quality of the federal government’s understanding of how the insurance industry actually work “will impact the effectiveness of the federal government’s oversight role over insurance to whatever extent is decided in the final rule,” Caligiuri says.
Eric Arnold, a partner specializing in insurance regulation at Sutherland, Asbill & Brennan L.L.P., Washington, notes that, in letters in commenting on the FSOC’s initial criteria proposal, the insurance industry has questioned the FSOC’s authority to promulgate a regulation that provides no analytical framework for determining whether an insurer constitutes a potential threat to financial stability.
Congress is pressing the FSOC to wait until the FIO director post is filled and an independent insurance expert is serving on the FSOC before promulgating a rule establishing insurer systemic risk determination criteria, Arnold says.