NU Online News Service, July 1, 12:31 p.m.EDT

WASHINGTON–The House took an important step towardreforming financial services industry regulation last night,passing legislation that would for the first time establish afederal office designed to deal with insurance activities.

The legislation also contains a provision that climaxes aneight-year insurance industry effort to modernize and substantiallystreamline the surplus lines and non-admitted market.

The bill, H.R. 4173, the Dodd-Frank Wall Street Reform andConsumer Protection Act, passed by the House of Representatives, bya vote of 237-192 along party lines, sets the stage for Senatepassage of the legislation when it returns from an Independence Dayrecess July 12.

"This bill is about putting the referee back on the field andsaying, 'Obey the rules; do not trample on the little people; don'ttake risks that
you will expect them to pay for,'" said House Majority Leader StenyHoyer, D-Md.

Senate action was delayed because of procedural reasonsexacerbated by the unexpected death of Sen. Robert Byrd, D-W.Va.,and the fact that Republicans balked at a last minute decision toadd a tax on financial institutions to raise $19 billion estimatedto pay for implementation of the bill over 5 years. That forcedDemocrats to reopen the conference and drop the tax in favor ofother means of raising the money.

Ironically, the delay benefited the insurance industry. BlainReithmeier, a spokesman for the American Insurance Association,explained that, "This is a major development because in removingthe proposed tax, insurers will no longer face the potentialfront-end assessments as was originally proposed in that title ofthe bill."

The insurance industry escaped most provisions of a bill thatwas mostly "bank-centric."

The National Association of Insurance Commissioners thankednegotiators crafting a final bill saying that it "largely preservesthe critical role of state insurance regulators in protectingconsumers and ensuring the viability of the insuranceindustry."

Specifically, NAIC officials said they supported the finallanguage in the bill creating the so-called Federal InsuranceOffice.

The final bill allows the FIO to provide Congress and theadministration with information and expertise on insurance mattersin the course of setting government policy and conducting tradenegotiations.

Jane Cline, NAIC president and West Virginia insurancecommissioner, said, "We were pleased to see that the FederalInsurance Office (FIO) set up under the bill is narrowly designedto carry out its mission while not unnecessarily undermining strongstate regulation."

"In similar fashion, the addition of a state insurance regulatorto the Financial Stability Oversight Council created by thislegislation will add an important safeguard for consumers andprovide an early warning system for other financial regulators ifan insurance company were to become subject to systemic risk," sheadded.

Under the bill, federal regulators would have the authority towind down troubled large institutions. But, as the NAIC noted, themeasure also makes clear that state insurance regulators willcontinue to have the ability to "wall off" insurance companies fromtroubled holding companies, protecting insurance policyholders fromother risks in the financial system. State regulators will alsoretain their role to monitor consumer protections in the insurancesector.

The bill would also impact industry investment and hedgingactivities.

In the FIO, the Treasury Department will share the ability toconclude bilateral trade agreements on insurance with foreigncountries that preempt inconsistent state laws with the U.S. TradeRepresentative's Office.

The office will have no regulatory authority, but it will havethe power to monitor all activities related to the business ofinsurance except for health insurance and long term careinsurance.

The final language also mandates that the new FIO conduct astudy of insurance regulation and make recommendations to Congresswithin 18 months. The House added a provision to the studyrequiring that the study include recommendations on the U.S. andglobal reinsurance markets.

The surplus lines provisions in the bill dictate that in anymulti-state placement of surplus lines, the only state whose rulesgovern access to the products is the state in which the insuranceis placed–the "principle place of business" for the insured.

Under the provision, those rules include diligent searchrequirements (declinations), premium tax allocations, andeligibility standards. The new rules will go into effect one yearafter the measure is signed into law.