What’s next for the Federal Insurance Office?

A federal office of insurance created just 15 years ago, designed to address weaknesses in financial oversight, has been an endangered species since the day it was born.

Despite the U.S. insurance industry being a cornerstone of the national economy and a critical player in global financial markets, regulation of it has been left to individual states. This varying patchwork system of oversight of such a vital segment of the U.S. economy was seen by some as outdated in the worldwide financially interconnected 21st century. And yet the newly christened Federal Insurance Office continually faces calls for its abolition.

The FIO’s mission of “monitoring the insurance industry, collecting data, identifying systemic risks, and promoting global insurance regulation, is already effectively fulfilled by state regulators,” wrote David J. Bettencourt, New Hampshire Insurance Department commissioner, in a December letter co-signed by eight other state insurance commissioners to the head of the Department of Government Efficiency, Elon Musk. “Since its inception, FIO has fluctuated between ineffectiveness and outright dishonesty in its dealings with the states.”

Several bills aim to shut it down

Several bills to restrict the FIO’s operations or shut it down completely have been introduced over the years, and some are still awaiting action. The FIO’s critics see it as redundant, bureaucratic and an unwelcome intrusion into a state-dominated regulatory framework that has governed U.S. insurance for decades.

“It’s an office that’s looking for a mission,” said Jon Godfread, president of the National Association of Insurance Commissioners. “You have a federal insurance office that holds itself out as an insurance regulator and it doesn’t regulate anything. And at times, it can get crosswise with a state-based system in terms of what we should be doing on a global stage.”

In May, Rep. Scott Fitzgerald, R-Wis., refiled legislation he originally introduced in 2023 that would strip the agency of its subpoena authority and limit the way it can collect data. Rep. Ben Cline, R-Va., also pushed efforts to abolish the FIO. And Rep. Troy Downing, R-Mont., who had served in a role as Montana’s insurance commissioner, put forward his own bill this year to end the FIO.

FIO supporters say the department plays an indispensable role in modernizing the country’s fragmented insurance regulatory system, standing for U.S. interests abroad and identifying risks.

Moreover, it is needed now more than ever, they say, as states grapple with a host of challenges in the overall insurance market.

“It is so outrageous that in the midst of a crisis stemming from state insurance markets, the focus of state regulators is to shut it down,” said Douglas Heller, director of insurance at the Consumer Federation of America.

It’s a turf battle

At its essence, the issue is largely a turf battle, Heller said.

“The insurance industry knows that it controls most states,” he said. “It doesn’t know how much control it would have at the federal level. So, it gets nervous politically.”

What is the FIO? Why was it created? What has it done, and why are lawmakers and industry heads pushing to dismantle it? And does the case for keeping it outweigh the critiques? The answers lie in the complex interplay of history, regulation and a rapidly evolving global insurance market.

The Federal Insurance Office was set up in the wake of the failure of the world’s largest insurance company, AIG, which threatened a global financial panic. That development exposed deep weaknesses in U.S. financial oversight, including gaps in insurance regulation. 

The collapse of AIG, which needed a massive federal bailout, highlighted how vulnerabilities of a giant insurer could threaten the broader financial system. It also exposed the limits and vulnerabilities of a purely state-based regulatory framework, which struggled to oversee sprawling, globally active firms.

The FIO, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was designed not to replace state regulators but to complement them by filling key gaps — monitoring the insurance sector for risks to U.S. financial stability, improving access to affordable insurance in underserved communities, representing U.S. interests in international forums and coordinating federal policy on insurance matters that demanded national consistency.

Why federal engagement is needed

As Michael McRaith, the FIO’s first director, argued in congressional testimony, the need for federal engagement stems from several realities.

» Economic significance and global reach: U.S. insurers operate in an integrated global market. Foreign regulators increasingly demand harmonized standards, and the U.S. needs a coherent federal presence to defend its interests.

» Inefficiencies of state-based regulation: The lack of uniformity among state laws and practices creates inefficiencies, redundancies and barriers that increase costs for insurers and consumers alike.

» Lessons from the financial crisis: State-based regulators were ill-equipped to monitor large, complex insurance holding companies and their systemic risk potential — a weakness revealed during the AIG collapse.

» Persistent regulatory gaps: Despite decades of debate, states have not fully resolved long-standing issues such as inconsistent product approvals, divergent solvency standards and inconsistent treatment of emerging practices like data analytics.

McRaith advocated preserving the hybrid model of state and federal regulation but modernizing it to meet today’s challenges by strengthening state oversight, while allowing targeted federal standards where necessary.

“State-based market conduct examinations and product approval processes have long been unduly burdensome, costly and redundant, but states have been unable to resolve these challenges with uniform practices,” McRaith said in his testimony. “The status quo will not resolve the problems of inefficiency, redundancy or lack of uniformity.”

Although the FIO does not regulate insurers directly — a responsibility that is still with the states — it has carved out a substantial role in several areas.

Proponents believed the need for federal insurance oversight was prima facie in the face of the industry being a $9 trillion global business. As companies grew internationally, the collaboration and economies became increasingly interconnected, and it was important for supervisory authorities to engage globally. In fact, Article 1, Section 10 of the Constitution makes it clear that it is precisely the role of the federal government.

Insurance market has changed since 1945

As McRaith testified, the insurance market today is profoundly different from what it was in 1945, when state regulation evolved. It is now global, highly integrated and exposed to new systemic risks, from climate change to cyber threats. These realities demand a coordinated federal role that state regulators alone cannot fulfill, he said.

Without a federal voice, the U.S. risks being marginalized in international negotiations. The FIO ensures that American insurers can compete globally under fair terms.

As one administrator more bluntly put it, “Do we really want the elected commissioner of the state of North Dakota, or some Midwest state, serving as a president of the National Association of Insurance Commissioners, and facing off against the prudential regulatory authority of the United Kingdom or equivalent authorities around the world? They will ask, ‘Why are we talking to a guy from North Dakota who’s not even authorized in his home-state constitution to represent the state, much less the country?’”

The FIO advises the Financial Stability Oversight Council on systemic risks posed by the insurance sector. It was part of the process that led to designating companies including AIG, Prudential and MetLife as systemically important financial institutions in the wake of the financial crisis, although those designations have since been lifted.

The FIO initially found support from insurers, trade groups and others, including the NAIC. That support slowly eroded, however, and the issue came to a head when the office released a climate risk report, as per a 2021 executive order, highlighting how increasingly severe weather events and natural disasters imperil insurance affordability and availability — especially in vulnerable communities.

NAIC President Godfread called the report “half-baked.”

“We told them that they didn’t have the complete set of data, and they said, ‘Well, we’re going to release it anyway.’ That to me doesn’t really feel like a partnership,” Godfread said.

It also proposed collecting ZIP code-level data on property insurance markets to better understand and address gaps in coverage in high-risk areas.

“FIO’s recent push to collect insurance underwriting data under the guise of climate risk is just another example of unelected bureaucrats advancing a political agenda that has no place in insurance regulation,” said Fitzgerald in reintroducing his bill to limit the FIO’s subpoena powers.

Rep. Mike Flood, R-Neb., chair of the House Financial Services Subcommittee on Housing and Insurance, said the FIO’s use of subpoenas and data collection was unneeded and unnecessary. In an interview with S&P Global Market Intelligence, Flood said the agency should focus on advocating against European regulations, saying those regulations could run insurers out of business. 

“When the states are doing so well … why are we messing with it?” Flood said. “The idea that FIO is in there trying to scramble everyone’s eggs ... it’s like what the heck, stop it.”

The FIO looks at affordability

The office has also issued reports on insurance affordability and accessibility, examining how costs disproportionately affect low-income and minority communities. Its 2017 report on auto insurance affordability was one of the few nationwide studies of its kind, shedding light on equity gaps in the market.

“It released the first-ever set of data about the homeowner’s insurance market in the crisis,” said the CFA’s Heller. “And what thanks did they get for releasing that data? They had all the folks at the NAIC teaming up with the insurance industry saying, ‘Shut down the FIO,’ which is crazy.”

Many of the efforts to dismantle the FIO come from lawmakers with a philosophical commitment to limited federal government and skepticism of regulatory expansion. For these critics, the FIO is seen as just another bureaucratic layer. Certain segments of the insurance industry — particularly property and casualty insurers — have opposed the FIO, fearing it could morph into a huge federal regulator, adding costs and complicating compliance with conflicting standards.

Many assumed the FIO would fall under the DOGE hatchet, but it has survived — so far — probably due to its tiny niche in the D.C. bureaucracy. The FIO is staffed by roughly one to two dozen full-time employees on a budget estimated at roughly $50 million annually, funded through the Treasury’s appropriations for executive direction and salaries and expenses.

Even some proponents of the FIO believe its current head, Steven E. Seitz, who was assistant general counsel for business and finance, may not be the best person for the job owing to his lack of experience with insurance. Attempts to reach Seitz and a U.S. Treasury representative were unsuccessful.

A pragmatic, hybrid approach — one that respects state authority while leveraging federal strengths — may offer the best path forward, some believe. Strengthening state oversight, modernizing standards and maintaining a targeted federal role could help preserve U.S. leadership in the global insurance market, protect consumers and strengthen financial stability.

But industry executives, including Godfread, don’t have faith that a compromise solution would work.

“I’d love to get rid of it,” he said. “I think an alternative might be for it to be almost like a chamber of commerce, where they can go out and talk about the U.S. system and try to incentivize capital development and deployment into the United States system. But that’s not the role that we’ve seen FIO take on over the last decade. They’ve been trying to insert itself as a federal regulator over a system that it has no authority over. And so it makes for confusion, especially on the international stage.”

Calls to dismantle the FIO reflect a broader tension between federal and state authority — a tension that has existed for decades in insurance regulation. But as the industry faces unprecedented challenges from climate risk to globalization, the case for keeping the FIO — and indeed enhancing its capabilities — might be stronger than ever.

To some, it is not a question of whether federal engagement is needed but of how to balance it with the proven strengths of the state-based system. The FIO may be a thoughtful step in that direction — a bridge between tradition and modernity, local and global, stability and innovation.

But it is also one more bureaucratic layer of government oversight. The debate remains whether the risks of eliminating it outright could be greater than the risks of keeping and improving it. 

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].