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F.I.O. Finally Makes its Recommendation: “Hybrid” State-Federal Insurance Regulation

Back in June 2011, we reported here that Congress’ brand new creation known as the “Federal Insurance Office” (FIO) had found its first Director in former Illinois regulator Michael McRaith.  We cautiously anticipated then the issuance of the FIO’s initial report to Congress, scheduled for January, 2012, regarding the effectiveness of the state-based system of insurance regulation, as well as recommendations for changes and improvements.  Industry stakeholders speculated then about what the establishment of this new federal bureaucracy might signal and what role the Feds might be looking to assume in their industry in the wake of scares about financial instabilities surrounding major U.S. insurers. The decades-old debates about federalism in the regulation of insurance were sparked anew and we waited for word from Director McRaith and his Office.  And we waited.  A year passed and we waited some more.  Another year passed and the Feds rolled out their health insurance marketplace and that went…well, they did roll it out!  You may have heard.

At long last, the FIO finally issued the long-overdue report to Congress on December 12, 2013.  So what does it say?  Well, not surprisingly, the Feds do see a role for themselves in insurance regulation, but the states should have one too, the report says.  A “hybrid” model of state-federal regulation is recommended, for now.  As summarized in its accompanying press release:

[T]he report concludes that in some circumstances, policy goals of uniformity, efficiency, and consumer protection make continued federal involvement necessary to improve insurance regulation. However, the report concludes that insurance regulation in the United States is best viewed in terms of a hybrid model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths and opportunities that each brings to improving solvency and market conduct regulation.

The report acknowledges the massive undertaking, and expense, that would be required to re-shape insurance regulation into a pure federal model, and further recognizes the importance of local (state) regulation for best understanding and responding to the market close to its consumers.  Thus, a hybrid model is probably best, the report concludes, but modernization is necessary and the report suggests some specific areas where states must improve, including with respect to:

  • Capital solvency/financial soundness of companies
  • Resolution practices reforms
  • Marketplace monitoring and regulation improvements

The report is in.  The debate carries on.

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