NU Online News Service, March. 4, 3:23 p.m. EST
The emerging conflict between state and federal regulators over regulation of large insurance companies is the "cutting-edge issue as it relates to insurance regulation at this time," according to several industry lawyers.
Sam Caligiuri, a partner at Day Pitney in Hartford, said that because it is a "cutting-edge issue," how the Financial Stability Oversight Council (FSOC) defines its authority to regulate insurers under the Dodd-Frank bill will "play out over the next few months to a year."
One of the ways the issue is being defined is through the FSOC proposal on the criteria it will use in determining whether an insurer presents a potential risk to economic stability and therefore should be monitored by the Federal Reserve Board.
Eric Arnold, a partner specializing in insurance regulation at Sutherland, Asbill & Brennan in Washington, D.C., said the insurance industry comment letters on the FSOC proposal are questioning the FSOC's authority to promulgate a regulation that provides no analytical framework for determining whether an insurer constitutes a potential threat to financial stability.
He said "it will be very interesting" to see how this plays out.
He sees congressional pressure on the FSOC not to promulgate the rule establishing a framework for determining if an insurer is systemically risky until the FIO post is filled and the independent insurance member of the FSOC is nominated by the administration and confirmed by the Senate.
Mr. Arnold cited letters from members of both the House and Senate on the independent FSOC member and FIO director appointments as potentially forcing the FSOC to delay the applicability of the federal oversight provisions to insurers until these officials are seated.
Mr. Caligiuri said that what makes the timing so significant is that under Dodd-Frank, the Federal Insurance Office is supposed to conduct a thorough review of insurance regulation through 2011 with a report and recommendation due to Congress by early 2012.
He said the proposed FSOC regulations, depending on how broadly federal power is defined in the regulation, could have the effect of pre-empting the recommendations that the FIO is supposed to make to Congress in early 2012.
"In a sense, you have two facets of Dodd-Frank arguably working in conflict with one another," Mr. Caligiuri said.
He added that what remains to be seen is how effective the federal government will be in recognizing how different insurance is from banking and, as a result, having the regulations reflect those differences as well as an actual functional respect for the ongoing role of state insurance regulators.
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