After much anticipation, on December 12, 2013, the Federal Insurance Office (“FIO”) released its report on modernizing the system of US insurance regulation. The report is published under Dodd-Frank Title V’s mandate, and provides FIO’s view on the benefits that potential federal regulation can bring to the insurance regulatory landscape. While the release of this report satisfies the FIO’s legislative mandate, we do not expect the report to lead to substantial changes in the insurance regulatory environment any time soon.
The report discusses state regulation’s “inefficiencies and lack of uniformity” with the understanding that “federal regulation should [not] completely displace state-based regulation.” It concludes that the overall determination of federal involvement in insurance regulation is a matter for congressional action. Given the existing political environment, we view it as unlikely that federal regulatory authority will be expanded beyond its current boundaries in the near term.
This view is further supported by recent regulatory developments. The designation of AIG, Prudential, and GE Capital as systemically important nonbank financial institutions shows that federal oversight can be exercised without significantly changing the state insurance regulatory system. These designations also serve as a learning opportunity for the Federal Reserve (which is more familiar with banks) to understand the intricacies of the insurance business model, so going forward the Federal Reserve can more accurately evaluate insurance companies’ operations, their ability to withstand idiosyncratic shocks, and their risk of systemically important failure.
This Financial Services Regulatory Brief provides (a) highlights from the report regarding the insurance industry’s key regulatory concerns and FIO recommendations, and (b) our view of next steps for insurance companies. We will cover more specific areas from the report in future regulatory briefs.