Washington

President Barack Obama signed financial services reform into law last week, setting in motion an intense effort by interested parties to shape the regulations and government bodies that will implement the legislation to their liking.

For insurers, H.R. 4173–the Dodd-Frank Wall Street Reform and Consumer Protection Act–generally retains state regulation of insurance, while giving federal financial regulators authority to prevent future market meltdowns by forcing prompt corrective action and, in a pinch, a federal takeover of failing institutions (including insurers) deemed to constitute a potential systemic risk.

Thus, the final bill "allows federal regulators' whiskers, not their nose, under the tent of state regulation," one industry lobbyist quipped.

The law contains a provision to modernize and substantially streamline the surplus lines and non-admitted market. This provision dictates that in any multistate placement of surplus lines, the only state whose rules govern access to the products is the state in which the insurance is placed–the "principal place of business" for the insured. The bill would also streamline regulation of the reinsurance market.

The law also creates a Financial Stability Oversight Council to monitor large institutions and take them under federal control, if necessary. But the provision also gives state insurance regulators the authority to "wall off" insurance companies from their troubled holding companies.

State regulators will also retain their role to monitor consumer protections in the insurance sector.

The bill establishes a Federal Insurance Office, but one with far more limited powers than originally envisioned by backers.

Through the FIO, the Treasury Department will share with the U.S. Trade Representative's Office the ability to conclude bilateral trade agreements on insurance with foreign countries that would preempt inconsistent state laws. FIO will have no regulatory authority, but it will have the power to monitor all activities related to the business of insurance except for health and long-term care coverage.

The FIO provision "signals the beginning of a new era of federal involvement, at least at the macro level, in the U.S. insurance industry," analysts at Washington-based K&L Gates said in a note to investors.

Significantly, however, the K&L note points out that the law "does not include a federal insurance charter provision, long sought by many in the insurance industry, and the states will remain the primary insurance regulatory authority."

However, the law mandates that the FIO conduct a study of insurance regulation and make recommendations to Congress within 18 months. The House added a provision to the study requiring that it include recommendations on the U.S. and global reinsurance markets.

Frank Nutter, president of the Reinsurance Association of America, said that while his group is "pleased with the establishment" of the FIO and passage of the law in general, reinsurers have reservations they hope the FIO study will address.

"While it is certainly a positive step toward improving the ability of the U.S. to deal effectively and efficiently with foreign regulators in the matters of insurance and reinsurance, we would have preferred that it have greater authority to address global reinsurance," said Mr. Nutter. "However, the legislation contains a study of the reinsurance market that should make clear that a strengthened federal office is a necessary feature of a sound regulatory oversight system."

Industry officials emphasized that the reform process is far from over, as regulations are written to implement the law.

Leigh Ann Pusey, president and chief executive officer of the American Insurance Association, noted that "it will be important in the months ahead to work with Treasury and other federal regulators to ensure the implementing regulations and related rule-making are consistent with the legislative intent." She added that "with some 250 new regulations to be implemented by 11 different federal agencies, the stage is now set for an intense rule-making process that will be AIA's top priority."

"We need to remain vigilant to ensure that the low-risk nature of the property and casualty industry continues to be recognized during the implementation phase," she said.

David Sampson, president and CEO of the Property Casualty Insurers Association of America, said while PCI is "pleased that Congress ultimately limited the scope of the FIO and recognized that it should not be a duplicative federal insurance regulator," he cautioned that "it is important to note that this is still only the midpoint for financial services reform."

"We have a long road ahead of us as we move into the rule development phase. We look forward to working with regulators to preserve a strong and stable insurance marketplace to protect home, auto and business owners."

Charles Chamness, president of the National Association of Mutual Insurance Companies, said that "for the most part, our arguments were accepted and the legislation rightly respects the role of state insurance regulators," noting that the law "does not impose onerous new federal or dual regulation on the property and casualty insurance industry."

He said NAMIC will be particularly wary about the operation of the new FIO, which under the law should provide Congress and the White House with information regarding the insurance industry and assistance in trade negotiations and other policy decisions. "This office was created with the intent of providing information and expertise about the insurance industry to policymakers, and NAMIC will continue working as the FIO takes shape to ensure it remains true to that purpose," he said.

Robert Rusbuldt, president and CEO of the Independent Insurance Agents and Brokers of America, said his group is "pleased that the final financial services regulatory reform legislation leaves day-to-day regulation of the insurance market at the state level," adding that p&c insurers were not to blame for the financial crisis and pose no systemic risk to the economy.

Officials of the National Association of Professional Surplus Lines Offices said the group is "pleased to see NAPSLO's efforts to establish a more rational and efficient method of paying surplus lines taxes and conducting multistate surplus lines transactions become a reality."

NAPSLO called the non-admitted industry and their broker representatives "big winners" in the law's passage. However, NAPSLO officials cautioned that to realize the full benefits of the law, "the states must implement the surplus lines reforms in the way Congress has directed."

NAPSLO Executive Director Richard Bouhan explained that the full promise of the new law will not be realized until the states have put in place uniform forms, processes and procedures for collection, payment and allocation of surplus lines premium tax, implemented through an interstate compact or similar mechanism.

Currently, the majority of states require payment of an allocated portion of tax on a multistate risk, but several state statutes impose the tax on the entire gross premium of a multistate risk, which can create a "double tax" on a portion of the premium in some transactions, the industry noted.

Mr. Bouhan said the surplus lines modernization provisions "will make access for insurance consumers to the surplus lines market quicker and more efficient, and the payment of surplus lines premium taxes to the states less burdensome for the consumer and broker."

The president of the American Association of Managing General Agents, Mark Rothert, head of Ron Rothert Insurance Services in Portland, Ore., noted the efforts of other associations, in addition to NAPSLO, in getting the surplus lines provision passed. He cited the IIABA, the Council of Insurance Agents and Brokers, PCI and RAA, as well as support from big commercial policyholders via the Risk and Insurance Management Society.

"We now continue with the second phase of moving this from legislation to implementation through the Surplus Lines Insurance Multistate Compliance Compact, which the industry has been working on with all state regulators and the AAMGA member surplus line and stamping offices," Mr. Rothert added. "We have a year to get the job done and will continue to move this forward with the same mutual energies that allowed us to persevere with this effort."

Ken Crerar, president of the Council of Insurance Agents and Brokers, said "now that multistate surplus lines placements will be subject to regulatory oversight by a single state, a substantively streamlined process will be created for commercial consumers, regulators, insurers and brokers."

Among last-minute actions, a decision to drop a $19 billion tax on large financial services companies to finance the law's implementation means insurers will no longer face the potential of front-end assessments to pay for liquidating insolvent financial institutions.

Special Reports /

Focus Shifts To Regulation Writing, Implementation On Fin'l Reform Law

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