The three-year anniversary of President Barack Obama signing the Dodd-Frank financial reform act into law was July 21. But since the law creating it went live in 2010, the Federal Insurance Office has still not "learned to define and confine the lanes so people know what it is and what its role is," former U.S. Sen. Ben Nelson, chief executive officer of the National Association of Insurance Commissioners, told BestWeek Americas.
While FIO Director Michael McRaith has garnered praise from some corners of the insurance industry, Nelson said other state regulators remain unclear about the FIO's role at the international level. Nelson said the lack of clarity has caused some to worry that the office may begin to exceed its non-regulatory function.
Nelson said he has been meeting with McRaith and holding conference calls in an effort to clarify the FIO's role on the international stage. But he said more communication may be necessary. "Communication involves more than just meetings and telephone calls," Nelson said. "It has got to mean that FIO has to tell us their positions in advance, so we don't learn about them as a surprise or that they have a position but they can't tell us what it is. That's not communication."
Questions about the FIO's role have reached a point where Rep. Randy Neugebauer, R-Texas, who chairs the House Financial Services Subcommittee on Housing and Insurance, has asked McRaith to submit monthly updates about the office's interaction with the NAIC and on the development of policy positions. In a July 15 letter, Neugebauer said McRaith's testimony before the subcommittee last month "raised a number of important matters about the role of the various U.S. representatives in the international insurance standard-setting discussions."
Under Dodd-Frank, the FIO is designed to serve as an information-gathering agency for Congress and the Treasury Department on trends in the insurance industry. It is also tasked with identifying systemic risks to the U.S. financial system posed by insurers and with developing federal policy on international insurance matters. It has been working with the International Association of Insurance Supervisors and U.S. and European Union regulators to develop a common framework, or ComFrame, to bring the two systems together. Dodd-Frank explicitly prohibits the FIO from acting in a regulatory capacity.
In a statement, a Treasury spokeswoman said that while individual states remain the primary regulatory authority over the business of insurance, Dodd-Frank makes clear the role of the FIO at the international level.
"According to Title V of the Act, FIO coordinates federal efforts and develops federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors. We will continue to work closely with state regulators and to update members of the Financial Stability Oversight Council, as we have so far, on insurance matters," the statement said.
However, Nelson said McRaith has attempted to speak on behalf of state insurance regulators and has "taken positions that run contrary to the state regulatory mechanism." Nelson said some of FIO's actions and statements have led to confusion among its international counterparts about whether the office is actually a regulator. He said only representatives of state regulatory bodies should speak on behalf of regulation.
"There have been international regulators who preferred to have a single voice for the United States," Nelson said. "Well, they now have a single voice, but that single voice is not the voice of regulation. It's the voice of the federal government, as the federal government has an interest in markets and consumer interests. I can understand how there would be confusion among the international community."
Nelson said that ensuring the FIO and the NAIC are in step with each other on matters of insurance regulation has become increasingly important as the European Union works to implement the new Solvency II regulatory framework.
Both Solvency II and the ComFrame proposal seek to impose a consolidated regulator. Regulators from the United States have argued against moving to a consolidated regulator, saying the U.S. system has been in place for decades and has proven capable of ensuring insurers remain solvent. The U.S. insurance regulatory system differs from the E.U. approach in that each legal entity of a company is overseen by regulators in the state where the entity is domiciled.
Nelson said one of the benefits of that system is that holding companies cannot "go in and take assets of a subsidiary insurer because a holding company needs capital." The U.S. system also prohibits a regulatory supervisor from unilaterally requiring the holding company to make such a move if it gets into financial trouble, Nelson said. The limits imposed on holding companies was demonstrated during the financial crisis when American International Group Inc.'s financial services arm suffered significant losses and required a historic bailout from the federal government. But Nelson noted that none of AIG's insurance subsidiaries suffered similar losses or required bailouts.
"If you want to have integrity of insurers, as we had in the case of AIG, so the promises and the policies offered to policyholders are honored, you can't go to something where the supervisor has the authority to just unravel insurers, take assets out and put them into the holding company," Nelson said. "That's what we're protecting. If someone from Treasury goes out and says we need to have consolidated supervision, that could create problems."
Some of the confusion could be addressed by the FIO providing more information about its role in several long-overdue reports to Congress on the state of the insurance and reinsurance markets in the United States.
That said, FIO's work on the international stage has drawn praise from representatives of the U.S. insurance industry. David Snyder, vice president of international policy for the Property Casualty Insurers Association of America, said FIO has solicited industry comments on a range of international issues that will affect companies based in the United States.
"We have shared our concerns about the current form of ComFrame, which we think could disadvantage large companies in markets where other companies may not be subject to additional regulations," Snyder said. "We would like to see more progress on supervisory coordination, and we have shared those concerns with FIO."