The Blind Men and the Elephant: How In-House Counsel Might See Dodd-Frank Differently—Part 2

The Blind Men and the Elephant: How In-House Counsel Might See Dodd-Frank Differently—Part 2  

Note: This is the second in a series of articles that will explore the reach of the Dodd-Frank Act as it impacts in-house counsel. 

We have observed that the size and scope of the Dodd-Frank Wall Street Reform and Consumer Protection Act virtually guarantees that in-house counsel across different industries will likely face different challenges in ensuring their companies are in compliance. 

Dodd-Frank, of course, is the omnibus federal law enacted last summer that seeks “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” But like in the story of the Blind Men and the Elephant, companies that approach it from different angles, according to their industry, will view it in different ways. 

Safe to say the insurance and reinsurance arenas will be as challenged as many others are, but at least one top attorney says it shouldn’t be that way. 

“The area that we’re most concerned about for insurance is in the systemic risk area, and whether or not insurance companies are going to be large companies that would be deemed to be potentially systemically risky,” says Fran Semaya, chairperson of the American Bar Association’s (ABA) Task Force on Federal Involvement in Insurance Regulation Modernization.  “And there’s a tremendous outcry from the industry and the regulators saying that insurance and reinsurance companies are not systemically risky; if one fails, it is not going to tumble the economy of this country.” 

Title V 
Nevertheless, Title V of Dodd-Frank—aptly named “Insurance”—contains unmistakable signs that significant changes are in store for the industry, most notably the introduction of limited federal oversight into an area traditionally left to individual states to regulate.– One thing Title V does is create a Federal Insurance Office (FIO), charged with monitoring the insurance industry, collecting information on insurance activities, advising the Financial Stability Oversight Council (another Dodd-Frank–created entity) regarding potential systemic risk by any insurer, and representing the United States at international meetings concerning insurance.   

Although the FIO is generally not authorized to preempt any state regulation of insurance rates, premiums, underwriting practices, sales, solvency or antitrust matters, some warn that its creation could be the thin end of a wedge of federal involvement in the insurance industry. Dodd-Frank requires that the FIO report to Congress within 18 months on how insurance regulation could be modernized, including how to achieve uniformity in state regulation, whether federal regulation of some lines of insurance would make sense, and whether the federal government should step up consumer protection activities. A report calling for increased federal involvement could indicate future legislation mandating it. 

Some industry insiders take comfort from language in the act that requires the FIO to get input from state regulators and peer federal agencies before pursuing further reporting obligations for insurance companies. Leigh Ann Pusey, president and CEO of the American Insurance Association, told the National Underwriter Property and Casualty News shortly before Dodd-Frank received final Senate approval that “[i]n most instances the legislation appropriately recognizes that our industry does not pose a systematic risk.”

Either way, however, it seems clear that in-house counsel at insurance companies will need to brace for possible increases in future federal involvement.   

Surplus Lines 
The other major insurance provision of Dodd-Frank focuses on surplus lines insurance and reinsurance. Surplus lines insurance has long presented headaches to in-house counsel charged with ensuring that regulatory schemes are satisfied, particularly where multi-state risks are concerned.  Dodd-Frank, however, requires single-state regulation of the placement of surplus lines insurance as well as application by all states of uniform eligibility criteria for U.S. and foreign surplus lines insurers. Among other things, it provides that only an insured’s home state may require payment of premium taxes and encourages all states to reach agreements on how to allocate and remit taxes among them. 

In-house counsel will have to be aware of any agreements affecting the states in which their companies do business. Semaya notes that there are two major competing versions of such an agreement currently circulating: one from the National Conference of Insurance Legislators (NCOIL) known as the Surplus Lines Insurance Multi-state Compliance Compact (SLIMPACT); and the other from the National Association of Insurance Commissioners. According to Semaya, SLIMPACT—which would allow compliance with the laws of only the home state of the insured where multi-state risks are involved and would provide for uniform tax allocation formulas—has the inside track. As of late March 2011, at least two state legislatures had signed on and 11 more were considering it. 

In the reinsurance arena, Dodd-Frank eliminates the application of extraterritorial regulation of credit for reinsurance and addresses the solvency regulation of U.S. reinsurers. A reinsurer’s home state would be solely responsible for regulating its financial solvency, and other states may not require the reinsurer to provide financial information other than that which the reinsurer is required to file with its home state. In-house counsel will need to be aware of this single-state regulation and financial reporting scheme. 

Less than a year into the enactment of Dodd-Frank, it’s unclear just how drastically the law will change the insurance and reinsurance landscape in the long term. What is certain, however, is that in-house counsel for insurers and reinsurers will not be spared from the brunt of the changes affecting the entire financial spectrum.