Filed Under:Life Insurance, Life Products

FIO Modernization report: It's out, but where is it going?

The long shadow -- or promise of federal insurance regulation resides in the FIO report. (AP Photo/Francisco Seco)
The long shadow -- or promise of federal insurance regulation resides in the FIO report. (AP Photo/Francisco Seco)

The U.S. Treasury’s Federal Insurance Office (FIO) long-simmering report on modernization was greeted like a wonk’s Rorschach ink blot for many who reviewed it Thursday afternoon

The report either affirms state regulation or allows for the hand of the federal government to guide insurance regulation down a smoother path, both for interested parties and for itself in certain areas. 

The National Association of Insurance Commissioners (NAIC) president, Jim Donelon of Louisiana, wrote that he was “pleased the Treasury Department continues to embrace the state-based system of insurance regulation.”

Sen. Ben Nelson, NAIC CEO, put it in the same category as other government reports that offer advice by noting that “reports such as this one, as well as other comments provided by consumers, industry and governmental organizations as part of this process are always welcome and are useful tools for assisting regulators in identifying areas that require improvement.” 

Members of the NAIC leadership will be meeting in Washington next week with Treasury Secretary Jacob Lew to discuss the FIO role and its report.

“We are glad that the report endorses the passage of producer licensing reform known as the National Association of Registered Agents and Brokers (NARAB) Act,” stated National Association of Insurance and Financial Advisors (NAIFA) President John Nichols, referring to the Act which passed the U.S. House of Representatives in September. 

NAIFA also said it agreed that certain state-based marketplace reforms are crucial for consumers, such as all states adopting the NAIC's Suitability in Annuity Transactions Model Regulation. The alternative of not significantly moving ahead with this and widespread state adoption of other model laws across the states is federal intervention under the FIO report's scenario.

The FIO report noted that the United States has entered an era of unprecedented levels of retirement age residents -- so financial security for the aging population is an essential priority in its discussion of annuities.

As in other areas, the report noted that, in the event that national uniformity is not achieved in the near term, federal action “may become necessary.”

The report says that the 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. 

The FIO report said that 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. Likewise, organizations urged states to join the IIPRC so that competitive products can be brought to market faster. 

The report, despite the cries of alarm or resistance from bellweather states like New York and California, also cautiously endorsed the NAIC's and the life insurance industry's principles-based reserving, if it has the right controls and oversight. 

The American Bankers Insurance Association said it supported FIO’s call for uniformity, its "consideration of an optional federal charter," and for its endorsement of the NARAB II legislation. The report discussed the recent history of the optional federal charter but did not call for it's implementation as such.

The American Council of Life Insurers (ACLI) straddled the good news/bad news fence by noting that, “The current state-based system of regulation has served consumers and the industry well for generations." However, as noted in the report, “improvements are needed to promote uniformity and address inefficiencies and burdens for consumers, insurers and the international community.”

“This report paves the way for hearings and serious examination of the deficiencies of the state-based system,” said Kevin McKechnie, ABIA senior vice president.

Rep. Ed Royce (R-Ca.), a supporter of the Optional Federal Charter in the past and whose amendment with a colleague created the statutory requirement for the report, said state insurance regulators have been put on the clock to address the "inefficiencies and burdens for consumers, insurers and the international community" in the current regulatory apparatus... The FIO and Congress must hold states accountable if they again fail to act on the recommendations from the Treasury Department. “

Royce applauded the reports' focus on the need to increase rate freedom for personal lines insurance consumers and pursue a covered agreement on reinsurance collateral. Although not in the life insurance arena, the reinsurance collateral is significant on the state pre-emption and international fronts.

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. This model law was adopted by the NAIC in November 2011 and two years later had been adopted by 20 or fewer states allowing less than the previous high of 100 percent collateral standard, as FIO noted. This is near and dear to the hearts of international reinsurance interests, depending on the terms, but because it is trade, it can be seen as pre-emption of state insurance laws. 

Non-U.S. reinsurers play a large role in the U.S. market, accounting for at least 58 percent of the reinsurance premium volume that is ceded by U.S.-based insurers.

FIO Director Michael McRaith wrote in the FIO report that the likelihood that the Model Collateral Law would be of non-uniform application, together with the complicating effect of state-by-state inconsistency on economic matters spurred the need for Treasury to pursue these covered agreements for reinsurance collateral requirements.

The primacy of the push for federalization of private mortgage insurance is not a surprise to some, as it appears to be an administration and Senate point of interest as Fannie Mae and Freddie Mac wind down, and as mortgage pooling speculation led to the 2008 financial crisis. 

There have been numerous sightings of federal agencies' noses under the tent of state regulation over the years -- but never the whole camel -- even before the concept of the optional federal charter, as championed by Royce and others before him in the 1990s, rose.

One could pick a year and dust off, say, the Federal Insurance Act of 1977 (Sen. Edward William Brooke, R-Mass.) with the proposed establishment of a federal guaranty fund in response to the Justice Department report looking at various exemptions to the federal antitrust laws. Intrusion from the Federal Trade Commission (FTC) was also a concern at one time with its investigation of the retirement industry’s disclosure “techniques as well as with auto insurance pricing and credit scores, as was the IRS and the SEC.

“The industry should seek to strengthen the NAIC so that the problems of uniformity can be ameliorated. States should be encouraged, particularly by Commissioners, to adopt uniform regulations and laws as written by the NAIC unless there are strong reasons for making changes,” reads a discussion paper of life insurance industry actuaries in 1977. (See: RECORD OF SOCIETY OF ACTUARIES 1977 VOL. 3 NO. 4)

Like other reports before this, the FIO report did not exactly embrace the current state-based system that most of the industry and the state regulators say has served consumers well for 140 years.

FIO's 65-page report to Congress cited a 2009 McKinsey & Co. report that said a uniform system of insurance regulation can reduce unnecessary cost to the tune of an unnecessary $13 billion annually, $7.2 billion of which are borne by property casualty insurers. 

"Okay, enough for history. It serves merely to point out that we are not dealing with a new phenomenon. But recent developments seem to indicate that the discussion may be reaching a new intensity and that we may indeed see a significant modification in the nature of insurance regulation in the not too distant future.”

Wait, that's a quote from 36 years ago, found in the discussion transcript by then-ACLI staffer Vincent Donnelly.

For more on the industry response to property casualty elements of the FIO report, see this article from National Underwriter Property & Casualty

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