Shortly after industry lawyers called conflicts over the scope of the Financial Stability Oversight Council the "cutting-edge issue" for insurance regulation, an industry report labeled the Federal Insurance Office the "biggest wildcard" in regulatory reform.
Both new federal bodies, housed in the Treasury Department, were created by the Dodd-Frank financial services reform law. And while experts have differing views on which office could have the greatest impact on regulation, they all said the timing is still early, with the biggest questions still unanswered.
Regarding the FIO, a Deloitte report, "Insurance Industry Outlook: High Hurdles Loom in 2011 & Beyond," authored by Sam Friedman, insurance leader for Deloitte Research, notes that while the FIO does not have much regulatory authority on paper, it can strain insurer operations and raise compliance costs by demanding data from the industry to carry out its mandate to produce studies.
The report points out that the FIO is required to seek existing information before going to the industry, but the law does allow the FIO to compel carriers to produce data if needed. Aside from costs related to providing data, the outcome of the FIO studies could also impact the industry.
"Of particular concern to personal-lines carriers is that the FIO can gather information about the ability of minorities and low-income consumers to access affordable insurance products," the report states. "The subject has been raised by a number of state regulators in the past, generating controversy about insurer underwriting and pricing decisions."
Additionally, the FIO is scheduled to issue a report to Congress on the state regulatory system, addressing, among other topics, the costs and benefits of enacting federal oversight of insurance. The Deloitte report states that such oversight could be across the board or specific to certain lines. "Given the proclivity of regulatory agencies to seek more power, and prior Treasury Department statements favoring more national insurance regulation, FIO is expected to conclude that a greater federal role is required," according to the report.
The report does point out that concerns about the FIO must take into account the agency's limited resources, "with staff allocations likely to be minimal in the current budget-conscious environment."
It also notes the potential benefits some in the industry see coming from the FIO. "Association leaders believe there is actually an opportunity for the FIO to be a positive force if its influence results in more uniform regulatory practices across the country," the report states.
For the impact of the FSOC, Sam Caligiuri, a partner at Day Pitney in Hartford, said the role the council ultimately plays in regulating insurers under the Dodd-Frank bill will "play out over the next few months to a year."
The issue is beginning to be defined through an 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, Mr. Caligiuri said.
Eric Arnold, a partner specializing in insurance regulation at Sutherland, Asbill & Brennan in Washington, D.C., noted that there is some industry pushback on the FSOC proposal, coming in the form of comment letters. The letters, he said, 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 he also sees congressional pressure on the FSOC not to promulgate the rule establishing a framework for determining if an insurer is systemically risky until a head of the FIO is named 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 the scheduled FIO studies on regulation also play into the timing of defining FSOC authority.
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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