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Monday, December 16, 2013

FIO Issues Insurance Regulatory Modernization Report

Last week, the Treasury Department’s Federal Insurance Office (FIO) issued its Insurance Regulatory Modernization Report which makes recommendations on how best to modernize the system of state-based insurance regulation. ABIA is holding a briefing on January 7, 2014 with an in-depth review of the FIO report and its impact on bank-insurance priorities. 

The FIO report is comprehensive. In general, the report supports broad goals, such as requiring the states to participate in uniform regulatory standards in the areas of solvency and market conduct. However, it also supports targeted, federal reforms such as the adoption of the NARAB II legislation pending before Congress.

From the report:
“[T]his Report concludes that the proper formulation of the debate at present is not whether insurance regulation should be state or federal, but whether there are areas in which federal involvement in regulation under the state-based system is warranted. Reframed in this manner, the basic question with respect to reforming any aspect of insurance should be whether federal involvement is warranted at this time and, if so, in what areas. The necessity for federal involvement should depend on assessment of questions such as whether states can take measures to regulate effectively and with uniformity, the degree of the national or federal interest, and the nexus of the issues and the firms with the global marketplace.

"If the answer to the first inquiry is that federal involvement is warranted, the inquiry then turns to what kind of federal involvement would best provide for attaining the policy objectives. Federal involvement can take many forms, ranging from direct regulation to standard-setting or operating a program that supports or replaces an otherwise failed insurance market. In all events, federal involvement should be targeted to areas in which that involvement would solve problems resulting from the legal and practical limitations of regulation by states, such as the need for uniformity or the need for a federal voice in U.S. interactions with international authorities."
With this in mind the report suggests eighteen areas where the states should be required to implement federal standards in solvency and market regulation. The report lists nine areas for direct federal regulation, which includes producer licensing reform and which specifically endorses the approach in the NARAB II legislation, the passage of which is a priority for ABIA.

The report also leaves open the possibility that congress adopt a comprehensive solution, such as an Optional Federal Charter, and lists the bills that would have enacted such reforms in previous congresses. These bills are consistent with the recommendations Treasury offered Congress in the Administration's 2007 proposal on financial modernization. Another comprehensive solution, and one that would have to be passed in Congress for the state-based reforms to succeed, would be the suite of targeted reforms recommended in the SMART Act, proposed in 2006. This system of federal tools achieved uniformity by providing the states with one set of tools to enact and enforce.

The report is long and offers good suggestions for how best to proceed; however, it remains the case that congress would need to draft, debate, pass and then enact legislation for any of those recommendations to become law. Currently, the only legislation pending is the NARAB II bill. Alternatively, the states are free to enact any of the state-based reforms mentioned in the report. ABIA will strongly support this position in the upcoming meetings of the National Association of Insurance Commissioners (NAIC), the National Conference of Insurance Legislators (NCOIL) and the National Conference of State Legislatures (NCSL).