The Federal Insurance Office (FIO) has – nearly two years overdue – finally published its long awaited report to Congress on its recommendations for the modernization of insurance regulation in the United States. The broadly ranging 65-page report identifies limitations in the current state-based regulatory model but does not recommend that federal regulation should displace state regulation entirely. Rather, the report proposes a hybrid model, where the current state-based system is generally preserved except where the need for greater uniformity or the requirements of an increasingly global insurance industry are best served by regulation at the federal level.


The FIO’s December 2013 report, entitled “How to Modernize and Improve the System of Insurance Regulation in the United States,” can be found here. The FIO’s December 12, 2013 press release about the report can be found here.


Section 502 of the Dodd-Frank Act created the FIO as a unit within the U.S. Department of Treasury to monitor all aspects of the insurance industry and, among other things, to identify issues contributing to systemic risk. Section 502 (p) of the Act expressly provided that “not later than 18 months after the date of the enactment of this section, the [FIO’s] Director shall conduct a study and submit a report to Congress on how to modernize and improve the system of insurance regulation in the United States.” The Act was enacted in late July 2010, and the modernization report was officially due on January 21, 2012, nearly two years ago. In preparing the report the FIO solicited public comment and also held public hearings as well.


The Dodd Frank Act was of enacted in the wake of the global financial crisis, in order to try to address the issues that were thought to have caused the crisis. As the FIO’s recent report acknowledges, one of the critical developments at the peak of the crisis was the near collapse of insurance giant AIG. However, it is worth noting that the problems that led to AIG’s near demise did not involve its insurance operations (which were and are regulated at the state level), but rather involved the company’s alternative financial products division (which theoretically at least was regulated at the federal level).


Thus even though a critical part of financial crisis was the near collapse of one of the largest participants in the global insurance industry, that development in and of itself does not present a case for setting aside the current model of insurance regulation in the United States. Indeed, the insurance industry generally weathered the financial crisis in reasonable good order, which could be interpreted to make the case for preserving the current regulatory model.


On the other hand, as the FIO report notes, the current balkanized regulatory model, involving as it does 56 different insurance regulators (if the regulators in the District of Columbia and territories are included in the count) “creates inefficiencies and burdens for consumers, insurers, and the international community.” The report observed that “the need for uniformity and the realities of globally active, diversified financial firms compel the conclusion that federal involvement of some kind in insurance regulation is necessary.”


However, the FIO does not suggest that the limitations in the current system imply that a federal regulator should displace state regulation completely. The report observes that the creation of a new federal regulatory agency to regulate all or part of the $7.3 trillion insurance sector “would be a significant undertaking.” For the federal government to amass the “personnel, resources and institutional expertise to execute such an endeavor” would require a substantial and unequivocal commitment from the political branches of government.


The report concludes that “the proper formulation of the debate” is not whether insurance regulation should be state or federal, “but rather whether there “are areas in which federal involvement in regulation under the state-based system are warranted.”


With this approach, and based on an extensive overview of the current state of the industry and the current approach to regulation, the report recommends a number of steps that could be taking to modernize and improve the regulatory system. The steps are divided into two categories: short term steps for the states to take; and steps toward direct federal involvement in regulation in certain areas.


Among other things, the report suggests that states should come up with new policies related to resolving failed insurers; monitor the impact of different rate-regulation and market conduct examination practices; develop plans to reduce losses in natural disasters. The report also suggests that the states should develop a uniform regime for the oversight of reinsurance captives. In addition, the report suggests that the states “should move forward cautiously with the implementation of principles-based reserving.”


As far as regulation at the federal level, the report recommends, among other things, the development and implementation of federal standards and oversight for mortgage insurers; in order to effect uniform treatment of reinsurers, develop provisions for reinsurance collateral requirements; and identify issues or gaps in the regulation of large national and internationally active insurers. The report also proposes that the FIO will study and report on the use of personal information in insurance pricing. The FIO also proposes to make recommendations pertaining to the availability of certain types of insurance for military personnel and Native Americans. The FIO will also monitor state progress on modernizing the collection of surplus lines taxes “and determine whether federal action may be warranted in the near term.”


According to news reports (here), the industry has generally been supportive of the FIO’s approach, although there clearly is wariness of the steps toward federal regulation that the report recommends. In addition, as noted in a December 14, 2013 memo about the report from the Nelson Levine de Luca & Hamilton law firm (here), one of the more “surprising” aspects of the report is its suggestion that “if states do not reform their laws and processes to meet the recommendations of the report, they could face federal action. “ The memo went on to note that the report suggests that “Congress should strongly consider direct federal involvement if states do not implement the FIO’s recommendations.”


The report includes several recommendations that may be of particular interest to readers of this blog. For example, among the report’s recommendations for the state is the proposal that the states should “develop corporate governance principles that impose character and fitness expectations on directors and officers appropriate to the size and complexity of the insurer.” The report explains this recommendation by noting:


Many U.S.-based insurers are expanding rapidly in geography, size and complexity, thereby imposing even greater de­mands on leadership. For example, internationally active insurers are increasingly engaged in sophis­ticated enterprise risk management practices to measure and understand risks posed to the enterprise from any angle or perspective. With standards appropriately scaled to the size and complexity of the firm, state regulators should adopt director and officer qualification standards that require individuals serving in those roles to have the expertise to assess strategies for growth and risks to the enterprise. For an insurer that exceeds size and complexity thresholds, state regulators should adopt an approach designed to ensure that individuals nominated to serve in the firm’s leadership ranks have sufficient capacity to understand and challenge an insurer’s enterprise risk management.


Another recommendation in the report that will be of interest to this blog’s readers is its suggestion that “the National Association of Registered Agents and Brokers Reform Act of 2013 should be adopted and its implementation monitored by the FIO.” This proposed legislation, which can be found here, is intended to create a uniform agent and broker licensing clearinghouse is supported by the Independent Insurance Agents and Brokers of America. (More information about this proposed legislation can be found here.)


The FIO report contains a wealth of information, including some very interesting data showing how important the insurance industry is in the United States. Among other things, the report states that 2012 U.S. insurance premiums totaled $1.1 trillion, representing 7 percent of the country’s GDP. Insurers directly employ 2.3 million people in the U.S, representing 1.7 percent of non-farm payrolls. As of year-end 2012, insurers reported $7.3 trillion in total assets, including $6.8 trillion in invested assets


Special thanks to a loyal reader for sending me a copy of the FIO report.


And in the End: The Beatles ended their Abbey Road album with the simple song called “The End.” The song features short but memorable lyrics – “And in the end, the love you take is equal to the love you make – and a sonic quality that make the track truly unforgettable. In a December 13, 2013 post on Something Else Reviews entitled “Deep Beatles: ‘The End,’ from Abbey Road (1969)” (here), music journalist Kit O’Toole takes a closer look at the song, which she says “serves as more than a mere final track to an album”; the song, she says, “effectively summarizes [the Beatles’] career trajectory as well as the end of the 1960s.”


The song features one of the only drum solos that Ringo Starr has ever recorded, as well as the dueling guitar solos featuring the other three Beatles. As O’Toole says, “after the angst expressed in ‘Carry That Weight’ and the ‘You Never Give Me Your Money’ reprise, ‘The End’ injects pure adrenaline and joy in the proceedings.”


Even if you think you know the song, read O’Toole’s account of how the song was recorded and how the pieces came together, and then listen to the song again on the embedded video link below. (The video starts with “Golden Slumbers” and ends with “The End”.)


O’Toole ends her article quoting Paul McCartney as saying “I’m very proud to be in the band that did that song and that thought those thoughts and encouraged other people to think them to help them get through little problems here and there.” It really is a great song.


After you have watched the video, you might want to visit the website for Abbey Road Studios (here) which has a webcam set up on the famous Abbey Road cross walk. If you check out the webcam shot during the daytime (London time) you won’t have to wait long to see random groups of people trying to recreate their version of the Abbey Road album cover.