The comprehensive bill—which weighs in at more than 2,300 pages—is a response to the financial crisis that has gripped the country and will produce profound changes in certain financial sectors. While seismic changes are in store for the banking and securities industries and their regulators, the bill has a far less dramatic effect on the insurance industry. Congressional leaders recognized that the turmoil caused by commercial banks, investment firms and international holding companies did not extend to the insurance world and concluded that similarly expansive action was not warranted in the insurance arena. The bill’s preservation of state insurance regulation is a victory for the Big “I," the National Association of Insurance Commissioners (NAIC) and other proponents of the state system as it allows insurance regulators to continue to effectively ensure that insurers are solvent, that claims are paid and that consumers are protected.
Perhaps the most notable insurance feature of the “Dodd-Frank Wall Street Reform and Consumer Protection Act”—and one that has been discussed in previous editions of IN&V—is the creation of the Federal Insurance Office (FIO). This new non-regulatory insurance office will be housed within the Treasury Department and is primarily tasked with monitoring the industry, issuing reports, advising the Treasury Secretary on insurance matters and working jointly with the U.S. Trade Representative on international insurance negotiations. The full impact of this office remains to be seen, but the bill contains numerous protections and administrative safeguards that will help prevent interference with the work of state regulators and other unintended consequences. The FIO will not have any regulatory authority over the insurance industry, and the Big “I” worked diligently to secure an additional protection that forbids the office from requiring agents and brokers to respond to data and information requests.
The financial services reform bill also uses targeted measures to bring about several much-needed and long-overdue reforms in the surplus lines marketplace. For surplus lines placements that cover risks in multiple jurisdictions, only the licensing, premium tax collection and regulatory requirements of the insured’s home state will apply in the future. The collection and distribution of premium taxes in multi-state surplus lines transactions has long been a complex and nearly impossible task, and the burden of allocation among the states will now be shifted to government officials. These and other reforms (including a simplification of due diligence search requirements) utilize the targeted approach to regulatory modernization that the Big “I” has long supported. They provide an example of how Congress can implement meaningful and significant marketplace improvements without dismantling state insurance regulation or creating an unprecedented regulatory structure at the federal level.
Some of the bill’s other features of interest to insurance agents and brokers are:
Creation of New Entities – The bill establishes the Financial Stability Oversight Council to identify potential systemic risks and respond to emerging threats to the country’s financial system. The 15-member council would be comprised of 10 voting members (primarily federal financial services regulators) and five nonvoting members (including the FIO’s director and a state insurance regulator selected by the NAIC). The proposal also creates the Consumer Financial Protection Bureau, an independent body within the Federal Reserve empowered to establish consumer protections and other rules for institutions offering financial services and products. The bill is clear, however, that the bureau will have no oversight authority over insurance products or providers.
Regulation of Indexed Annuities – A last-minute and somewhat controversial amendment will likely end recent efforts by the Securities and Exchange Commission to regulate equity-indexed annuities as securities and ensure that they will continue to be regulated as insurance products. Indexed annuities provide a guaranteed level of return to buyers—with the possibility of higher returns, depending upon the performance of a stock market index—and were scheduled to come under SEC oversight next year. The amendment allows insurance regulators to maintain control if two conditions are met: (1) the state where the annuity is issued adopts the NAIC’s Suitability in Annuity Transactions Model Regulation and (2) the issuing company adheres to the standards and requirements of the model regulation on a national basis. This amendment—which was not included in either of the bills originally passed by the House or Senate—preserves the authority of insurance regulators over indexed annuities and is a victory for supporters of state insurance oversight.
Fiduciary Duty for Broker-Dealers – As described in greater detail by Dave Evans in a separate IN&V article last week the bill gives the SEC the authority to extend the fiduciary duty that currently applies to investment advisors to broker-dealers who give personalized advice to retail customers. Many observers expect the SEC will use this new authority to establish such a standard, and it could have ramifications for independent agencies that operate in this field.
Reinsurance – The bill includes a series of reinsurance provisions that will give greater meaning and effect to the actions of regulators in jurisdictions where insurers and reinsurers are domiciled. The final proposal gives a reinsurer’s state of domicile sole responsibility for regulating the company’s financial solvency, provided the state is accredited by the NAIC (or has solvency requirements similar to the NAIC standards). It also prohibits other jurisdictions from requiring the submission of financial information beyond that required by the domiciliary state. In addition, a state would be prohibited from denying credit for reinsurance if a ceding insurer’s domiciliary regulator recognizes credit for the ceded risk and is accredited by the NAIC or imposes similar requirements.
Senior Investment Protection Grants – The bill’s intention is to bolster the level of senior investor protections by making financial grants available to states that establish certain suitability requirements in connection with annuity sales and adopt regulations concerning the appropriate use of professional designations.
Reports to Congress – The bill requires the FIO to study and issue separate reports on the reinsurance marketplace and on ways that Congress can improve insurance regulation, and it calls on the Government Accountability Office to examine and issue a report on the surplus lines marketplace.
The House of Representatives passed the reform package by a vote of 237 to 192 after several hours of debate yesterday, and the Senate is now expected to consider the proposal following the Independence Day recess.