Obama Administration Regulatory Reform Proposal Creates Office of National Insurance
The Obama administration’s sweeping regulatory reform proposal, released on June 17, 2009, contemplates the creation of a federal-level insurance regulator tasked with gathering information, developing expertise, negotiating international agreements, and coordinating policy in the insurance sector. The proposal creates the Office of National Insurance (ONI) within the U.S. Department of the Treasury (Treasury) and tasks the Treasury with developing proposals to modernize and improve insurance regulation in accordance with six principals outlined in the president’s report.
Citing the impact of the insurance industry on the country’s financial system, the proposal notes that the 135-year-old system of state regulation lacks uniformity, reduces competition across state and international boundaries, and has resulted in inefficiencies that must be cured by the development of a national “modern regulatory framework for insurance.” The ONI would be responsible for monitoring all aspects of the insurance industry and would work to identify the emergence of any problems or gaps in regulation that could contribute to a future crisis. Further, the ONI would be tasked with recommending to the Federal Reserve any insurance companies that it believes should be supervised as “Tier 1 FHCs.” Tier 1 FHCs are defined as “any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed.” Under the president’s proposed plan, Tier 1 FHCs will face heightened consolidated supervision and regulation by the Federal Reserve Board. Finally, the ONI will be responsible for carrying out the government’s existing responsibilities under the Terrorism Risk Insurance Act.
The centralized regulatory authority also is cited as being a boon for the nation’s effectiveness in engaging internationally on issues related to insurance. As the European Union prepares to implement Solvency II legislation, many U.S. companies engaging in the insurance business in the European market will be subject to supervision in the company’s home country that is comparable to that required in the EU. The proposal argues that this will be better accomplished if one entity, namely ONI, is empowered to work with other nations to better represent American interests, is given the authority to enter into international agreements, and can work to promote international cooperation on insurance regulation.
ONI’s primary task will be to “modernize and improve” our system of insurance regulation by incorporating six principles supported by both the administration and the Treasury:
- Effective systemic risk regulation with respect to insurance. This includes making changes to regulations that would increase integration of companies into the new regulatory regime and would further reduce systemic risk in the sector.
- Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies. Recognizing the importance of adequate capital standards and a strong capital position for all financial firms, the ONI regulatory regime should adopt strong capital standards and appropriate risk management, including the management of liquidity and duration risk.
- Meaningful and consistent consumer protection for insurance products and practices. Any new insurance regulatory regime should enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of insurance producers.
- Increased national uniformity through either a federal charter or effective action by the states. The proposal notes that “our current insurance regulatory system is highly fragmented, inconsistent, and inefficient,” and calls all efforts to date to increase uniformity “insufficient.” Thus, ONI should seek to enhance financial stability, increase economic efficiency, and improve services for consumers by providing a regulatory regime that is consistent across the country.
- Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business. As American International Group’s (AIG) financial instability largely resulted from problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business, the ONI would seek to put into place a regulatory regime that addresses the current gaps in insurance holding company regulations.
- International coordination. Any improvements to the traditional insurance regulatory system should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services.
The full text of the reform proposal is available here: http://www.financialstability.gov/docs/regs/FinalReport_web.pdf
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Please contact your Foley attorney or the individuals listed below if you have any questions about these issues or want additional information regarding insurance matters:
Kevin G. Fitzgerald
Milwaukee, Wisconsin
414.297.5841
[email protected]
Sarah E. Molenkamp
Milwaukee, Wisconsin
414.319.7357
[email protected]