The U.S. Treasury's Federal Insurance Office (FIO)long-simmering report on modernization was greeted like a wonk'sRorschach ink blot for many who reviewed it Thursday afternoon.

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The report either affirms state regulation or allows for thehand of the federal government to guide insurance regulation down asmoother path, both for interested parties and for itself incertain areas.

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The National Association of Insurance Commissioners (NAIC)president, Jim Donelon of Louisiana, wrote that he was "pleased theTreasury Department continues to embrace the state-based system ofinsurance regulation."

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Sen. Ben Nelson, NAIC CEO, put it in the same category as othergovernment reports that offer advice by noting that "reports suchas this one, as well as other comments provided by consumers,industry and governmental organizations as part of this process arealways welcome and are useful tools for assisting regulators inidentifying areas that require improvement."

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See PC360's summary of the report here

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See industry reactions here

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Members of the NAIC leadership will be meeting in Washingtonnext week with Treasury Secretary Jacob Lew to discuss the FIO roleand its report.

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"We are glad that the report endorses the passage of producerlicensing reform known as the National Association of RegisteredAgents and Brokers (NARAB) Act," stated National Association ofInsurance and Financial Advisors (NAIFA) President John Nichols,referring to the Act which passed the U.S. House of Representativesin September.

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NAIFA also said it agreed that certain state-based marketplacereforms are crucial for consumers, such as all states adopting theNAIC's Suitability in Annuity Transactions Model Regulation. Thealternative of not significantly moving ahead with this andwidespread state adoption of other model laws across the states isfederal intervention under the FIO report's scenario.

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The FIO report noted that the United States has entered an eraof unprecedented levels of retirement age residents — so financialsecurity for the aging population is an essential priority in itsdiscussion of annuities.

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As in other areas, the report noted that, in the event thatnational uniformity is not achieved in the near term, federalaction "may become necessary."

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The report says that the state-based insurance product approvalprocesses should be improved by securing the participation of everystate in the Interstate Insurance Product Regulation Commission(IIPRC) and by expanding the products subject to approval by theIIPRC.

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The FIO report said that state regulators should pursue thedevelopment of nationally standardized forms and terms, or aninterstate compact, to further streamline and improve theregulation of commercial lines. Likewise, organizations urgedstates to join the IIPRC so that competitive products can bebrought to market faster.

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The report, despite the cries of alarm or resistance frombellweather states like New York and California, also cautiouslyendorsed the NAIC's and the life insurance industry'sprinciples-based reserving, if it has the right controls andoversight.

The American Bankers Insurance Association said it supportedFIO's call for uniformity, its "consideration of an optionalfederal charter," and for its endorsement of the NARAB IIlegislation. The report discussed the recent history of theoptional federal charter but did not call for it's implementationas such.

The American Council of Life Insurers (ACLI) straddled the goodnews/bad news fence by noting that, "The current state-based systemof regulation has served consumers and the industry well forgenerations." However, as noted in the report, "improvements areneeded to promote uniformity and address inefficiencies and burdensfor consumers, insurers and the international community."

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"This report paves the way for hearings and serious examinationof the deficiencies of the state-based system," said KevinMcKechnie, ABIA senior vice president.

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Rep. Ed Royce (R-Ca.), a supporter of the Optional FederalCharter in the past and whose amendment with a colleague createdthe statutory requirement for the report, said state insuranceregulators have been put on the clock to address the"inefficiencies and burdens for consumers, insurers and theinternational community" in the current regulatory apparatus… TheFIO and Congress must hold states accountable if they again fail toact on the recommendations from the Treasury Department. "

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Royce applauded the reports' focus on the need to increase ratefreedom for personal lines insurance consumers and pursue a coveredagreement on reinsurance collateral. Although not in the lifeinsurance arena, the reinsurance collateral is significant on thestate pre-emption and international fronts.

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FIO recommends that Treasury and the United States TradeRepresentative (USTR) pursue a covered agreement for reinsurancecollateral requirements based on the NAIC Credit for ReinsuranceModel Law and Regulation. This model law was adopted by the NAIC inNovember 2011 and two years later had been adopted by 20 or fewerstates allowing less than the previous high of 100 percentcollateral standard, as FIO noted. This is near and dear to thehearts of international reinsurance interests, depending on theterms, but because it is trade, it can be seen as pre-emption ofstate insurance laws.

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Non-U.S. reinsurers play a large role in the U.S. market,accounting for at least 58 percent of the reinsurance premiumvolume that is ceded by U.S.-based insurers.

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FIO Director Michael McRaith wrote in the FIO report that thelikelihood that the Model Collateral Law would be of non-uniformapplication, together with the complicating effect ofstate-by-state inconsistency on economic matters spurred the needfor Treasury to pursue these covered agreements for reinsurancecollateral requirements.

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The primacy of the push for federalization of private mortgageinsurance is not a surprise to some, as it appears to be anadministration and Senate point of interest as Fannie Mae andFreddie Mac wind down, and as mortgage pooling speculation led tothe 2008 financial crisis.

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There have been numerous sightings of federal agencies' nosesunder the tent of state regulation over the years — but never thewhole camel — even before the concept of the optional federalcharter, as championed by Royce and others before him in the 1990s,rose.

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One could pick a year and dust off, say, the Federal InsuranceAct of 1977 (Sen. Edward William Brooke, R-Mass.) with the proposedestablishment of a federal guaranty fund in response to the JusticeDepartment report looking at various exemptions to the federalantitrust laws. Intrusion from the Federal Trade Commission (FTC)was also a concern at one time with its investigation of theretirement industry's disclosure "techniques as well as with autoinsurance pricing and credit scores, as was the IRS and theSEC.

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"The industry should seek to strengthen the NAIC so that theproblems of uniformity can be ameliorated. States should beencouraged, particularly by Commissioners, to adopt uniformregulations and laws as written by the NAIC unless there are strongreasons for making changes," reads a discussion paper of lifeinsurance industry actuaries in 1977. (See: RECORD OF SOCIETY OFACTUARIES 1977 VOL. 3 NO. 4)

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Like other reports before this, the FIO report did not exactlyembrace the current state-based system that most of the industryand the state regulators say has served consumers well for 140years.

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FIO's 65-page report to Congress cited a 2009 McKinsey & Co.report that said a uniform system of insurance regulation canreduce unnecessary cost to the tune of an unnecessary $13 billionannually, $7.2 billion of which are borne by property casualtyinsurers.

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"Okay, enough for history. It serves merely to point out that weare not dealing with a new phenomenon. But recent developments seemto indicate that the discussion may be reaching a new intensity andthat we may indeed see a significant modification in the nature ofinsurance regulation in the not too distant future."

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Wait, that's a quote from 36 years ago, found in the discussiontranscript by then-ACLI staffer Vincent Donnelly.