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Reactions Mixed to FIO Modernization Report

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On December 12, 2013, the Federal Insurance Office released its report on how to modernize the United States insurance regulatory system. The report had been long awaited by the insurance industry, so it comes as no surprise that many in the industry have responded to the report’s findings. So far, reviews are mixed.

National Association of Insurance Commissioners:

“The Dodd-Frank Act established the Federal Insurance Office (FIO) within the Treasury Department and makes clear that FIO is not a regulatory agency and its authorities do not displace state insurance regulation.  While we appreciate FIO’s suggestions for improvement, the states have the ultimate responsibility for implementing regulatory changes.”

Independent Insurance Agents & Brokers of America, Inc.:

“While we agree with the report’s conclusion that insurance regulation could be improved and modernized in certain areas, we strongly believe that any federal action should be targeted and limited with day-to-day regulation left in the in the hands of state officials. The state-based system of insurance regulation has served consumers and our economy well for decades. The Big ‘I’ strongly supports the continued preservation of this system and is ardently opposed to any direct infringement by the federal government.”

National Association of Professional Insurance Agents:

“As a strong supporter of our successful state-based system of insurance regulation, we are concerned that the FIO report may be driven by assumptions and assertions that do not hold up to scrutiny. Many of FIO’s assumptions appear to have been contradicted by a Government Accountability Office (GAO) report that concluded that the state insurance regulatory system worked well to help mitigate the negative effects of the 2007-2009 financial crisis on the insurance industry.”

American Insurance Association:

“The Report provides a valuable guidepost for collectively working toward improvements that lead to greater regulatory effectiveness, efficiency, and marketplace competition.  The overall objective of modernizing and improving U.S. insurance regulation should be to promote the growth of healthy, competitive private insurance markets at home and abroad that will ultimately benefit and protect insurance consumers while emphasizing safety and soundness.  The FIO Report affirms these essential goals.”

RIMS:

“RIMS strongly supported the creation of the Federal Insurance Office as a first step toward needed federal regulation of the insurance market. There is no question that commercial insurers, producers and policyholders would benefit from more consistency and uniformity in terms and conditions when insurance is purchased from a single insurer.  Opportunities to streamline the insurance purchasing process are a priority for this Society and we’re happy to see the FIO make progress to enhance regulations.”

There is obvious tension between the FIO and many in the industry over what exactly the FIO’s role is and should be going forward. Now that the report has been released, it will be interesting to see what the FIO’s next steps are. Many government issued reports are released and never heard from again. It remains to be seen if the FIO’s report meets that same fate.

FIO Releases Insurance Modernization Report

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The Federal Insurance Office has released its long awaited report on ways to modernize United States insurance regulation has finally been released. The report, originally due January 21, 2012, was mandated as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In the report, the FIO calls for a “hybrid approach to insurance regulation that provides a practical, fact-based roadmap to modernize and improve the U.S. system of insurance regulation,” said Michael McRaith, Director of the Federal Insurance Office. “Importantly, this report reflects the dynamic nature of the regulatory system for insurers and provides an explicit path for state and federal regulatory entities to calibrate involvement going forward.”

“Today’s report details strengths and weaknesses of the current insurance regulatory system, considerations for determining where and how to modernize and improve that system, and a way forward to increase the effectiveness of insurance oversight in the United States, said Under Secretary for Domestic Finance Mary Miller. “This is a significant step in understanding and strengthening the current system to better protect American consumers.”

The FIO considered several factors in putting together the report including: systemic risk regulation with respect to insurance, capital standards, consolidated supervision, consumer protection and affordability, the degree of uniformity of state insurance regulation, and international coordination. A look at the costs and benefits of federal regulation over a variety of insurance lines was also required by Dodd-Frank, in addition to issues pertaining to competitiveness. All lines of insurance, excluding health, were examined.

A full copy of the report can be found here.

FSB Suggests More Federal Oversight of U.S. Insurance System

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On August 27, 2013, the Financial Stability Board (FSB) released an interim update on the progress the United States has made in implementing recommendations made during its 2010 Financial Sector Assessment Program (FSAP).

While the FSB does acknowledge that the United States has taken steps toward meeting recommendations through creation of the Federal Insurance Office (FIO), modernizing of solvency requirements, and increased coordination between U.S. state regulators and federal authorities, it concludes that “significant work is required to fully address the FSAP recommendations” in the area of insurance.

In a press release the FSB states that, “The architecture for insurance supervision in the U.S., characterized by the multiplicity of state regulators, the absence of federal regulatory powers to promote greater regulatory uniformity and the limited rights to pre-empt state law, constrains the ability of the U.S. to ensure regulatory uniformity in the insurance sector.”

Based on its perceived “drawbacks of the current regulatory set-up,” the FSB laid out several recommendations to enhance the U.S. insurance system: (1) further strengthening of the FIO; (2) further enhancement of insurance group supervision by establishing requirements for consolidated financial reporting for all insurance groups and by giving supervisors additional authority to fully assess the entire insurance group’s financial condition; and (3) implementation of FSAP recommendations concerning terms of state insurance commissioner appointments, rule-making powers of state insurance departments, and funding and staffing of insurance departments in order to strengthen specialist skills.

The FSB’s recommendations have been met with pushback from the National Association of Insurance Commissioners (NAIC). In a June 27, 2013 letter in response to an earlier draft of the FSB’s recommendations, the NAIC argued the report “focuses almost exclusively on the perceived cost of having a state-based system, but spends no time examining the benefits of this approach.” The letter goes on to argue that state commissioners are able to “act more quickly and in closer proximity to consumers,” which has led to an industry that is “competitive, profitable, solvent” while consumers “benefit from choice, security, and a local regulatory response that is second to none.”

Ben Nelson, Chief Executive Officer of the NAIC, went further in a September 17 interview with Bloomberg: “There is, I think, a philosophical difference about government here. We come from the Jeffersonian idea of the states.

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” He went on to say that “there is value in regulation that is closest to the people, because New York is different than Nebraska.

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”

The Financial Stability Board was established to coordinate the work of national financial authorities and international standard setting bodies at the international level. FSAP evaluations are conducted every five years and look at how a country’s financial sector compare to accepted regulatory international standards. For insurance, the study is based on the Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS). Recommendations from the FSB are advisory only and each country decides if and how to implement them.

This report was prepared by representatives from Deutche Bundesbank, Swiss National Bank, Japan Financial Services Agency, European Commission, European Systemic Risk Board Secretariat, Bank of Canada and the Insurance Regulatory and Development Authority of India. The FSB secretariat also provided support and contributed to the preparation of the report.

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Excellence in Risk Management

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The Great Recession is not known for inspiring great things, but it did spur the creation of the Dodd-Frank bill, which, among many things, created the Financial Stability Oversight Council and the Federal Insurance Office. And the near-collapse of the U.S. economy did wonders for the discipline of risk management.

As a result, according to a new survey from Marsh and the Risk and Insurance Management Society (RIMS), executives in the C-suite are expecting much more from the risk managers at their company.

Below are a few of the key findings from the report:

  • An overwhelming majority of respondents said that senior management’s expectations of their organizations’ risk management departments have grown over the past three years. Senior management’s list of desired changes from risk managers includes integrating risk management deeper with operations, executing daily risk management activities more efficiently, providing improved analysis and quantification, and leading enterprise risk management (ERM) activities.
  • The most common focus area for 2011 is strengthening strategic risk management, which was cited by more than half of survey respondents. For the second year, this area came out on top, although barriers to doing so remain.
  • The top barrier cited to senior leadership understanding of the risk landscape was silos within the organization. This is the same answer given in prior years, and is something that organizations should begin to confront if they have not already done so. One way to tear down the silos is to create or strengthen cross-functional risk committees.
  • As the role of chief risk officer (CRO) continues to develop, we are beginning to see some differences in how they view and prioritize the issues. For example, CROs were much more likely than other risk managers to categorize senior management’s change in expectations a “very significant.” CROs said strengthening ERM capabilities and integrating ERM into strategic planning were focus areas for 2011.
  • Economic conditions ranked as the number one risk among respondents, and was also the risk that they were least comfortable with their organizations’ ability to manage. In other areas, such as business disruption, risk managers and the C-suite are not as aligned in their views of how prepared their companies are to manage the risk.
  • Nearly 60% of companies said their use of data and analytics has changed over the past three years. This is likely a reflection of leadership’s desire for there to be more transparency and quantification around risk decisions, particularly the economic implications. Despite the stated changes, however, there appears to be a need for companies to better use the available tools and analytics.

And let’s take a look at the areas in which senior management’s expectations of the risk management department have grown:

It seems the financial crisis continues to shine a light on the importance of risk management as a whole and, more specifically, enterprise risk management and strategic risk management.