|[March 02, 2012]
The Federal Government's Role in Insurance Regulation
NEW YORK --(Business Wire)--
Nelson, chairman of law firm Nelson
Levine de Luca & Horst, represents insurers and reinsurers in
regulatory matters, as well as in complex litigation in multiple
jurisdictions throughout the country. His firm publishes FIO Focus, a
newsletter covering the latest developments concerning what many refer
to as "insurance modernization" and activities at the Federal Insurance
Office (FIO) (http://www.nldhlaw.com/CM/EmergingTopics/Federal-Insurance-Office.asp).
Below he answers the most pressing questions about the recent NCOIL and
NAIC meetings, the highly anticipated FIO report on insurance
modernization, and current federal government activity relating to the
business of insurance.
Q1: You attended the Spring National Conference of
Insurance Legislators (NCOIL) meeting last weekend. Would you
explain what NCOIL is, who attends these meetings, and the topics
discussed that might impact insurance modernization?
A1: NCOIL assists state legislators in addressing issues relating to
insurance regulation and other state-based insurance laws. NCOIL has
three meetings annually where legislators and regulators convene to
discuss policy issues, debate proposed model insurance rules, and hold
committee meetings, hearings, and panel discussions. NCOIL meetings
provide a forum for state legislators and state regulators to meet to
consider the regulation of insurance and hear perspectives from the
insurance-focused constituency. In contrast, the National Association of
Insurance Commissioners (NAIC) is an organization of state-based
While the recent NCOIL meeting addressed a wide variety of issues, most
topics touched upon the federal government's role in insurance
regulation. Implementation of the Dodd-Frank Act and Patient Protection
and Affordable Care Act (PPACA) were the two most frequently talked
about issues. A number of legislators raised concerns regarding the
ability of their states to afford the new Medicare mandates under the
PPACA. Speed-to-market, agent licensing, and market conduct continue to
be a concern to the industry. There was also a lot of discussion
regarding the possible contents of the FIO's upcoming modernization
report and development of the FIO office.
U.S. Senator Roger Wicker (R-MS), who spoke at the conference, discussed
the Supreme Court's pending review of PPACA and provided an update of
the proposed reforms of the National Flood Insurance Program.
Q2: You mentioned that the FIO report was discussed.
What were some of the concerns that were publically expressed by members
of NCOIL and state-based regulators?
A2: The modernization report was heavily discussed at the NCOIL meeting.
Legislators and regulators expressed a great deal of concern regarding
what will be included in the report. NCOIL representatives mentioned
that the organization has been largely uninvolved in discussions with
FIO Director Michael McRaith. The fact that the FIO report is now more
than a month overdue only added to attendees' anxiety.
NCOIL was strongly opposed to the FIO's creation. The organization has
long argued that the FIO is the first step to a federal insurance
charter - and possibly to the dismantling of the state regulatory
system. Many attendees at the meeting consider the modernization report
as the beginning of significant federal involvement in nsurance
regulation. Several legislators publicly expressed "We need to stop
FIO!" as if it should be eradicated. There was discussion of possible
legal challenges to the report if it exceeds the FIO's legislative
It is likely that some of the members' anxiety results from the dearth
of information about what the report will contain. There were not any
FIO representatives at the meeting and while Director McRaith was
invited, he did not attend.
Q3: With the report now a month late, have you heard
of any reasons for the delay? Do you know when the report may be
A3: I am not sure that anyone - even Director McRaith - is certain when
the report will be released. The stated goal of releasing the report by
the end of January may not have been realistic. There were simply too
many industry comments and too much information which needed to be
It has been reported that the FIO modernization report is currently
being vetted within the administration. Some regulators and legislators
speculated that the report will be released after the NAIC meeting next
weekend. Others suggested that the report may not come out for months,
and suggested that the FIO did not have the resources in place to
publish the report in a timely fashion. The lack of staffing may be one
reason the report is so late. Other attendees suggested that the delay
in publication was timed in a way that it would be published immediately
after the upcoming NAIC meeting.
Q4: NCOIL passed a resolution against the Department
of Housing and Urban Development's proposed rule to implement a
disparate-impact legal standard under the Fair Housing Act - 76 Fed.
Reg. 221, 70921 (November 16, 2011). Can you explain the proposed rule?
What are the concerns that were expressed by NCOIL?
A4: The Department of Housing and Urban Development's (HUD) proposed
rule would add a new subpart to its Fair Housing Act (FHA) regulations.
The proposed regulations provide insurance underwriting and rate
criteria that may be considered to have a discriminatory effect,
regardless of whether the practice is adopted for a discriminatory
NCOIL attendees expressed strong concern that the proposed rule may
impact the underwriting and pricing of homeowners insurance as well as
potentially other housing-related insurance coverage, such as private
mortgage insurance, title insurance, and perhaps credit life coverage.
Many legislators, regulators, and the insurance industry are surprised
that HUD included pricing and provisions of homeowners coverage within
the list of possible practices which would be impacted by the rule.
There was also significant concern regarding the city of St. Paul's
decision to withdraw its petition to have the Supreme Court grant
certiorari in Magner v. Gallagher, which concerns whether
disparate impact without discriminatory intent is sufficient to
establish a violation of FHA. The regulatory community, consumer groups,
and the insurance industry have addressed the concept of disparate
impact in rate and underwriting under the state-based schemes. HUD's
proposed involvement will complicate the process.
Some have speculated that HUD's proposed rule may be an indication of
what direction the federal government and, in particular, the FIO will
take regarding the Dodd-Frank mandate to monitor traditionally
underserved communities access to affordable insurance. There has been
some discussion that the modernization report may include a section on
disparate impact. Director McRaith has expressed concerns regarding the
use of credit scores in the underwriting of personal lines insurance - a
process which some have argued has a disparate impact on low-income
Q5: Congressman Edward Royce (R-Calif.) recently
sent a letter to NAIC raising questions regarding its role in the
insurance regulator system. What did you think about the letter?
A5: Congressman Royce's questions about the nature and authority of the
NAIC reflect perennial concerns. Over the years questions have often
been raised as to whether it should be subject to open meeting laws and
other accountability mechanisms. Many have also asked if the NAIC should
derive sole benefit from the resale of data collected from states.
Certainly, many within the industry would welcome a discussion about the
NAIC's structure and budget, but Congressman Royce's assertion
that it is inconsistent for the NAIC to say it is integral to helping
"form the national system of state-based insurance regulation in the
U.S." and that it is a "standard-setting organization" is unfounded.
The NAIC after all fills a vital role as facilitator and forum for the
states to coordinate their regulatory efforts - without which the state
insurance regulatory system would not be able to engage in such
coordination. Still, the NAIC does not require states to participate,
but rather merely provides material support to states for processes and
mechanisms, such as the financial accreditation process, joint product
filing process, and development of model rules. These are not the acts
of a regulator, and states are not bound by the NAIC's actions.
Some states follow the NAIC's model regulations and look to it for its
considered position on policy. Other states act more independently.
Perhaps Congressman Royce envisions FIO filling the role currently
occupied by the NAIC.
Q6: What issues do you expect to be addressed at
this week's upcoming NAIC meeting in New Orleans?
A6: The NAIC meeting will have a very full agenda. I am sure there will
be a lot of discussions regarding the FIO modernization report. There
are also several issues which will be discussed that will have an
equally profound impact on the insurance industry.
The NAIC's Own Risk Solvency Assessment (ORSA) proposal, which will
require insurers to design and conduct internal risk assessments based
on prescribed regulatory criteria, and the Accounting Guideline 38 (AG
38), which is used to determine reserves for certain life insurance
products, have been fast-tracked. The Solvency Modernization Initiative
Task Force will work on the process of converting their proposed ORSA
Guidance Manual into proposed model laws.
There is likely to be a lot of discussion regarding international
insurance issues. Just last week, FIO Director Michael McRaith attended
the IAIS summit in Basel, Switzerland. Solvency II and the developments
related to the Comframe continue to be of interest - and a source of
concern - for the insurance industry and regulators.
Producer licensing is also a topic of significant concern for the
industry. Another major issue is the implementation of the NRRA. While
it has been almost a year since the NRRA took effect, states are still
struggling to develop a single system for sharing surplus lines premium
If the FIO modernization report is released before the Spring NAIC
meeting, the entire agenda of the meeting will undoubtedly be upended.
The industry is undergoing a lot of changes, many of which are likely to
be addressed at upcoming NAIC meetings.
For more information about the Federal Insurance Office, please
With offices in the United States and London, Nelson Levine de Luca &
provides comprehensive legal services to the insurance industry in the
areas of reinsurance, regulatory, complex litigation, class action,
coverage, subrogation, bad faith consulting, and insurance fraud.
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