While the Federal Insurance Office's regulation modernizationreport attempted to re-frame the traditional state vs. federaldebate by advocating for a hybrid regulatory approach, someinsurance groups feel the FIO leveled unwarranted criticisms on thestate-based system.

A pair of industry experts, though, noted that the ultimateobjective of the report was not to extol the virtues stateregulation, but rather to propose ways to improve upon it.

The report, mandated by the Dodd-Frank Act and releasedyesterday after a series of delays, alters the state vs. federaldebate by contending that it is not whether insurance regulationshould be state-based or federal, but whether there are areas inwhich federal involvement in regulation under the state-basedsystem would be beneficial. 

See PC360's summary of the report here

See further analysis of keyprovisions here

Nearly all insurance groups and experts say they agree with thereport's conclusion that insurance regulation needs to be reformedin some capacity with an aim toward greateruniformity. 

Joel Wood, senior vice president, government affairs for theCouncil of Insurance Agents and Brokers, even championed thereport's recommendations for finding "areas for direct federalinvolvement in regulation."

Wood says, "In particular, we believe the case for a unifiedvoice in international insurance negotiations is persuasive and, inmany respects, irrefutable. The stakes are too high on theinternational regulatory environment for our industry to berepresented in a confusing, disjointed; competitive way."

Wood says he believes the FIO "hits the right notes of balance"in its report.

Most other insurance groups, though, were cautious about how agreater federal role would be pursued, and some felt the reporteither attacked or did not do enough to highlight the positives ofthe current state-based system.

David Sampson, president and CEO of the Property CasualtyInsurers Association of America, notes that the report "starts bylisting a number of attacks on state regulation that PCI believesdoes not adequately reflect the strengths and historical success ofthe current state-based system."

He adds, "Any discussion of insurance regulatory modernizationneeds to start with the recognition that the state-based system hasbenefited consumers by creating the largest insurance market in theworld and one that is innovative, competitive, financially soundand comprehensively regulated."

The National Association of Professional Insurance Agents saysthe report failed to properly highlight conclusions of a June 27 GovernmentAccountability Office report stating that the state-basedsystem worked well to help mitigate the negative impacts of the2008 financial crisis on the insurance industry.

But Howard Mills, chief advisor with Deloitte LLP's insuranceindustry group, tells PC360 that while the report could have gonefurther in pointing out the strengths of state regulation, that wasnot really its aim. The report, rather, was intended to point outweak points and inconsistencies in the current regulatorymodel.

He also notes that given the desire of some within the federalgovernment to pursue a larger role in regulating insurance, it isnot surprising the FIO report did not spend more time celebratingthe strengths of state regulation.

Overall, Mills says he felt the report contained no bigsurprises, was fairly limited and its recommendations stuck to whatone would have expected.

Robert Hartwig, president of the Insurance InformationInstitute, says he understands how some might view the report ascritical of the state-based model. "I can see that," he says. "Atthe same time, I think the report is trying to identify areas forimprovement."

He also says he would not be surprised if the report resurrectspassions on both sides of the state vs. federal debate "that haveexisted quite frankly for over a century."

PIA National Executive Vice President and CEO Mike Becker, whilenoting the group needs to take a closer look at the FIO report,wonders if it is merely a first step in a march toward expandedfederal regulation. "On first blush, this looks like 'the camel'snose under the tent,'" he says.

Others, including National Association of Mutual InsuranceCompanies president and CEO Charles Chamness, echoed thatconcern.

Hartwig, though, contends that day has come and gone. "Thecamel's nose is under the tent; in fact the camel's head is underthe tent," he says, noting that Dodd-Frank is the law of the landfor the indefinite future, and it already codifies parts of thehybrid approach to regulation that the FIO report contemplates.

The Federal Reserve, for example, is the ultimate regulator ofsystemically important financial institutions, including insurers,Hartwig notes.

"Other parts of the body are coming under the tent from theConsumer Financial Protection Bureau or HUD, and maybe other areasas well," he adds.

Hartwig says, in fact, that it is almost a positive that the FIOreport was delayed as long as it was, as the industry got to seethe hybrid approach play out through implementation of theDodd-Frank Act.

"So we have clearer understanding of how this hybrid approachwill operate," he says. 

NAMIC's Chamness took a cautious approach to the FIO report'srelease, especially where it explores areas in which a federal rolemay be beneficial. He notes that policymakers should be carefulwhen considering changes to a regulatory system that has provenitself in favor of untested alternatives.

Hartwig and Mills also note strengths in the state-based system,with Hartwig stating, "I think there's no question that, during thefinancial crisis, in terms of solvency and prudential regulation,the current system of state regulation performed very, veryadmirably in the face of extraordinary adversity."

Mills, himself a former superintendent of insurance for NewYork, says the state-based system is very good at monitoring forsolvency. He also said having multiple state regulators provides acertain level of oversight in itself, where regulators check eachother.

But he also says having so many regulators leads toinconsistencies. "Some of the strengths are, in fact, some of thechallenges as well," he says.

Federal regulation brings its own challenges, he notes, such asthe lack of insurance expertise at the federal level and thus adifficulty in acknowledging the differences between banks andinsurers.

Dodd-Frank, in fact, recognized the lack of expertise when itcreated the FIO, Mills says, but at the same time Congress passedthe law without that needed experience and input.

Charles Symington, Independent Insurance Agents and Brokers ofAmerica senior vice president of external and government affairs,summed up the thoughts of most industry groups, stating, "While weagree with the report's conclusion that insurance regulation couldbe improved and modernized in certain areas, we strongly believethat any federal action should be targeted and limited withday-to-day regulation left in the hands of state officials."

Interestingly, one group that did not question the report'sviews on the state-based system was the National Association ofInsurance Commissioners, made up of state-based regulators. NAICPresident and Louisiana Insurance Commissioner Jim Donelon says ina statement, "Like the recent GAO report…we note that [the FIOreport] acknowledges the effectiveness of state-based insuranceregulation and the improvements states have made."

The American Insurance Association, noting it needs more time toexamine the report, struck a neutral tone in its response, althoughPresident and CEO Leigh Ann Pusey did offer words of caution,saying that "any movement toward proposing bindingrisk-classification standards would be counterproductive."

CIAB's Wood says he realizes the report's recommendations for astronger federal role in mortgage insurance and nondiscrimination"will no doubt create a stir," but he contends that "allstakeholders in our industry should be very pleased at the careful,methodical, thoughtful recommendations that have been made in thisdocument. In short, it was worth waiting for. We hope and trustthat this report will be well-received by Congress."