While Treasury’s Federal Insurance Office is promoting a hybrid landscape of state and federal insurance regulation, discussion in insurance regulatory circles still centers on preemption of state regulation—the need, fear or avoidance of it.

FIO Director Michael McRaith, in one of his first public appearances since FIO released the modernization report in December, said that no one debates that the absence of uniformity in the states creates inefficiencies and burdens for stakeholders like consumers and insurance companies.

He said that he envisions building upon the hybrid model and calibrating the state and federal roles.

The states are the primary regulators of insurance, but the federal government is equipped to play a part as well—and will, according to McRaith’s remarks at the Networks Financial Institute’s (NFI) 10th anniversary Insurance Public Policy Summit at Indiana State University in Washington on Mar.12.

McRaith highlighted a few areas of concern examined in the modernization report including reinsurance collateral, life reinsurance captives, market conduct exams, product approvals and data mining and producer licensing.

“These are a few examples of longstanding issues in need of a solution. The status quo will not resolve the problems of inefficiency, redundancy, or lack of uniformity,” McRaith said.

National Association of Registered Agents & Brokers Act (NARAB 2) legislation is addressing the multi-state licensing issue, McRaith noted. FIO’s work on a covered agreement on reinsurance under Title V of Dodd-Frank could empower the states to make collateral requirements uniform, the former Illinois insurance director added.

McRaith, however, laid into the controversial state-by-state reinsurance captive regulatory apparatus for its lack of capital standards and its use for state economic development, raising questions about the state-based solvency regime.

As for insurance market conduct exams and product approvals, they are not uniform, and states are far from even developing a consensus approach, according to McRaith’s remarks.

Michael McRaith, FIO Director
Michael McRaith, FIO Director
The states are the primary regulators of insurance, but the federal government is equipped to play a part as well—and will, McRaith says.

In a short interview later, National Association of Insurance Commissioners (NAIC) President-Elect Monica Lindeen, a Democratic elected insurance commissioner in Montana, said that she believes the NAIC has “come a long way” in market conduct and in other areas cited by McRaith.

Also speaking at the conference, Rep. Randy Neugebauer, R-Texas, chair of the House Financial Services Subcommittee on Housing and Insurance, noting that NARAB is pending in the House, said that a NARAB act will indeed happen, but did not give a timetable.

The NAIC is looking at a market accreditation process or standard now, Lindeen said. In her public address to the group, Lindeen also elaborated on market conduct work in dealing with consumer complaints and fighting fraud.

During a brief question-and-answer period following his prepared remarks, McRaith said that perhaps one could get away from the perception that insurance sector should be treated differently than any other sector.

On private mortgage insurance, where FIO clearly sees a federal role, the NAIC is also standing firm in defending the states’ continued oversight.

“We appreciate the offer, but we’ll see you in Congress,” NAIC’s director of government relations Ethan Sonnichsen said in response to the FIO modernization report position on federalizing mortgage insurance.

Earlier, Sen. Heidi Heitkamp, D-N.D., a member of the Senate Banking Committee, championed the laboratory of the states and told conference-goers, which included lobbyists, insurers, current and former state commissioners and Financial Stability Oversight Council (FSOC) insurance expert Roy Woodall, that “if you aren’t paying attention, you should” to international trade challenges to the supremacy of state insurance regulation.

On the subject of legislation introduced in the Senate to change the nature of the Dodd-Frank required bank-like capital standards for insurers, McRaith deferred to the Federal Reserve and previous statements of what Fed and Treasury officials had deemed appropriate.

Insurance industry representatives have noted that Treasury and others in government who worked closely on Dodd-Frank do not want to open up even this section of the act, Section 171, despite the industry’s effort for a precise surgical maneuver to exempt insurers from bank-centric standards.

That’s because when legislation reaches the House for a hearing and any consideration, it could allow for other Dodd-Frank provisions to be added, removed or changed.

A hearing Tuesday before the Senate Banking’s Subcommittee on Financial Institutions and Consumer Protection brought the lingering issue front and center in Washington.

Sen. Susan Collins, R-Maine, introduced a bill Tuesday S.2102, that seeks to clarify that Section 171 does not mean that insurance companies should be treated like banks and that was not her intent in drafting the section in Dodd-Frank.

Leigh Ann Pusey, who heads the American Insurance Association, said that there is really no momentum for Congressional action until perhaps late 2015 on a legislative fix to Section 171, which affects Federal Reserve-regulated insurers, including insurers deemed to be significantly important financial institutions (SIFIs) and companies that have savings and loans whether to serve their policyholders or otherwise.

However, there will be a fix at some point because of the enormous outcry from about half of the Senate and the affected industry, whether it comes from pressure on the Fed to allow for differential treatment of insurers from banks, or eventually from Congress, according to Pusey.

The question about the inevitable capital standard for subject insurers will be, “what does it look like,” Pusey said.

The challenge, she added, will be defending the insurance sector’s risk-based capital standards, which the states use as a trip-wire for regulatory action.

Topics USA Carriers Legislation Reinsurance