In the Financial CHOICE Act, which was approved by the House Financial Services Committee by a 30-26 vote on September 13, House Republicans revealed their alternative vision for the new federal role the Dodd-Frank Act created for insurance regulation. In effect, the legislation would create a new office that would be both less powerful, and in some ways more independent, than the two entities it would succeed. The new office would represent a partial move of authority back to state insurance regulators, and be a step away from a federal insurance regulator and charter that some have envisioned.
Here are some of the main changes the bill would make to federal insurance regulation:
Repeal and Replace
After the near-failure of insurer AIG caused the financial crisis to snowball in 2008, Congress created an unprecedented federal role in insurance regulation. The Federal Insurance Office (FIO) was created in Dodd-Frank to monitor the business of insurance and to assist the new Financial Stability Oversight Council (FSOC) in understanding the impact insurance could have on financial stability, among other duties.
FIO was placed within the Treasury Department rather than being made a standalone, independent agency. Congress also wanted a representative on FSOC with insurance expertise. But since the Treasury secretary chairs FSOC, giving FIO a vote on the council would effectively give the Treasury Department two votes. That led Congress to split up the new federal insurance role by creating a position for a separate voting FSOC member with insurance expertise (the Independent Member).
Since Dodd-Frank, insurance has been high on the agenda of federal regulators. FSOC has designated three large insurance companies as systemically important, subjecting them to regulation by the Federal Reserve Board. (FSOC’s designation of MetLife was overturned by a federal district court judge in March and that case is now under appeal. The House legislation would also eliminate SIFI designation and retroactively remove SIFI status from the remaining designated SIFIs.) FIO has produced a number of reports on the status of the U.S. insurance industry and ways it could be modernized, and also entered into negotiations with the European Union on a “covered agreement” on insurance issues.
FSOC has designated three large insurance companies as systemically important, subjecting them to regulation by the Federal Reserve Board.
The Financial CHOICE Act would eliminate FIO and the Independent Member, and replace them with a new Office of the Independent Insurance Advocate (OIIA). Like FIO’s director, the head of OIIA would perform their duties under the general direction of the secretary of the Treasury.
However, OIIA would be more independent of Treasury than FIO. The legislation establishes OIIA as a “bureau” within the Treasury Department with statutory independence, unlike FIO. OIIA would not need to submit its legislative comments or recommendations, or its testimony, for approval to the Treasury secretary or anyone else in the federal government. Further, the Treasury secretary would not be able to intervene in OIIA’s deliberations or proceedings, or delay or prevent OIIA from implementing new regulations—although FIO does not have, nor would OIIA have, regulatory authority. The head of OIIA would also be able to comment on budget requests made on the office’s behalf by the president.
OIIA would, however, face new requirements to testify twice per year in front of Congress and report on its activities. And as an office within Treasury, OIIA would rely on congressional appropriations of the Treasury Department for its funding, as FIO does now.
A Political Merger
The legislation would effectively combine the offices of FIO director and FSOC Independent Member into a single Independent Insurance Advocate. The director of FIO is a civil service position appointed by the Treasury secretary, and so does not serve a fixed term. The advocate would be nominated by the president to a six-year term and subject to Senate confirmation—the same framework that applies to the Independent Member. Until a new advocate is nominated and confirmed, the Independent Member would serve in that role. The advocate would replace the independent member as a voting member of FSOC.
A Global Voice
FIO has a mandate to negotiate covered insurance agreements and represent the United States internationally. The Independent Member has generally been shut out from participating in international insurance forums, even as an observer. The act would eliminate this bifurcation of roles by combining the two positions, but it would go a step further. OIIA would have the authority to participate on the Financial Stability Board and with the G20 on insurance matters, and also consult with international supervisors and their financial stability counterparts.
A Narrower Mission
The duties of OIIA would be similar to the duties of FIO, with the some notable exceptions that would leave OIIA with less authority than the combination of FIO and the Independent Member.
No Authority to Collect Insurer Data: Instead of having a duty to “monitor” the insurance industry like FIO, OIIA would have a duty to “observe” the industry. The major difference is that OIIA would lose the authority FIO has to collect data and information from insurance firms. OIIA would need to rely on state insurance supervisors and other agencies for its data.
No Supervisory Coordination Role: OIIA would be specifically barred from participating in supervisory colleges or similar forums that are set up to improve coordination and communication among supervisors from different jurisdictions. Supervisory colleges are often used, for example, to help global regulators supervise insurers with footprints in multiple countries.
The Financial CHOICE Act is unlikely to pass this year but its provisions could suddenly become more prominent next year depending on the election results.
FIO has recommended that it be included in supervisory colleges but that idea has been resisted by some state supervisors and insurers. The change in the act reflects a view that the National Association of Insurance Commissioners and states have made changes—such as allowing greater access to information about subsidiaries of insurance holding companies in other states and improving cross-jurisdictional coordination—that will allow them to handle the supervision of internationally active insurance groups without federal help. This is an important debate, as one of the reasons given by FSOC for its three insurance company SIFI designations was that those firms were not subject to consolidated supervision by state regulators.
No Authority to Monitor Access and Affordability: Unlike FIO, OIIA would not have the authority to monitor whether underserved communities and consumers, minorities, and low- and moderate-income people have access to affordable insurance products.
The result of these changes would be a greater reliance on state insurance regulators to handle certain issues, as they did before Dodd-Frank was passed. There is still a constituency for a federal insurance charter and federal insurance regulatory agency, but it has been less vocal since the financial crisis. These changes would move the U.S. regulatory system farther away from a federal regulatory model.
The Financial CHOICE Act is unlikely to pass this year but its provisions could suddenly become more prominent next year depending on the results of the November elections. Those changes could have a substantial impact on the federal regulation of insurance.
KEYWORDS: FEDERAL RESERVE BOARD, DODD-FRANK ACT, FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), HOUSE FINANCIAL SERVICES COMMITTEE, 2016, DEPARTMENT OF TREASURY, EUROPEAN UNION, SIFIS, FINANCIAL STABILITY BOARD, G20, 114TH CONGRESS, FEDERAL INSURANCE OFFICE