Industry Awaits FIO Report, Sees Positives in Office’s International Efforts

Under the Dodd-Frank Act, FIO is charged with studying and making recommendations to Congress on the insurance industry. It also serves as a lead voice on behalf of the U.S. regulatory system when meeting with international regulators. It does not have regulatory authority. Among its first jobs was to craft a report to Congress to detail FIOs role in the existing state-based insurance regulatory system, what changes the current system might need, and how the U.S. plans to interact internationally as Europe and other regions enact new rules of their own. Shortly after taking the FIO post, McRaith said the paper was due in January 2012, but nearly a year later it remains unissued. A similar report on the reinsurance industry, for which FIO accepted comment through Sept. 30, remains unissued.

A spokesperson at the Treasury Department declined to comment on FIO's behalf for this story.

Michael Nelson, chairman of Nelson Levine de Luca & Horst, said the report should be issued in December or January. FIO appears to have the resources to complete the insurance report, although as late as October he received conflicting reports about its progress. I dont think the insurance industry feels like its progress is being impeded, Nelson said. But the industry is guarded about what FIO could recommend in the report. In many ways, I think the insurance industry and state-based regulators are anxious, he said. It is probably stopping some steps theyre going to take. For instance, he said Connecticut's Department of Insurance budget contained funding for additional staff to help it coordinate with the FIO, but the uncertainly about the report has kept Connecticut from deciding when to hire.

J. Robert Wooley, a former Louisiana insurance commissioner during the Hurricane Katrina crisis and counsel at Adams Reese Law Firm, said the FIO has a chance to make some long-overdue changes to the insurance regulatory system. Rules dating back to the passage of the Sherman Antitrust Act initially served to keep prices up and keep companies solvent. But he said state regulators now are starting to suppress rates to appeal to constituents seeking lower-cost insurance. I'm not for getting rid of the state-based system, Wooley said. What would be better is if we can create some uniformity in some areas that would make sense. FIO might look to recommend that licensed adjusters from outside states be allowed to work in states with disaster areas on a temporary basis. In the aftermath of Hurricane Sandy, a hurricane zone could be created from Maine to the Gulf Coast that might provide companies with uniform pricing.

David Snyder, vice president, international policy at the Property Casualty Insurers Association of America, said PCI wants the reports to continue supporting a competitive insurance community, and urged the insurance markets be allowed to evolve based on competition and not regulatory mandates. Were hopeful the reports will provide further information about how well the current system is working, he said. To the extent there are new proposals, we will look at those.

We cant comment on what its contents might be or could be, Snyder said of the report. Its our view that the overall U.S. insurance regulatory system has performed well. The industry remains solvent despite the financial crisis, the recession and national catastrophes of historic proportions. McRaith, a former insurance director in Illinois, has stated his support for the state-led regulatory system (Best's News Service, Dec. 9, 2011).

Tom Sullivan, a former Connecticut state commissioner and now a partner at PricewaterhouseCoopers, was not overly concerned about the late reports, saying the delay perhaps has been the result of some political considerations, but the substance of the report will not have an immediate impact on the insurance market. FIO is not the only agency late in responding to Dodd-Frank requirements, as agencies asked to move on Dodd-Frank have produced fewer than half of the laws that required rules, he said.

International Efforts

FIO is also involved in discussions with international officials, particularly those in the European Union, over how to create a regulatory framework that would help insurers expand internationally by finding a way to resolve differences between the state-based U.S. regulatory system and the more top-down version laid out under the European Union's Solvency II regulatory framework.

Central to European efforts is a Solvency II requirement that companies based outside the EU must come from regulatory system that it deems equivalent to that created under Solvency II, a situation Snyder said could ultimately create trade barriers instead of opening up markets. Snyder said previously that if the final European definition requires outside companies act in a manner that is identical to EU companies, U.S. companies would either have to post more capital or restructure themselves by creating European holding companies.

Snyder said FIO has played a positive role in the U.S. and the European Union dialogue, which resulted in a draft paper in October that Snyder said might serve as a template for both markets to help accept each other's systems without great change. It's unknown what impact FIO will have on international insurance commerce, but McRaith could be a major player in those discussions and serve as a conduit to groups such as the National Association of Insurance Commissioners, Snyder said.

Compared with international discussions before the financial crisis, the dialogue with international regulators has never been more robust, despite the substantial issues that remain, Sullivan said, noting he can't foresee the United States and EU ultimately reaching absolute agreement on issues that involve Solvency II requirements that would have the U.S. regulators meet the equivalency regulatory standards. FIO and McRaith, he said, likely will serve as a positive and constructive bridge between NAIC and the international regulatory community.

FIO met its missions, which include advising the Treasury Department, determining what FIOs role is in relation to the state-based U.S. regulatory system, and in helping to shape discussions with international authorities, Snyder said. So far, we think FIO has been deliberative in its efforts to lay the foundation for what role it will play in all of those areas, he said.

Despite the frustration about the late reports, Nelson said there is also recognition that the tasks FIO has been asked to perform are difficult, especially in the start-up phase. I think they have a difficult job. Let's face it this is all brand new If I had to express how everybody feels about FIO, Id say they are a little frustrated, but also somewhat understanding.