Federal Insurance Office Conference Highlights Industry Issues of Concern to Regulators, Businesses and Consumers
Dec 12, 2011
The insurance industry must become more transparent, provide more disclosure, eliminate duplicative regulation, and offer fairer treatment to consumers, according to insurance industry representatives, academics, and consumer advocates who spoke during a four-hour conference hosted by the U.S. Department of Treasury in Washington D.C. on December 9, 2011.
The purpose of the conference, which featured three panel discussions and an array of representatives from insurance sector businesses, was to discuss modernizing and improving the insurance regulatory system. Discussion focused on consumer protection and the business of insurance, international developments, and prudent standards for insurance companies.
The Federal Insurance Office (“FIO”) hosted the event as part of an ongoing effort to seek public comment for a study and report it is compiling on the issue of modernizing insurance regulation. The FIO also has issued a request for comments through the Federal Register, with an 11:59 p.m. December 16, 2011 deadline for submission, according to Michael McRaith, director of the FIO.
Deputy Secretary of the U.S. Treasury Neal Wolin opened the conference by emphasizing the important role insurance plays in both the economy and lives of everyday Americans. Spending on insurance comprises eight percent of the Gross National Product while two percent of the total workforce is employed by the insurance industry. However, there was no central repository for insurance expertise until the Dodd-Frank Act of 2010 fixed that “glaring omission,” Mr. Wolin said.
“Through the FIO we have the institutional capacity to develop and coordinate insurance policy at the federal level more effectively than in the past,” Mr. Wolin stated. “Today’s conference is an important part of our outreach process.”
Consumer Protection and the Business of Insurance
The first of three panel discussions focused primarily on consumers.
Daniel Schwarcz, a professor at the University of Minnesota Law School and author of “The Need for Transparency,” said traditional state insurance regulators have pursued insurance regulation through a prescriptive approach, with attention to specifics like price regulation. Little attention has been paid to transparency, which would serve to ensure consumers can tell the difference between companies and products.
“You have no capacity to compare what is provided. Right now, insurance regulation does virtually nothing to provide this,” Mr. Schwarcz said. “The most powerful regulator will be an informed market where consumers act and respond to how different carriers act and perform in the market.”
“Getting there” requires the following, he said:
- Effective summary disclosures by experts that are tested and re-evaluated
- Full availability of information, so market intermediaries can study and promulgate it
- Intermediaries who have the proper financial incentives to convey information to consumers that is in the consumers’ best interest
Panelist John Hill, chief executive officer of Magna Carta Companies, said solvency is the “hallmark” of state-based insurance systems. He said the current system needs to be streamlined by eliminating burdensome and duplicative regulation, which adds cost to consumers.
Markham McKnight, president of Bancorp South, expressed support for the creation of a national registry to “eliminate a complicated, redundant quagmire of processes.”
Johnny Johns, chief executive officer of Protective Life, said too little attention is being paid to life insurance issues. Surveys indicate that less than 50 percent of Americans have life insurance policies and more than 100 million Americans who have such policies consider themselves underinsured, he stated.
Mr. Johns said consumers aren’t buying life insurance because they are confused and afraid they are going to make a mistake. He the industry needs to correct this perception.
Another issue of concern is the structure of the National Association of Insurance Commissioners (“NAIC”), he said. The NAIC has a problematic structure of governance, with too much turnover among commissioners, a tendency to focus on what makes headlines, and a disregard for Roberts Rules of Order, he added. NAIC leadership is effective in terms of trying to work collaboratively with the industry, he said.
Bob Hunter, director of the Consumer Insurance Federation of America, said the FIO could help eliminate some consumer protection weaknesses by studying the regulation of credit-related insurance products and the availability of insurance to low and moderate income consumers. One way to do so would be to research disparate treatment of low-income policyholders, he said.
He also agreed that barriers in transparency create huge problems.
Texas Insurance Commissioner Eleanor Kitzman said U.S. involvement in the development of international standards is important for many reasons.
“We as U.S. regulators need to know something about those companies and how we can compare them to our domestic insurers. There are many legal, operational, and cultural differences between many U.S. and international markets . . . but we can attempt to ensure a solvent, financial, transparent insurance market,” she said.
Commissioner Kitzman said work being done internationally mimics the NAIC process. She too stated that the NAIC should work more toward producing results and make decisions more quickly than it has in the past.
Walter Bell, chairman of Swiss Re, expressed support for supervisory colleges as a way to improve insurance regulation. The system would take time, but it might eventually become easier to avoid multiple requests for the same information that may have been filed in multiple jurisdictions, he stated.
“The FIO must use its authority to reform the system. While state insurance regulators made some progress under NAIC, only four states have enacted collateral reform,” Mr. Bell added.
It was noted that regulation needs to be helpful, not disadvantageous, to U.S. insurers when operating outside the United States.
Chris Mansfield, senior vice president and general counsel for Liberty Mutual Group, said domestic and international insurers need a single federal point of contact.
“We need someone to be the field general and we are looking to the FIO to be that,” Mr. Mansfield said. “The FIO can play a huge role in giving guidance to industry on the life side and the property/casualty side.”
Some discussion focused on Solvency II. Commissioner Kitzman wondered how equivalency could be measured against a system that hasn’t been fully implemented.
“Until then we will continue to stress an outcome-based approach as the only one that works,” she said.
Prudentialial Standards for Insurance Companies
Janice Abraham, president and chief executive officer of United Educators, asked panelists to consider the following three questions:
- Is the possible solution you are focused on going to support solvency?
- Does the possible solution you are thinking about encourage competition?
- Does the possible solution encourage innovation?
She said her company, which provides liability insurance to educational institutions, is successful because the officers of these organizations demand clarity and consistency in regulations. Duplicative, overlapping or contradictory regulations cause problems, she said.
Financial solvency, financial stability, competition, and innovation are key to succeeding, she added.
Birny Birnbaum, executive director for the Center for Economic Justice, said regulatory arbitrage is bad and must be eliminated. Given a choice, regulatory entities will always choose a regulatory structure that is beneficial to them, he said.
He said consumer protection and financial solvency complement one another. If bad products are sold then the financial solvency of the enterprise will be affected, Mr. Birnbaum stated.
Mr. Birnbaum characterized the current situation of insurance solvency as a “hodge podge,” with companies that are selling the same thing subject to different rules in different places.
He said the NAIC contributes to the overall murkiness by performing a quasi-government function but acting as a private organization. The role of the NAIC should be clarified and the organization – to increase its credibility – should accept itself as a quasi-governmental entity and act accordingly, Mr. Birnbaum stated.
Mr. Birnbaum also voiced support for eliminating the National Flood Insurance Program so private insurer carriers could pick up the business.
After panelists fielded some questions, FIO Director McRaith again stated that public comments about modernizing and improving the insurance regulation system could be filed through the Federal Register through December 16, 2011.
With no further business, the conference was adjourned.
Opening remarks by U.S. Treasury Deputy Secretary Neal Wolin are reprinted below.
Remarks by Deputy Secretary Neal Wolin Federal Insurance Office Conference “Insurance Regulation in the United States: Modernization and Improvement” December 9, 2011
As Prepared for Delivery
Thank you, Mike, for that kind introduction, and for all your hard work standing up the Federal Insurance Office (FIO). Great to be here.
Thank you all for joining us and welcome to the Treasury.
Everyone here today knows what an important role insurance plays – not only in the smooth and efficient functioning of our economy, but also in Americans’ everyday lives, protecting their homes, their wealth, and their businesses. In the U.S. alone, spending on insurance comprises about 8 percent of GDP. The insurance sector employs fully two percent of our workforce.
Despite this sector’s size and importance, before the Dodd-Frank Act was passed, the Federal government had no central repository for comprehensive insurance expertise.
Dodd-Frank fixed this glaring omission so that, through FIO, we will have the institutional capability to develop and coordinate insurance policy at the federal level more effectively than in the past.
FIO has begun carrying out the responsibilities laid out for it in the Dodd-Frank Act. As you all know, the office is responsible for, among other things:
- Monitoring the insurance industry, identifying gaps in regulation, and participating in the Financial Stability Oversight Council (“the Council”) – all to help ensure stability in the insurance industry and the broader financial system;
- Developing and coordinating federal policy on prudential aspects of international insurance matters;
- Evaluating the accessibility and affordability of insurance products for low- and middle-income Americans; and
- Advising the Secretary of the Treasury on insurance issues.
To be clear: regulating the insurance industry is not one of FIO’s responsibilities. Nothing in the Dodd-Frank Act alters the fact that insurance is fundamentally regulated by the states.
State regulators are important partners in our work. As FIO moves forward, we understand that maintaining a strong relationship with the states will be critical for fulfilling the responsibilities Congress assigned to the new office.
In recent months, FIO has made important progress. Through its work with the Council, FIO has already lent its expertise to Dodd-Frank Act studies and rulemakings that are central to financial regulatory reform.
Both in this work, and in its advisory role helping the Council monitor risks to U.S. financial stability, FIO works closely with two other Council members who provide perspectives on insurance: Former Kentucky Insurance Commissioner Roy Woodall, who serves as the Council’s independent insurance expert, and the Director of Missouri’s Department of Insurance John Huff, who was selected by state insurance regulators.
FIO’s advisory body, the Federal Advisory Committee on Insurance, has also been established. Last month, FIO announced the appointment of 15 insurance experts, approximately half of whom are state insurance regulators, to serve as its first members.
On the international side, FIO recently became a full member of the International Association of Insurance Supervisors (IAIS), which is currently working to designate globally significant insurers and develop a framework for supervising of internationally active insurance groups. FIO will continue to work closely with state regulators as it develops and advances a U.S. perspective on these and other international insurance regulatory matters.
Finally, as you all know, FIO will report to Congress in January on how to improve and modernize the United States’ system of insurance regulation. We want the views of a wide range of stakeholders to inform our work.
To that end, we are reaching out in a variety of ways. In October, we put out a request for public comments in the Federal Register. The comment period closes on December 16, and we encourage all interested parties to submit their thoughts on the issues we’ll cover in the report.
Today’s conference is an important part of our outreach process, and a valuable opportunity to convene experts with different views and experiences together in one room. We look forward to hearing your ideas and appreciate the time you’ve taken to be here to share them.
Going forward, we look forward to continuing to work with you and hear your perspectives on FIO’s work in both the domestic and international context. In the U.S., FIO will continue to play an important role in the FSOC as it continues to work on the designations process and monitors systemic risk. Globally, FIO is engaging with the international community and starting to play an important role in the IAIS, one we look forward to fully assuming.
Again, we welcome you here to the Treasury. We hope to see you here often. We look forward to a productive and insightful day.
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