Compliance, Regulators

The FIO’s 2013 Modernization Report: Pulling Back the Curtain on the Great and Powerful Oz

The Federal Insurance Office (“FIO”) has finally released the long awaited modernization report that could turn 140 years of state-based regulation upside down and diminish the role that the States have traditionally filled as regulators of insurance. How to Modernize and Improve the System of Insurance Regulation in the United States is akin to a State of the Union address on insurance, generated considerable public grumbling before it was published, and has caused no small amount of controversy since it was submitted to The House Committee on Financial Services on December 13, 2013. For although the Dodd-Frank Wall Street Reform and Consumer Protection Act  (“Dodd-Frank”) created the FIO to monitor all aspects of the insurance industry and coordinate Federal policy on international insurance, the FIO has no defined regulatory authority, and many of the key players in the insurance world, along with members of Congress, are concerned that the FIO has over-stepped. But irrespective of where one falls along the state vs. federal debate spectrum, insurance professionals, regulators, and legal professionals are urged to take a cold, hard look at what the 2013 Modernization Report says, what it doesn’t say, and what it implies between the lines, because the carefully crafted provisions in its 65 pages will likely form a framework for further discussions about the current insurance regulatory system in these United States for many years to come.

2013 was a landmark year for insurance, with key events highlighting the emergence of an evolving regulatory landscape. Increasing flood insurance rates brought a watershed of controversy, Congress debated the Terrorism Risk Insurance Act (“TRIA”) reauthorization, and the nation struggled with implementation of the Patient Protection and Affordable Care Act. At the same time, the states continued to roll out various National Association of Insurance Commissioners (“NAIC”) model laws, developments occurred in the areas of unclaimed property and e-commerce, and a growing international influence continued to impose its collective will on the nation’s state-based regulatory structure. The FIO’s Modernization Report encompasses all of these touch points and more, recommending a hybrid model of insurance regulation in which state and federal systems play complementary roles to improve solvency and market conduct regulation.

However strong its words may be, and however well-supported its statements and recommendations, the Modernization Report can only go so far. Here’s the rub: the FIO is not empowered to tell the States what to do. In fact, as a reporting and moderating body (but not a regulatory body)  the FIO isn’t authorized to do anything other than, well, monitor, recommend, assist, coordinate, develop and represent, without further congressional action. The NAIC is similarly restricted to its self-described role as a standard-setting organization. In fact, as FIO Director McRaith was careful to point out in remarks to industry professionals at an October, 2013 conference sponsored by the Dentons law firm and the Insurance Regulators Educational Foundation at Illinois State University, “a State is not legislatively or constitutionally authorized to speak for any other state, the States are not legislatively or constitutionally authorized to speak for the United States, and the NAIC isn’t legislatively or constitutionally authorized to speak for anyone.”

A commentary that I’ve written discusses the statutory basis for the FIO and its 2013 Modernization Report, examines the Report’s various provisions and recommendations, details its implications from state, national, and international perspectives, outlines the steps that state regulators and the NAIC are taking in response, and offers some thoughts on where all of this anticipated change appears to be headed. But before we dive in to the Report, let us recall that FIO Director Michael McRaith, a former state regulator himself, knows a thing or two (or three) about insurance regulation. And just like Oscar Zoroaster Phadrig Isaac Norman Henkle Emmannuel Ambroise Diggs, an ordinary man (and consummate politician) who was able to subdue the citizens of Oz by appearing as a giant head and a ball of fire, McRaith needs to find a way to launch a new federal entity that has (at this juncture at least) no regulatory authority in the face of serious congressional and state-based opposition. Ultimately, the 2013 Modernization Report is a mere initial parlay into what will surely be a contentious struggle to meet this ongoing challenge head on.

LexisNexis is publishing my commentary in the upcoming issue of the New Appleman Current Critical Issues print quarterly. Here is the Table of Contents for the article so you can see the detailed topics that the commentary covers:

INTRODUCTION

II. THE ORIGINS AND ISSUANCE OF THE REPORT

A. Dodd-Frank and the FIO

B. Tardy Submission

III. AN OVERVIEW OF THE FIO REPORT
A. Requirements and Structure
B. Summary Recommendations
C. Potential Federal Solutions to Apply When the States Fail to Modernize and Improve

IV. INITIAL INDUSTRY REACTION

V. INSURANCE REGULATION FROM AN HISTORICAL PERSPECTIVE

VI. THE DRIVE FOR INCREASED FEDERAL AND INTERNATIONAL REGULATION
A. Prudential Oversight
B. The Solvency Framework
C. Capital Standards
D. Mortgage Insurance
E. Captives
F. RBC Methodology and Adequacy Determination
G. Reserving
H. Credit for Reinsurance
I. Corporate Governance
J. Group Supervision
K. Resolution of Insolvent Insurers
L. Receivership
M. Guaranty Funds
VII. MARKETPLACE OVERSIGHT, CONSUMER PROTECTION AND ACCESS TO INSURANCE
A. The Objective Is Efficiency
B. Producer Licensing

  1. Product Approval
    D. Market Conduct Regulation
    E. Rate Regulation
    F. Risk Classification
    G. Nonadmitted and Reinsurance Reform Act of 2010
    H. Natural Catastrophes
    VIII. TAKING ACCOUNT OF REGULATORY REFORM
    IX. CONCLUSION

 

Please send me an email at Karen@StraightTalkonInsurance.com or call me direct if you’d like additional information about my in-depth analysis of the FIO’s 2013 Modernization Report.

A Note from the Author

Karen Yotis

Welcome to Straight Talk! I trust that you'll find the content that I post for you to be helpful and thought provoking.

This has been a remarkable year for insurance compliance and workers' compensation and I anticipate equally incredible developments in both areas during 2015. You'll be able to share your thoughts about top trends and issues in Straight Talk's December Survey, coming soon! The best responses will be quoted in future blogs and newsletter articles.

Thanks for visiting,

Karen C. Yotis, J.D.
Author and Content Strategist