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Debate over fed, state, international rules intensifies

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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.

She said the timeframe “makes sense given the recent confirmation of Jack Lew as Treasury secretary.

“I think the industry, regulators and all of us are going to be surprised by the contents of the modernization report,” Stead said.

“We’re confident the report will be helpful, constructive, authoritative, and move the dial in the right direction on issues of regulatory harmonization,” added Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers.

Culturally, Wood said, “the Treasury Department hasn’t had much engagement on state insurance regulatory issues, so officials have moved cautiously, which is what accounts for the delay.

“But now that FIO is almost fully staffed and has excellent leadership, I think this is the year they’ll hit their stride,” Wood said.

The director of the FIO said today that some of the findings about potential abuses in the use of captives by the life insurance industry might find its way into the report on recommendations for modernizing and improving insurance regulation the agency will release “before July.”

FIO and Captives

Comments by McRaith at the FACI meeting that he intends to establish a task force operating out of the FIO to monitor of use of captives and special purpose vehicles (SPVs) to finance perceived excess reserves prompted state regulatory officials to make clear they would guard their turf.

Connecticut’s Leonardi, who has decried inefficiency and duplicative efforts by the FIO, immediately responded at the meeting that examination of issues involving the use of captives and SPVs was already being undertaken by the NAIC and the FIO shouldn’t establish a group within itself to examine the issue.

McRaith replied he was not interested in duplicating the efforts of the states, but needs the U.S. Treasury Department to be “fully informed” about what is going on with this type of risk transfer.

The FIO task force will be led by fellow insurance commissioner and FACI member, Washington D.C.’s William White, a former businessman and captives expert who supervises a robust captive industry in Washington.

Both Leonardi and White are active NAIC members and state commissioners on the international supervisory scene, as well, and work with McRaith in multiple arenas, representing the U.S. regulation of insurance abroad, although both have been unequivocal in public statements about who represents the U.S. abroad.

Most recently, the NAIC has called the FIO its “partner.” The FIO has said it represents U.S. interests abroad, but has not publicly iterated its statutory authority to pre-empt state laws in the international arena for some time.

The industry has acknowledged the tensions, with some calling it “growing pains,” which flared up among NAIC and FIO staff at an IAIS meeting in Singapore last year.

“My feeling then and now is that it is a duplication of effort,” Leonardi said, adding that duplications of efforts are costly, inefficient and an ineffective way to find solutions to issues.

Larry Mirel, a partner at Nelson Levine DeLuca and Hamilton in Washington, who created a large captive oversight component as Washington, D.C. insurance commissioner, said the issue is “important.”

Mirel said life insurance companies” should be allowed to develop new mechanisms for transferring risk, such as captives and SPVs, but the regulators must make sure that those new structures support and do not compromise the solvency of the insurer using them.

Mirel noted that White said at the meeting that, “how to strike that balance is a major concern for the NAIC and deserves careful attention by the Federal Insurance Advisory Committee.”

Tom Finnell, who heads FIO’s regulatory policy development and tracks the NAIC’s work at its meetings, is very interested in the issue and will work on it at the FIO, McRaith said. 

See also: Reserving emerges as key fed-state issue

Some members of FACI had wanted the investigation of the use of captives for offloading excess reserves to artificially bolster risk-based capital ratios to be the sole province of the NAIC.

An NAIC subgroup headed by Rhode Island Insurance and Banking Superintendent Joe Torti III is spearheading the issue at the NAIC and has been developing its own white paper, which has been recently re-exposed for comment under the Captive and SPV Use Subgroup.

New York’s Department of Financial Services (DFS) has for months been investigating the use of captives to soak up excess reserves and has not made its progress known except to emphasize its concern and discomfort at public meetings.

Robert Easton, insurance regulatory deputy superintendent of the DFS, who often sits in for FACI member, DFS superintendent Ben Lawsky, is dealing with the issue for the DFS.

Easton pointedly noted to FIO and FACI members that some life insurance companies have said that these types of transactions would not cease even under the more malleable principles-based reserving (PBR) regime, if and when it is finally implemented. Easton said the DFS finds this “very interesting.” 

Easton has called the risk transfer process by life insurers’ opaque, involving largely untrackable risk transfers that occur out of state and could impact the domestic industry in New York.

But the ACLI Insurers said captives are an appropriate tool.

“Many life insurers use captives because they enable effective risk management and capital efficiency,” an ACLI spokesman said. “Appropriately regulated captives are a positive component of a diverse and innovative insurance market that can help life insurers provide consumers with affordable insurance products,” the spokesman added.


A key emerging issue is legislation introduced in the House and Senate that would allow insurance producers with the option of becoming a member of the National Association of Registered Agents and Brokers or NARAB, provided they meet the professional standards set by the Association.

Membership in NARAB would streamline the licensing process for agents and brokers, enabling them to be licensed once under a single standard rather than following different standards in each state, saving time and money.

The legislation is S. 534, the National Association of Registered Agents and Brokers Reform Act of 2013. It was introduced in the Senate last week by Sen. John Tester, D-Mont., and Sen. Mike Johanns, R-Neb.

Companion legislation, H.R. 1155, has been introduced in the House by Rep. Randy Neugebauer, Tex., and Rep. David Scott, D-Ga.

The legislation has the support of the National Association of Insurance and Financial Advisors (NAIFA), a key life trade group, as well as the Independent Insurance Agents and Brokers of America and the Council of Insurance Agents and Brokers, the two key property and casualty insurance trade groups.

Rob Smith, NAIFA president, said NAIFA “encourages and supports” enactment of what is now called “NARAB II.”

Smith said the legislation is “a common-sense approach to eliminate the duplicative and burdensome state-by-state non-resident licensing.”

He said the legislation “will be a win for insurance consumers and for agents both, reducing unnecessary costs and establishing standards that exceed existing requirements.”

And, because of revisions made to prior versions of the bill, the NAIC now says it is a strong supporter.

Jon Jensen, president of Correll Insurance Group, Spartanburg, S.C. and chairman of the Government Affairs Committee of the Independent Insurance Agents and Brokers of America. said in his testimony at the hearing that, in order to join NARAB, an insurance producer must be licensed in good standing in his/her home state, undergo a recent criminal background and satisfy the criteria established by NARAB.

Jensen made his comments at a hearing on the legislation March 19 convened by the Securities, Insurance and Investment Subcommittee of the Senate Banking Committee.

He noted that a criminal background check was “long a criteria requested by the NAIC.”

As a result of concessions made by industry in the proposed legislation, an NAIC official said at the hearing that the group would support enactment.

“Today’s bill contains improvements over versions introduced in previous Congresses, and hopefully with support from both regulators and producers, it will continue to attract bipartisan co-sponsors and votes as it works its way through the legislative process,” Montana’s Lindeen said.

“The NAIC recognizes that streamlined non-resident producer licensing is an important goal, but I want to emphasize that efforts to do so must not undermine current state authorities to protect insurance consumers and take enforcement action against malfeasant producers,” Lindeen said.

“State insurance regulators take our consumer protection responsibilities very seriously, and our support of this legislation is contingent on the preservation of our ability to carry out that mission as we regulate our markets and enforce state insurance laws,” she added.

The Insured Retirement Institute (IRI) study released in connection with the hearing found that, “Considering that most financial advisors, 83 percent, are licensed in multiple states, the redundant processes are viewed as a burden to financial advisors.”

“Time spent on redundant licensing requirements is time not spent servicing clients and focusing on their needs,” IRI President and CEO Cathy Weatherford.

“The time has come to advance NARAB II. This bipartisan and common-sense legislation promotes the efficient and cost-effective licensing of thousands of financial advisors across the country, while maintaining important consumer protections.”

She urged Congress in her statement to support and advance this legislation to establish a streamlined licensing process, and at the same time, retain states’ authority to regulate the marketplace.”

The IRI study is part of a research initiative to identify regulatory barriers that impede broker-dealers’ ability and financial advisors’ willingness to sell lifetime income products.

IRI officials said in a statement released at the hearing that the study found that 80 percent of broker-dealers said state regulations have a negative effect on the ease of conducting annuity sales. In fact, while 46 percent of broker-dealers say they would like to sell more annuities, 83 percent of broker-dealers and 76 percent of financial advisors believe it takes considerably more time to sell annuities compared to other investments.

IRI officials said that its study found that the average financial advisor spends nearly 22 hours per year to complete continuing education requirements and licensing renewals to sell annuities—compared to just under 16 hours to complete continuing education requirements and licensing renewals to sell securities.

Additionally, seven in 10 broker-dealers believe that state insurance licensing can be ambiguous or poorly defined, and eight in 10 broker-dealers believe that state insurance regulations are duplicative, the IRI study found.

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