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New Federal Insurance Office gets a Director, but will it get regulatory authority?

Michael McRaith officially began his new job earlier this month as the first Director of the Federal Insurance Office (FIO or Office) after serving for the past six years as Director of the Department of Insurance in President Obama’s home state of Illinois.  The FIO was established by the Dodd-Frank financial reform legislation of 2010 as an office within the U.S. Department of the Treasury, and represents a part of the Congressional response to concerns about the financial stability of certain large domestic insurers and their subsequent taxpayer bailouts in 2008 and 2009.  Director McRaith will report to Treasury Secretary Timothy Geithner.

At this time the FIO has only an advisory role and monitoring authority over the business of insurance, while regulatory authority remains vested at the state level.  However, the establishment of the Office has caused a great deal of speculation, both within the industry and among state regulators, regarding whether it represents a significant first step towards shifting insurance regulation to the federal level in the future.

Whether federal insurance regulation becomes a reality may ultimately depend on the continued financial security of major insurers in the U.S., since further perceived instability could increase the pressures on state regulators to prove to Congress that the current system remains the most effective option.

For now, Director McRaith will have the opportunity to help shape the new Office’s role, which includes responsibility to recommend to the (also new) Financial Stability Oversight Council (FSOC) those insurers that should be subject to regulation by the Federal Reserve System due to a determination that their financial (in)stability poses a risk to the national financial system.  The Office will also advise the Treasury and White House on insurance matters, report to Congress about the industry, and have some limited preemption authority over state laws that affect international insurance arrangements.  The contents of an FIO report due to Congress in early 2012 regarding the status of insurance regulation could provide the first tangible indications of future agenda-setting for possible shifts in regulatory responsibilities; it will certainly have the full attention of industry stakeholders looking for clues about the future oversight of the business of insurance in the United States.

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