Anticipated Dodd-Frank Federal Insurance Office Report Raises Questions About State Regulation of Insurance

Anticipated Dodd-Frank Federal Insurance Office Report Raises Questions About State Regulation of Insurance

The Federal Insurance Office (FIO)—which was created in June 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act—has sparked debate recently as to whether it is an attempt to federalize insurance regulation and whether this would be beneficial to the industry.

Of particular interest is a report that the FIO was required to release in January of this year, which has yet to appear, said James Veach, a partner with Mound, Cotton, Wollan & Greengrass. The report is expected to contain FIO Commissioner Mike McRaith’s recommendations on ways to improve, modernize and make more efficient state regulation of insurance.

“I just returned from the National Association of Insurance Commissioners spring meeting in New Orleans. There was a lot of discussion about the report, about what’s causing the delay, and what’s going to be in it,” said Veach.

“I suspect that when this report comes out, those who were concerned about a federal invasion of state regulation will be reassured. This report will not be a frontal assault on state regulation,” said Veach.

Veach said he is “quite confident” that FIO and the federal government will not, for example, step into setting premium rates for auto insurance.

Nor does he believe that the report will spend much time on insurance company receiverships.

“Of course, I could be surprised. There exists an NAIC white paper on alternatives to traditional insurance receivership. If the authors of the report are really ambitious and want to get into an area like that, they could write a chapter on how we could make state receiverships a lot more efficient, and close out estates more quickly, and less expensively, but I doubt that [the FIO has] the appetite for that sort of thing,” said Veach.

Nevertheless, when the report does come out, Veach predicts that it will generate a “lot of media attention,” and push back from the NAIC and individual state commissioners.

Joseph T. Holahan of Morris, Manning & Martin, LLP said that there are “some sectors of the insurance industry that would like to see federal regulation because of the cost of being regulated on a state-by-state basis.”

“We’re now faced with the patchwork of state regulation. And there are many who would want to see a single federal regulator … a single set of regulations. A single place to file insurance forms and rates and get approval rather than having to do that 50 times every time a new product is developed,” said Holahan.

He said that those who are opposed to federal regulation believe we currently have a “well-functioning regulatory framework at the state level” that does not require federal involvement.

He also said that there are some who argue that insurance is a local issue, which should take into account the conditions of the particular region.

“So, for example with homeowner’s insurance, you have issues concerning the states that are in the hurricane belt that are different from states outside those areas,” Holahan noted.

Captive Insurance

Another provision included in the Dodd-Frank Act was the Nonadmitted and Reinsurance Reform Act (NRRA), which addressed the regulation of reinsurance and insurance placed on a nonadmitted basis for unusual or hard-to-place risks. The intent of the Act regarding nonadmitted insurance was to “simplify and unify the regulation of surplus lines insurance,” said Holahan.

“Prior to NRRA, the reporting and payment of the premium tax on surplus lines was really a mess. Surplus lines brokers, who generally are responsible for filing and paying the tax, had to allocate the tax among the various states depending on where the risks were,” he said.

Under NRRA, only the “home state” with respect to the insured risk can require payment of the premium tax.

“The home state generally is where the insured has its principal place of business—and then the states are free to enter into interstate compacts to allocate the tax among themselves—but the home state collects 100 percent of it,” said Holahan.

When the bill was working its way through Congress, the intent was to focus on surplus lines.

“Now there are some who argue —¬¬ I would argue the contrary—but there are some who argue that this applies not only to surplus lines but also captive insurance,” said Holahan.

Holahan said this is “creating some confusion” among captive owners and that he expects to see further clarification on the issue. He also recommended that companies that have a captive insurer or are considering forming one take a “close look at their captive insurance programs … especially at state insurance regulation where they have their principal place of business and where there are concentrations of insured risk.” “It’s important to structure your captive program to minimize the risk of incurring premium tax liabilities outside the domicile of the captive,” Holahan said.