Until the Dodd-Frank Act of 2010, regulation of the insurance industry at the federal level had been deemed entirely off limits.
But Dodd-Frank—one of whose primary aims is to avoid another hundred-billion-dollar Washington bailout, such as the one insurer AIG received—sticks the proverbial camel’s nose under the tent of an industry that had been completely state-regulated since the country’s founding.
Under the terms of Dodd-Frank, a Federal Insurance Office (FIO) has been created. A key role of this office is to serve as a negotiator for international insurance treaties.
FIO is also meant to bring insurance-industry expertise to the federal government—the absence of which was made painfully obvious when the Federal Reserve Board and the Treasury Department were forced to help AIG and found that they had few people with any insurance knowledge to turn to.
Dodd-Frank also has created a new committee, the Financial Stability Oversight Council, which has been given the power to impose federal oversight on an insurer deemed to pose a systemic risk to the economy—i.e. “too big to fail.”
Additionally, Dodd-Frank has given birth to an Office of Financial Research empowered to provide the Treasury Department with data on insurance-related activities.
The Nonadmitted and Reinsurance Reform Act (NRRA) is also a part of Dodd-Frank. NRRA provides that the placement of nonadmitted insurance will be subject solely to the regulatory requirements of an insured’s home state and that no state, other than an insured’s home state, may require a surplus-lines broker to be licensed to sell, solicit or negotiate nonadmitted insurance with respect to the insured.
NRRA also provides that no state, other than an insured’s home state, may require any premium tax payment for nonadmitted insurance.
So the key drafter of this legislation that carves out an influential role for the federal government in insurance for the first time certainly qualifies as an industry legend.
Rep. Barney Frank, D-Mass., for whom the landmark legislation is partly named and who played a key role in crafting the final compromise language regarding insurance in the bill, makes it clear that the act bearing his name does not interfere with the state regulation of insurance.
However, what it does do, he says, is try to ensure that ancillary activities conducted by insurers are monitored so that they don’t pose a threat to the U.S. and world economies.
“The key goal of the legislation as to insurance is to impose regulation on new forms of financial activity so that those losses would not impact the rest of the country,” Frank tells NU. “We sought to contain certain types of players who get so indebted they have the potential to hurt everyone.
“We’re going to regulate your activity if the activity poses a threat to the financial system,” Frank continues. “But as to the core business of insurance, we are not going to interfere with state regulation of that,” he adds. “This bill does not interfere whatsoever with state regulation of insurance. The states are doing a fine job.
“Nothing in the bill increases the oversight of the primary business of insurance,” he adds. “But it does provide us the opportunity to gain some expertise [at the federal level] in how insurance is regulated. That was nonexistent before the DFA.”
“The magnitude of the AIG intervention in 2008 had a majority of us in the lobbying community fearing a punitive overlay of federal insurance regulation on top of the state-by-state system,” says Joel Wood, senior vice president for government affairs at the Council of Insurance Agents and Brokers.
“The Federal Insurance Office—a voice at the Treasury Department on international issues and a bully pulpit for insurance regulation generally—wouldn’t have happened without Frank, and we’re grateful for that legacy,” he adds.
As for how states will ultimately adopt NRRA, Wood is optimistic. “While implementation of the NRRA law has been challenging, it does promise an effective solution to the problems of multistate surplus-lines placements.”
Frank says he envisions no need for future federal regulation of P&C insurance: “No legislation is needed at the federal level to address property and casualty issues.
“Any legislation that is needed should address only an insurance company of a size that could cause a national or international [financial] crisis,” he adds. “But as for the business of insurance, regulation of that is unlikely to happen.”