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.

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.