While the battle over the budget deficit, gun control and immigration grab the headlines coming out of Washington, an equally intense debate is underway over insurance regulation.
As noted by a Congressional Research Service (CRS) official at a congressional hearing last month, insurance has been regulated by the states for more than 150 years.
The big question is not whether that will change; it will certainly have to.
The critical issue is how, and to what extent. That is because technology, competition — both domestic and international — economic pressures, and regulatory crises, such as the need for the federal government to intervene to save AIG, are certainly going to reshape the future of insurance regulation over time.
The announcement that the long-awaited report on recommendations for modernizing and improving insurance regulation will be released by the insurance office at the U.S. Treasury Department by or before July is expected to focus the debate, at least to some extent.
But, the role of this Federal Insurance Office (FIO) is also becoming a flash point.
At a recent meeting of the Federal Advisory Committee on Insurance (FACI) that advises the FIO, the Office’s first director, Michael McRaith, created — over a state regulator’s objection — a FACI task force that will be examining the national implications on solvency and balance sheets of life insurers’ use of captives and special purpose vehicles.
These tools are ostensibly being created to absorb perceived redundant reserves accruing from term life and universal life sold with secondary guarantee riders.
This is a huge concern for many publicly-traded companies in the life insurance industry; they are watching regulatory developments with a keen eye, wondering how deep the FIO will go.
For example, one representative of the American Council of Life Insurers (ACLI) said to a reporter after a panel discussion on federal regulatory oversight at the Networks Financial Institute (NFI) seminar March 20 that it was unfortunate that the captives discussion at the FACI meeting was one-sided.
Kim Dorgan, head lobbyist for the ACLI, made it clear that the discussion was weighted toward concerns and not some of the advantages the industry sees with captives use. ACLI continues to support captives for holding excess reserves.
And, a representative of the mutual life insurance industry, Mike Sproule of New York Life, rang a warning bell at the FACI meeting. The executive said the misuse of these vehicles by stock companies could tarnish the whole industry.
State regulators, who get their cues from the industry and also are under pressure from state governments, are concerned about the FIO’s intentions.
In comments at a meeting of state legislators in Washington, D.C. last month, Ben Nelson, CEO of the National Association of Insurance Commissioners (NAIC), warned the FIO folks to “stay in their own lane,” and not get involved in statutory accounting principle issues that should be the total turf of state regulators.
The root of the clash over special purpose vehicles is that the states have a huge conflict over the issue.
Use of captive insurers regulated off balance sheet raises safety and soundness issues that are the reason Congress created the FIO.
But, states want to facilitate creation of these vehicles as a revenue raiser.
Monica J. Lindeen, Montana’s securities and insurance commissioner and NAIC vice president, acknowledged in Washington as a speaker at the Networks Financial Institute conference that state budgets are strapped.
And, one of the most vocal critics of FIO intervention into NAIC territory is Tom Leonardi, Connecticut insurance commissioner and former business owner. Leonardi is head of the insurance supervisory branch of the state government that, like many others, has recently welcomed the captives industry as an economic driver after passing enabling legislation in 2011.
“Insurance is one of the most significant economic drivers of our state and there is no place better to grow the industry in than the Insurance Capital,” Gov. Dannel P. Malloy said in a statement last August welcoming the state’s first captive insurance company, Thomson Reuters Risk Management Inc. (TRRMI).
“The much-needed changes we made to outdated laws have done exactly what we intended — encourage and attract more business and revenue. I am proud to welcome TRRMI, and I am confident that because of the environment we have established in Connecticut, more captive insurance companies will put down roots here,” Malloy stated then.
“Let’s be honest – for some states – it’s an economic development tool,” McRaith said in creating up the captives task force atthe FACI meeting March 13. McRaith was responding to Leonardi’s objection that the effort was duplicative.
The issue was also raised at Securities, Insurance and Investment Senate Banking Subcommittee hearing dealing with legislation that would create the National Association of Registered Agents and Brokers Act (NARAB II).
This bill would create a non-profit membership organization to streamline the licensing process for insurance agents and brokers operating outside of their home states. Insurance agents and brokers, the NAIC’s Lindeen as well as lobbyists from the Insured Retirement Institute (IRI), voiced strong support for legislation that would create a streamlined non-resident producer licensing system.
Lindeen called NARAB II’s passage “99 percent” certain during an address at the NFI conference and on both days described support for the legislation a “love fest.”
However, NAIC consumer advocate, economist and FACI member Birny Birnbaum, said that it “seems like state insurance regulators are so concerned about the creation of federal insurance regulation with a federal regulator, that the states are willing to cede state authority over insurance to a de facto federal regulator as long as that de facto federal regulator is not a federal agency. But, in the process consumers get an organization with public responsibilities but not public accountability.”
Birnbaum, an economist by trade, noted that, “If the states are going to give up their regulatory authority to a nongovernmental organization, then the consumers — the people purchasing products from these kinds-of regulated producers — should be part of the governing board of the non-governmental organization.”
Baird Webel, a specialist in financial economics at the CRS testified that creating the NARAB II system would lead to increased competition in the insurance industry.
And, Webel sought to reassure members of the committee that the bill “is not a not a federal takeover of the [insurance regulatory] system.”
But, he acknowledged, “that there are insurance legislators out there in the country that do not trust the federal government that much.”
Their concern, Webel said, was that it would turned out to be like the 1987 legislation that pre-empted risk retention groups from state regulation, and, therefore, robbed the states of revenues.
And, international regulators are also involved.
The International Association of Insurance Supervisors (IAIS) is currently honing capital standards for those insurers it deems to be global systemically important insurers, or G-SIIs, including loss absorbency, increased capital, enhanced supervision, and resolution schemes applicable to them.
A key issue is whether capital standards for G-SIIs should be the same as for banks; a decision by May is expected.
G-SII designations are expected from the Financial Standards Board (FSB) of the G-20, on IAIS recommendations, at the end of June.
A FIO official noted late last month, also at the NFI, that they are pushing to align domestic criteria and methodology for the U.S. designations of significantly important financial institutions (SIFI) as determined by the Financial Stability Oversight Council (FSOC) with the IAIS measurements.
David Snyder, vice president for international policy at the Property Casualty Insurers Association of America (PCI), said, in reference to an IAIS meeting in Basel the third week in March, that the issues surrounding system risk with regard to insurers are “highly complicated and very different from banking.”
He said that, “We much appreciate the care and deliberation that IAIS is putting into this issue so that they get it right the first time.”
Specifically, Snyder said, “traditional insurance, regulated comprehensively as it is, does not pose a systemic risk to the international financial system. And we believe the same is true of non-traditional insurance as well that is subject to insurance regulation.”
At the same time, a study released late last month indicating strong public support for enhanced regulation of financial advisors is likely to increase public support for a new uniform standard being crafted by the Securities and Exchange Commission (SEC) and the Employment Benefit Security Administration unit at the Department of Labor.
The Financial Planning Coalition said its survey showed that 84 percent of Americans agree with the statement that the federal government should regulate advisors to protect investors and build consumer confidence.
The SEC on March 11th published for comment a request for data and other information from the public and interested parties about the “benefits and costs” of the current standards of conduct for broker-dealers and investment advisors when providing advice to retail customers, as well as alternative approaches to the standards of conduct.
SEC staff also said that the agency is beginning work on a regulation establishing a streamlined summary prospectus for variable annuities.
Federal Insurance Office
The FIO has come under pressure from members of Congress over the release of the FIO report on how state insurance regulation should be modernized. The report was due to be released in January 2012, but the Obama administration decided to hold off out of concerns that it would become a political issue in an election year.
It was mandated by a provision of the Dodd-Frank Act financial services reform law.
There are other FIO reports outstanding that are expected to come out at the same time that will also play a role in the debate.
These include the breadth of the global reinsurance market and the ability of state regulators to access reinsurance information.
Conservative members of Congress are just chafing at the bit at the opportunity to use the report’s likely recommendations for greater federal oversight of insurance to criticize the administration for needlessly proposing to expand the federal government.
Rep. Jeb Hensarling, R-Texas, new chairman of the House Financial Services Committee, issued a statement in February demanding the release of the long-awaited report.
In an oversight plan submitted to the Committee on Oversight and Government Reform and the Committee on House Administration, the Financial Services Committee urged the FIO to submit “long overdue reports without further delay.”
But, Sue Stead, chair of the insurance regulation practice group at Nelson Levine DeLuca and Hamilton in Washington, said she was “encouraged” by McRaith’s comments.
“This is the first time he has provided a clear signal to his advisory committee as to when the reports will be issued,” Stead said.