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Fed's Role in Insurance Regulation Poses Challenges, Opportunities

Source: Casualty Actuarial Society

Posted on 07 Dec 2010

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The federal government’s new role in insurance regulation poses significant challenges and opportunities for the insurance industry, actuaries were told here.

Speaking at the Annual Meeting of the Casualty Actuarial Society, Steve Broadie, vice president – financial policy, Property Casualty Insurers Association of America (PCI), said that for the most part insurers were spared many of the most onerous regulations in the Dodd-Frank Act which reformed regulation of financial services.

Broadie pointed out that insurers were unlikely to be subjected to systemic risk regulations or liquidation provisions contained in the law. “Our sense is that the impact of the Dodd-Frank Act on most insurers will be limited,” he said.

However, given the establishment of the Federal Insurance Office (FIO), “We are sailing into uncharted waters” in terms of insurance regulation,” said Broadie, whose association has advocated modernization of the state regulatory system, but not the option of a federal charter for insurers.

The functions of the FIO include data collection and analysis, systemic risk monitoring, advising on the Terrorism Risk and Insurance Act (TRIA), monitoring the affordability and availability of insurance in under-served areas, recommending insurers for systemic risk supervision, advising on insurance policy issues and coordinating the development of federal policy on international prudential insurance issues. “The creation of the FIO was an adjunct to much broader reform legislation triggered by the greatest financial panic since the Great Depression,” said Broadie. “We knew financial reform would be extensive and believed the industry was under severe peril of duplicative regulation by people who did not understand the insurance industry,” he said.

Broadie observed that the industry did a good job of explaining to Congress and federal agencies that the core business of property/casualty insurers did not cause the financial panic and, as a result, “we don’t need duplicative regulation to fix something that isn’t broke.”

He expressed concerns about the “unintended consequences” that the new regulatory regime could have on insurers, such as “mission creep” by the FIO that could result in duplicative regulation.

Broadie acknowledged that the FIO’s designated role in the international arena – an area where state regulators cannot play a major role – offers a great opportunity.

Mary Seidel, vice president and director – federal affairs, Reinsurance Association of America (RAA), said that throughout the debate on financial services reform, reinsurers made their case that the reinsurance industry needed a federal presence. “We saw this as an opportunity to improve the way reinsurers are regulated,” she said.

Seidel said the reinsurance industry reminded Congress of the global nature of reinsurance and pointed out that the lack of a “federal voice on the international stage” meant that reinsurers were in danger of losing their competitive edge abroad.

U.S. reinsurers also informed the drafters of the legislation that foreign reinsurers were frustrated by the redundancies of the 50-state regulatory system here, according to Seidel.

She expressed disappointment that the robust international presence originally envisioned for the FIO was not included in the final law.

“The FIO has very limited authority to enter into international agreements and pre-empt state law,” Seidel said. However, “the fact that there are international provisions is a positive,” she added.

“There is still a long way to go,” she said. “We are looking at the implementation of the office and looking for opportunities.”

David Snyder, vice president and associate general counsel, American Insurance Association, said his association’s position on reform legislation has been “guided by a basic yardstick that insurance regulation should be effective and efficient and impose the least costs on the industry so it can remain globally competitive.” The AIA has advocated an optional federal charter for insurers.

“While there are those who fear the potential authority of the Office, we think it may potentially have a very positive impact,” he observed.

For example, the Office may bring a national perspective to politically motivated developments in the states that may lead to undermining the solvency of a particular company or the insurance system as a whole,” said Snyder.
He also cited the mandated study of insurance regulation by the FIO as “a tremendous opportunity to talk about what’s right and what’s wrong with the

current U.S. regulatory system.”

For example, he cited the “politicization” of rate regulation in some states which makes it difficult, if not impossible, for insurers to match the rate regulators approve with the risk insurers assume, such as in coastal areas.

Moreover, regulatory delays in the approval of new forms for certain commercial lines of insurance have caused a flight to alternative risk mechanisms by commercial customers who cannot find the innovative products they need available in the marketplace, according to Snyder.

“A bright light needs to be shown on the inefficiencies of the state regulatory system,” Snyder said of the FIO study.
Calling the Dodd-Frank Act “truly historic,” Snyder said “There are some who view it as a threat, but I would view it as a significant opportunity to shape the world that all of us will be engaged in in the future. If we miss this opportunity, others will shape it for us.”

The Casualty Actuarial Society fulfills its mission to advance actuarial science through a focus on research and education. Among its 5,400 members are experts in property-casualty insurance, reinsurance, finance, risk management, and enterprise risk management.