[March 02, 2012]

The Federal Government's Role in Insurance Regulation

Michael 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 regulators.

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 mandate.

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 released?

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 analyzed.

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 purpose.

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 communities.

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 taxes.

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 visit: http://www.nldhlaw.com/CM/EmergingTopics/Federal-Insurance-Office.asp.

With offices in the United States and London, Nelson Levine de Luca & Horst (www.nldhlaw.com) 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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