FIO Director Michael McRaith (AP Photo/Paul Sakuma)

The long-delayed U.S. Treasury’s Federal Insurance Office (FIO) modernization report concludes that the debate at present is not whether insurance regulation should be state-based or federal, but whether there are areas in which federal involvement in regulation under the state-based system is warranted. 

Treasury officials have a keen interest in the consumer’s access to insurance and in the financial stability of the marketplaces with insurance as a key lynchpin. Recent evidence of this includes recommendations for oversight of private mortgage insurance and mortgage insurance pools markets, as well as in personal lines like auto with respect to the practice of risk-profiling groups and individuals based on personal information. Treasury also makes no bones about its commitment to being a guiding hand in international insurance regulatory areas.

The industry as it is has a role for federal government, according to Treasury. The report clarifies not whether federal involvement is necessary but how best to improve the uniformity and address realities of a globally active and diversified insurance industry, according to a Treasury official.

The FIO’s flagship modernization report calls for federal mortgage insurance oversight for all aspects of the mortgage business. This is a recommendation which would have to be enabled by an act of Congress. Speculation on mortgages helped caused the financial meltdown in 2008. 

The Federal Home Loan Finance Agency overseeing Fannie Mae and Freddie Mac already set capital standards for mortgage insurance companies that want to do business with Fannie and Freddie, which is de facto federal regulation. “As Fannie and Freddie are wound down, those credit risk takers need to be well-capitalized,” a Treasury official said, “especially as they may be guaranteeing mortgages at a pool level. There has to be safety and soundness and prudential supervision.”  

The states would still retain licensing of producers and premium taxes under the Treasury proposal. 

Treasury also made clear that it would stay very involved in international regulation as insurance is ever more global and as many insurers in the U.S. are owned by overseas companies.

It endorses, as expected, a cautious proceeding on principles-based reserving (PBR). 

The report states that “the basic question with respect to reforming any aspect of insurance should be whether federal involvement is warranted at this time and, if so, in what areas.” 

“The necessity for federal involvement should depend on assessment of questions such as whether states can take measures to regulate effectively and with uniformity the degree of the national or federal interest, and the nexus of the issues and the firms with the global marketplace,” the report states. 

The report recommends 18 areas for “short-term” insurance regulation improvement, centering around capital adequacy, reform of insurer resolution practices and marketplace regulation and nine areas of direct federal involvement in regulation.

The report concludes that insurance regulation in the United States is best viewed in terms of a hybrid model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths and opportunities that each brings to improving solvency and market conduct regulation, according to Treasury. 

One of the strongest  areas of federal intervention proposed is in mortgage insurance, reinsurance collateral and the monitoring of National Association of Registered Agents and Brokers Reform Act (NARAB). 

The report makes clear FIO has authority to monitor the affordability and accessibility of non-health insurance products to traditionally underserved communities. FIO will study the appropriate boundaries of use of personal information for insurance pricing and coverage purposes.

Many of the state-based recommendations are efforts already underway by the National Association of Insurance Commissioners (NAIC), although FIO would like to see a third party review accreditation for states for the sake of actually abiding by uniform standards. 

The report was issued today but was due to Congress in late January 2012.

The state-directed recommendations are, as listed: 

1) For material solvency oversight decisions of a discretionary nature, states should develop and implement a process that obligates the appropriate state regulator to first obtain the consent of regulators from other states in which the subject insurer operates.

2) To improve consistency of solvency oversight, states should establish an independent, third-party review mechanism for the  NAIC Financial Regulation Standards Accreditation Program.

3) States should develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives.

4) State-based solvency oversight and capital adequacy regimes should converge toward best practices and uniform standards.

5) States should move forward cautiously with the implementation of principles-based reserving and condition it upon: (1) the establishment of consistent, binding guidelines to govern regulatory practices that determine whether a domestic insurer complies with accounting and solvency requirements; and (2) attracting and retaining supervisory resources and developing uniform guidelines to monitor supervisory review of principles-based reserving (PBR).

6) States should develop corporate governance principles that impose character and fitness expectations on directors and officers appropriate to the size and complexity of the insurer.

7) In the absence of direct federal authority over an insurance group holding company, states should continue to develop approaches to group supervision and address the shortcomings of solo entity supervision.

  1. State regulators should build toward effective group supervision by continued attention to supervisory colleges.
  2. States should: (1) adopt a uniform approach to address the closing out and netting of qualified contracts with counterparties; and (2) develop requirements for transparent financial reporting regarding the administration

10) States should adopt and implement uniform policyholder recovery rules so that policyholders, irrespective of where they reside, receive the same maximum benefits from guaranty funds.

11) States should assess whether or in what manner marital status is an appropriate underwriting or rating consideration.

12) State-based insurance product approval processes should be improved by securing the participation of every state in the Interstate Insurance Product Regulation Commission (IIPRC) and by expanding the products subject to approval by the IIPRC. State regulators should pursue the development of nationally standardized forms and terms, or an interstate compact, to further streamline and improve the regulation of commercial lines.

13) In order to fairly protect consumers in all parts of the United States, every state should adopt and enforce the National Association of Insurance Commissioners (NAIC) Suitability in Annuities Transactions Model Regulation.

14) States should reform market conduct examination and oversight practices and:  require state regulators to perform market conduct examinations consistent with the NAIC Market Regulation Handbook;  Seek information from other regulators before issuing a request to an insurer; Develop standards and protocols for contract market conduct examiners; and (Develop a list of approved contract examiners based on objective qualification standards.

15) States should monitor the impact of different rate regulation regimes on various markets in order to identify rate-related regulatory practices that best foster competitive markets for personal lines insurance consumers.

16) States should develop standards for the appropriate use of data for the pricing of personal lines insurance. 17) States should extend regulatory oversight to vendors that provide insurance score products to insurers. 18) States should identify, adopt, and implement best practices to mitigate losses from natural catastrophes.

Areas for direct federal involvement in regulation are listed as:

1) Federal standards and oversight for mortgage insurers should be developed and implemented. 

2) To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the United States Trade Representative  (USTR) pursue a covered agreement for reinsurance collateral requirements based on the NAIC Credit for Reinsurance Model Law and Regulation.

3) FIO should engage in supervisory colleges to monitor financial stability and identify issues or gaps in the regulation of large national and internationally active insurers.

4) The National Association of Registered Agents and Brokers (NARAB) Reform Act of 2013 should be adopted and its implementation monitored by FIO.

5) FIO will convene and work with federal agencies, state regulators, and other interested parties to develop personal auto insurance policies for U.S. military personnel enforceable across state lines.

6) FIO will work with state regulators to establish pilot programs for rate regulation that seek to maximize the number of insurers offering personal lines products.

7) FIO will study and report on the manner in which personal information is used for insurance pricing and coverage purposes.

8) FIO will consult with Tribal leaders to identify alternatives to improve the accessibility and affordability of insurance on sovereign Native American and Tribal lands.

9) FIO will continue to monitor state progress on implementation of Subtitle B of Title V of the Dodd-Frank Act, which requires states to simplify the collection of surplus lines taxes, and determine whether federal action may be warranted in the near term.