When the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010, it was widely assumed that the following year would entail some regulatory uncertainty as the rule-making and implementation processes unfolded. For the insurance industry, the regulatory landscape in 2012 looks to be a sequel nobody wanted to see. "It's rather unfortunate that more than a year has passed since the passage of Dodd-Frank, and things are still very uncertain," says Howard Mills, director & chief advisor, Insurance Industry Group, Deloitte LLP.
Which is not to say that 2011 was devoid of progress. To the contrary, one of the most significant aspects of Dodd-Frank, the establishment of the Federal Insurance Office (FIO) within the Treasury Department, began operating in earnest. Envisioned as a repository of insurance expertise at the federal level, the FIO is tasked with presenting a harmonized national voice on international insurance matters and also with working closely with the state insurance departments, which remain the functional regulators over the business of insurance. Nonetheless, significant questions remain about what exactly the FIO is doing and what it may ask from insurers. "The FIO is statutorily required to have a report to Congress on the efficiency of the state regulatory system in early 2012," Mills says. "Beyond that, we don't know what they are doing."
Testifying before Congress in October, newly minted FIO Director Michael McRaith summed up his mission. "My aspiration is to develop a foundation of interaction between the FIO and state regulators, to establish customs and practices that best serve the United States, our economy, the insurance industry and consumers," he said. "Per its Dodd-Frank mandate, the FIO will monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a crisis in the insurance industry or the United States financial system; coordinate federal policy in the insurance sector; and offer its insurance expertise to the Financial Stability Oversight Council (FSOC)."
Yet, it's the manner in which the FIO completes this charge that may flummox insurers. Mills says the threat of onerous and duplicative data requests emanating from the FIO cannot be discounted. "The only real power that they have is the power to request data," he notes. "What type of timeframe would insurers have to produce the data? Is this something that could challenge our IT infrastructure's ability to produce it? A lot remains to be seen."
Moreover, Mills offers concern that there is not an expressly allocated budget for FIO, and it has to rely on the Treasury Department for its resources, which may complicate its efforts to build up the technical and human resources it will need to operate efficiently. "When you are new guy on the block and rely on others for support, it's not easy to do," he says.
One vacant position in particular, that of director of the National Flood Insurance Program, has been unfilled for three years and may well signify the uncertain nature of insurance regulation. Mills says the lack of a director has been especially troublesome as legislators push an overhaul of the financially troubled and intermittently funded program. Without a leader of stature heading the NFIP, the effort to enact actuarially sound rates is more susceptible to political pushback from legislators in flood-prone districts.
Systemic Risks
Nonetheless, one open position of significant import to the insurance industry was filled in 2011 as former Kentucky Insurance Commissioner Roy Woodall became the only designated voting member of the FSOC with insurance expertise. Charged with snuffing out systemic risk, the FSOC is developing a formula that would identify systemically important financial institutions (SIFI) to come under greater regulatory scrutiny. In October, the committee released a preliminary list of metrics it is considering to determine whether or not a firm is a SIFI (see sidebar). So which insurers could get the SIFI stamp? In a research note, Keefe, Bruyette & Wood surveyed the nine American life insurance carriers with greater than $50 billion in assets. Of the nine, only MetLife Inc. and Prudential Financial Inc. met any of the metrics. Nonetheless, the FSOC has yet to indicate whether breaching any or all of the criteria is enough to receive the SIFI designation.
However, the systemic risk gauntlet does not end at the water's edge. American Insurance Association (AIA) President and CEO Leigh Ann Pusey expressed concern in congressional testimony this summer that the "global" SIFI or G-SIFI designation process being led by the Financial Stability Board created by the G-20 carries risk for U.S.-based insurers. "We must ensure that this process accounts for the unique nature of insurance and is fair, transparent and, above all, does not overtake Dodd-Frank implementation efforts," she said.
Another continental concern, Pusey said, was whether the United States will be granted equivalency under the third-country equivalence process contained within the European Union's Solvency II framework. "The consequences of a negative equivalence determination, including having to meet solvency requirements without counting U.S. capital, are potentially severe both for U.S. insurers doing business in EU countries and for EU-based insurers with U.S. operations," she warned.
It is here that the FIO can make an immediate impact, Mills says. "There's a lot going on in the regulatory arena globally. That will probably become the space that director McRaith can move to occupy, and I expect that he will be heavily engaged on the international front."
Taken as a whole, the ongoing muddle surrounding insurance regulatory reform at the international, federal and state levels may leave insurers in a state of confusion, Mills predicts. "Until you have real clarity and know what the rules are going to be, it is very difficult to prepare and justify the expenditure of the time and resources necessary."
