Stuck in the middle

Editor’s Note: This is the second of a three-part series on the state-based insurance regulatory system. (Here is part 1.) This month’s story summarizes the issues surrounding state insurance commissioners and the differences between elected and appointed systems.

In October, Treasury Secretary Janet Yellen announced that the Federal Insurance Office (FIO) would collect climate-related claims data from insurers.

The effort came weeks after Hurricane Ian smashed the Florida coast, with projected insured losses of more than $60 billion, according to trade group Insurance Information Institute.

More importantly, the data call provided the FIO with a rare opportunity to play a significant role in the insurance rulemaking cycle. Or, to fulfill its charter as spelled out in the Dodd-Frank legislation that created the FIO in 2010.

The FIO sought five years’ worth of ZIP-code-level data from 213 private insurers, collectively representing at least 80% of the homeowners’ insurance market in each state.

The plan encountered immediate resistance. Trade groups, insurers and the National Association of Insurance Commissioners all wrote letters objecting to the data call.

Oklahoma Insurance Commissioner Glen Mulready added his own letter admonishing the FIO for not giving state regulators more time to respond with the data. Mulready reminded the FIO that state regulators are the final arbiters of insurance rules.

“FIO may collect data directly from insurers only after FIO ‘determines’ that the data is not available,” he wrote.

And so it goes. For the entirety of its 12-year existence, the FIO has compiled annual reports and appeared before a congressional committee every so often but has had muted real-world relevance in the U.S. regulation of insurance.

In 2019 and again two years later, a group of Republican senators filed a bill to eliminate the FIO. The opposition reliably returns to the same thread: The states control insurance regulation. “Our bill will empower states and defend their proper authority to regulate the insurance industry,” Sen. Ted Cruz, R-Texas, said of the legislation.

State territory

In 1869, the Supreme Court held, in the case Paul v. Virginia, that “issuing a policy of insurance is not a transaction of commerce.”

As a result, states were left responsible for the taxation and regulation of insurance. That led to the formation of the National Insurance Convention in 1871, which later became known as the NAIC.

In 1944, the Supreme Court ruled in United States v. South-Eastern Underwriters Association that the federal government could regulate insurance companies under the authority of the commerce clause in the U.S. Constitution and that the federal antitrust laws applied to the insurance industry.

Very quickly, Congress passed the McCarran-Ferguson Act, which essentially returned the regulation of insurance to the states.

All was relatively good until the new century dawned. By the mid-2000s, insurers were distributing ever more complex indexed universal life insurance and variable annuity policies that taxed state insurance departments. Then the mortgage bubble burst and created the 2008-09 economic catastrophe.

Cut to 2010, and Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Although laser-focused on Wall Street and big banks, legislators snuck in creation of the Federal Insurance Office. The NAIC supported the creation of the FIO in testimony to Congress.

The FIO was handed a set of nebulous duties to:

» “Advise” the Treasury Department on insurance issues.

» “Monitor all aspects” of the insurance industry.

» “Identify issues or gaps” in the regulation of insurance that could contribute to a systemic crisis in the insurance industry.

» “Receive and collect data” on and from the insurance industry.

Dodd-Frank also assigned international insurance issues to the FIO and, under Director Michael McRaith, that is where the agency focused much of its time and efforts in the initial years.

The International Association of Insurance Supervisors was just beginning a lengthy project to develop global international capital standards.

“There was a real push to create this sort of Team USA approach with the NAIC, the Federal Insurance Office and the Federal Reserve,” recalled Birny Birnbaum, executive director of the Center for Economic Justice. “There was also a set of issues with covered agreements, basically, agreements between the U.S. and the EU at the time regarding insurance and reinsurance.”

Louisiana Insurance Commissioner Jim Donelon served as president of the NAIC in 2013. The debate over capital standards turned into a yearslong battle, he said.

“Our greatest challenge was international and the effort of the Europeans to impose their Solvency II-based system of solvency regulation as the international standard,” he recalled. “We were adamantly pushing back to keep our risk-based capital standard as at least equivalent, if not accepted as the standard.”

The FIO ended up producing several concepts that were ultimately adopted by the NAIC, such as the covered agreements and permitted practices, an accounting practice that departs from the NAIC Accounting Practices and Procedures Manual and state-prescribed accounting practices.

First significant US study

The FIO’s first major initiative in the U.S. insurance market came with a 2017 automobile insurance study looking at affordability and availability.

The study found that 6 million people live in ZIP codes where auto insurance is unaffordable, including more than half of the residents of underserved ZIP codes in five states: Michigan, New Jersey, Rhode Island, New York and Delaware.

Consumer advocates are growing frustrated with the slow updating of that study, announced in 2021. FIO Director Steven Seitz recently testified at an open meeting of the Department of the Treasury’s Federal Advisory Committee on Insurance, saying the auto study update remains a high priority for the agency.

Otherwise, FIO’s main contribution to the insurance world is its Annual Report on the Insurance Industry — a 65-page effort in 2022 — followed by an appearance before the Senate Banking, Housing, and Urban Affairs Committee.

In 2017, the Bipartisan Policy Center recommended a bigger role for the FIO. A think tank formed in 2007 to combine Republican and Democratic ideas, the BPC assessed the fallout from the 2008-09 financial crisis via its Financial Regulatory Reform Initiative. It included a study of the insurance industry regulatory framework as part of that initiative.

The BPC, which declined to make someone available for this article, concluded that the FIO is underutilized. It recommended that Congress elevate the FIO to a bureau within the Treasury Department or make it an independent agency outside of Treasury.

Additionally, the FIO “should be funded by assessments of U.S. insurers and led by a director with a six-year term who would be appointed by the president and confirmed by the Senate,” the report concluded.

The BPC study is peppered with recommendations for an expanded oversight role for the FIO, such as:

“Congress should request a report from FIO that assesses state legislative funding of [insurance] departments and recommends appropriate levels of resources. FIO should then provide Congress with supplemental reports ‘scoring’ the states on the extent of their achievement of these goals.”

Risky concerns

When given a forum to make bold policy statements on the many pressing insurance issues, Seitz has thus far passed. In September, the FIO director frustrated several senators seeking answers during a Senate banking committee hearing.

The growth of private equity control over insurance assets is one of the biggest issues confronting regulators. Firms such as Apollo Global Management are investing billions of dollars from insurance funds in riskier investments. That makes regulators nervous.

Sen. Elizabeth Warren, D-Mass., sought reassurances from Seitz on the threat posed by private equity. In a September 2021 report, the FIO acknowledged that private equity investment in insurance brings with it more risk.

“Do you still agree with what you said?” Warren asked.

“It’s an issue that we are focused on in our office and we appreciate the changing investment portfolio of those companies,” Seitz said.

“In other words, there’s more risk?” Warren asked again.

“It’s an area of increased focus for our office,” Seitz said before Warren cut him off.

An exasperated Warren concluded her question time shortly thereafter by imploring the FIO and the NAIC to act to address private equity issues. “Enough studying,” she said. “It is time to act.”

Sources throughout the insurance industry say there is next to no chance that the federal government will achieve any takeover of insurance regulatory power anytime soon. It seems equally unlikely that the FIO is going to disappear.

Despite the anti-government fervor in some quarters of Congress, the bills to eliminate the agency have gone nowhere. The office will focus on several key areas, Seitz told senators, including the impact of climate change on insurance.

“FIO has a significant role to play,” Seitz said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.