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Financial Reform Law’s Ultimate Impact on Insurance Remains Unclear

While the Dodd-Frank bill, expected to be signed into law by President Obama next week, has spared insurers explicit duplicative regulation, the powers of the new Federal Insurance Office remain undefined.

The U.S. Senate has passed the Restoring American Financial Stability Act of 2010, also known as the Dodd-Frank legislation, by a 60-39 vote, and President Barack Obama is expected to sign the bill into law next week. It has been clear for many months that the law would not call for duplicative federal regulation of insurance, but questions remain as to it’s impact on insurance industry, particularly with regard to how the bill's mandated Federal Insurance Office (FIO) within the U.S. Department of Treasury will function.

Passage of the bill is a “milestone” in the history of insurance regulation, says Howard Mills, chief adviser for Deloitte's national insurance group and former New York Superintendent of Insurance. “The law will bring significant change, though not as significant as it could have been, which is largely to the benefit of the insurance industry,” he says.

Mills notes that the insurance industry will not fall under the authority of a new Bureau of Consumer Financial Protection within the Federal Reserve. “This will be a very aggressive new agency,” Mills says. “The insurance industry made the case that every state regulator has a consumer function. If there had been a duplicative layer, that would have been very troublesome for the industry.”

"Significant improvements have been made to the final bill to minimize the potential negative consequences of adding federal oversight to the state-based insurance regulatory system," comments David A. Sampson president and CEO of the Property Casualty Insurers' Association of America (PCI) in the trade group's statement on passage of Dodd-Frank. "However, deep concern remains over the long-term impact of this legislation on U.S. competitiveness for the financial services sector."

Sampson insists that Senate passage of the bill as "only the midpoint" in the financial reform process. "We have a long road ahead of us as we move into the rule development phase. We look forward to working with regulators to preserve a strong and stable insurance marketplace to protect home, auto and business owners," he adds.

A statement from The American Council of Life Insurers (ACLI) praised the willingness of Senate Banking Committee chairman Sen. Christopher Dodd’s, D-Conn., willingness to heed the concerns of the life insurance industry and applauded the creation of the FIO on the grounds that it would establish a team of insurance experts within the Treasury Department and also positively impact international insurance regulatory negotiations. However, the statement also expressed uncertainty about the ultimate impact of the financial reform law: “The impact of other major provisions in the Dodd-Frank bill—including those affecting derivatives, standard of care and systemic risk—on life insurers and consumers cannot be fully assessed until the relevant federal regulatory agencies complete the rulemaking process.”

The National Association of Mutual Insurance Companies (NAMIC) is yet to release a statement as of press time, but Jimi Grande, senior vice president of federal and political affairs spoke with Insurance & Technology recently about the final form of the bill. Most of the major concerns of P&C companies were addressed long before passage of the bill, as legislators were persuaded that the financial crisis had little to do with the stability of the insurance industry, according to Grande. He expressed satisfaction that, though the financial crisis could have been the pretext for some kind of federal regulation that either superseded or added a redundant layer on the state-based insurance regulatory system, the FIO was created to provide information and assist with international trade agreements relevant to insurance.

“We wanted to make sure that the FIO was not given a fishing license through this subpoena authority, allowing it to make duplicative, expensive data calls in the hopes of finding trouble where none exists,” Jimi Grande says. “By drawing upon the House legislation for the provision creating FIO, the conferees ensured that it will serve its intended purpose as an information resource for policymakers rather than trying to do the same job being done by state regulators.”

It remains unclear how the FIO will function, though has the potential to do considerable good, suggests Deloitte’s Mills. The body could help to streamline inefficient aspects of the state regulatory process, such as rate and form filing and the issuance of product approval. The FIO can also provide a single voice on international issues, relieving insurance companies of dealing with the 50-plus regulators of the state system on such matters, Mills notes.

“The downside of the FIO will depend on how activist the body will be under its first director,” Mills cautions. “If you get a person in there who seeks to expand jurisdiction and comes into conflict with the state regulators, then you have an industry caught in the middle, which would be vexing.”

While observers speak about the Dodd-Frank legislation as a standalone bill, Mills says that its impact must be assessed in conjunction with health reform legislation. “With the healthcare bill the federal government has established health insurance exchanges through the Department of Health and Human Services [HHS] which have their foot in the door in every state insurance department,” he explains. “You can’t tell me that the feds at the HHS aren’t, at some point, going to talk to the Treasury Department through the FIO.” Financial reform also raises questions about the possibility of the establishment of an optional federal charter, Mills notes. Speaking at the 2010 summer meeting of the National Conference of Insurance Legislators (NCOIL), Sen. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, said that the committee would debate optional federal charter (OFC) during 2011.

The concept of the OFC in earlier debates is one whereby insurers would be able to choose between existing state regulators or a new federal regulator created for the purpose. Frank’s support of a new push for OFC raises questions about the nature of the FIO, according to Mills. “Now we have federal regulator — the FIO — and your primary regulator is on the state level. How does OFC work in that construct? Do you have the option to leave states for FIO? If so, you’re going to have to change the FIO, and that opens a whole new can of worms.”

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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