The history of the federal role in the regulation of insurance is a story of fits and starts. Presumably, there would have been no such story, and the federal government would have assumed a primary regulatory role (as it did in other areas of financial services), but for the historical anomaly of the Supreme Court declaring that insurance was not interstate commerce. From that point until the Court reversed itself 75 years later, the states established a regulatory framework that would be difficult to displace. That difficulty was first evidenced by the quick passage of the McCarran-Ferguson Act to restore the primacy of the states when the Supreme Court dumped insurance regulation in the lap of Congress.
When Congress first decided to take on some insurance issues in a major way with ERISA in 1974, it still left the regulation of insurance to the states with a complex system of preemption, saving, and deemer clauses. With HIPAA in 1996, Congress enacted mandates for health insurance, but the federal government never made a serious effort to enforce those mandates, again leaving it to the states to monitor compliance via mini-HIPAA laws. The Gramm-Leach-Bliley Act in 1999 brought federal recognition of insurance as one of the major sectors of the financial services industry, but the functional oversight system again left regulation to the states. The health care reform law passed last year includes additional health insurance mandates, again with a preference for state enforcement, along with health insurance exchanges that the states have the first opportunity to create; the main federal obligation is to enforce the requirement for the purchase of health insurance, which is done through the IRS.
During this period there were occasional calls for a complete federal takeover of insurance regulation, as well as for lesser federal forays into regulation such as the optional federal charter for certain insurers. These calls resurfaced as the economic crisis deepened in 2008, especially with the prominent role played by AIG; but, in the end, the massive revision of the laws regulating financial services in the Dodd-Frank Act continued the tepid federal incursion into insurance: Dodd-Frank only created a noncontroversial, uniform national approach to the regulation and taxation of non-admitted insurance and the regulation of credit for reinsurance and reinsurer solvency, and a Federal Insurance Office
The Office is part of the Treasury Department, and is headed by a Director appointed by the Treasury Secretary.1 The Secretary has named Illinois Insurance Director Michael McRaith to be the first Director of the Office, with his term beginning this June. The Office has three basic functions:
- Monitor and report on the U.S. insurance industry, and consult with state regulators on national and international insurance matters.2
- Provide input on the insurance industry to the Financial Stability Oversight Council, the new systemic regulation body established by Dodd-Frank.3
- Coordinate federal efforts on international prudential insurance regulation, including determining whether any state laws are preempted by international agreements in that area.4
Generally, these functions apply only to lines of insurance other than health insurance (which, of course, is covered by the massive health care reform bill), long-term care insurance, and federal crop insurance.5
On May 9, 2011, Treasury announced that it was taking applications for membership on a new Federal Advisory Committee on Insurance to advise the Office and Treasury on insurance matters. According to the announcement, “Recognizing the important role of state insurance regulators, half of the Committee’s membership [of up to 15 persons] has been reserved for state and tribal insurance regulators. The remaining members of the Committee will represent a diverse range of perspectives from, for example, the property and casualty insurance industry, the life insurance industry, the reinsurance industry, the agent and broker community, public advocates, and academia.”
Monitor, Report, and Consult
One charge given to the Office is “to monitor all aspects of the insurance industry,”6 with a specific mention given to monitoring the “extent to which traditionally underserved communities and consumers, minorities …, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance.”7 In performing its functions, the Office “may require an insurer, or any affiliate of an insurer, to submit such data or information as the Office may reasonably require,”8 including by use of a subpoena.9 However, this authority does not extend to a small insurer as defined by the Office.10 In addition, this authority does not apply if the information is already available from state or federal regulators or public sources.11
Presumably, the information obtained by the Office will allow it to fulfill its function of advising Treasury “on major domestic and prudential international insurance policy issues,”12 and assisting Treasury with managing the Terrorism Risk Insurance Program.13 The Office’s information gathering authority will also allow it to prepare the many reports it is obligated to provide:
- An annual report to the President and Congress on the insurance industry is due by September 30, beginning this year.14
- A report to Congress on the “breadth and scope of the global reinsurance market and the critical role such market plays in supporting insurance in the United States” is due by September 30, 2012.15 Three months later, the Office must report to Congress on the impact of the Dodd-Frank Act provisions regarding the regulation of credit for reinsurance and reinsurer solvency on the ability of states to access reinsurance information for their domestic insurers.16 This report must be updated by January 1, 2015.
- A report to Congress on “how to modernize and improve the system of insurance regulation in the United States,” including recommendations, is due by January 21, 2012.17 This report must deal with several issues involving federal regulation of insurance, including the costs and benefits, the feasibility of dual authority with the states, the ability of federal regulation to “eliminate or minimize regulatory arbitrage,” the impact of insurance regulation outside the U.S., and the ability of a federal regulator “to provide robust consumer protection.”18
Finally, the Office will consult with the states and state regulators (1) “regarding insurance matters of national importance and prudential insurance matters of international importance,”19 and, (2) to the extent the Director deems it to be appropriate, regarding implementation of all functions of the Office.20 Just to make it clear, Dodd-Frank states that the Office does not have “general supervisory or regulatory authority over the business of insurance.”21
The Director serves in an advisory capacity as one of three insurance representatives on the Financial Stability Oversight Council.22 According to Treasury, “The Council is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.”23 To date, the Council’s main activity has been drafting rules, which are mainly focused on banks and other non-insurance financial institutions; of course, these rules could eventually include or affect insurers.
One of the Council’s high-profile obligations is to end the concept of an institution that is “too big to fail” by designating nonbank financial companies as requiring consolidated supervision. The Office has authority to recommend to the Council that it so designate an insurer or its affiliates.24 Finally, one of the purposes of the Office’s obligation to monitor the insurance industry is to identify “issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system.”25
International Prudential Insurance Regulation
The Office is authorized “to coordinate Federal efforts and develop Federal policy on prudential aspects of international insurance matters.”26 While “prudential” is not defined here, one of the examples of what is included in this authority is “assisting the [Treasury] Secretary in negotiating covered agreements.”27 A “covered agreement” is an agreement between the United States and one or more foreign governments or regulators that “relates to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under State insurance or reinsurance regulation.”28 While this definition leaves “prudential” undefined, it tells us that these prudential “aspects” or “measures” must provide at least the level of protection for consumers that is achieved under regulation by the states in the U.S.
Presumably, we can obtain guidance on the meaning of “prudential” from the “prudential standards” that Dodd-Frank requires the Fed to develop for nonbank financial companies that the Council designates as requiring consolidated supervision. Those standards must include:
- risk-based capital requirements and leverage limits;
- liquidity requirements;
- overall risk management requirements;
- resolution plan and credit exposure report requirements; and
- concentration limits.29
These prudential standards may also include contingent capital requirements, enhanced public disclosures, and short-term debt limits.30
The meaning of “prudential measures with respect to the business of insurance” in the definition of covered agreements is not clear, but it bears on one of the most controversial powers of the Federal Insurance Office, that is, the authority “to determine … whether State insurance measures are preempted by covered agreements.”31 To preempt a state insurance measure, the Director must determine that the measure (1) results in less favorable treatment of a non-U.S. insurer that is subject to a covered agreement than a U.S. insurer would receive, and (2) is inconsistent with a covered agreement.32 Moreover, the Director may not preempt a state law that:
- governs an insurer’s rates, premiums, underwriting, or sales practices;
- imposes coverage requirements for insurance; or
- applies an antitrust law to the business of insurance.33
Finally, the Office must submit an annual report to the President and Congress on any actions it takes under its preemption authority.34
The Federal Insurance Office is one of a long line of federal incursions into the business of insurance, but it is the first one to establish a bureau dedicated to that business. It remains to be seen how the Office will use its existing authority, and how its authority might be expanded in the future. However, the Office certainly could provide the foundation for a greater or even exclusive role for the federal government in the regulation of insurance.