There is no doubt that the Dodd-Frank Act will be under attack over the next several years. Battles over well-known aspects of the law, like the Volcker Rule or the Consumer Financial Protection Bureau, are sure to get a lot of attention. But lesser-known — though still important — components of Dodd-Frank will likely receive much less public scrutiny, making them vulnerable to repeal without much fanfare.
For example, recent reports suggest that the National Association of Insurance Commissioners — a standards-setting body consisting of state insurance commissioners — plans to lobby Congress for the elimination of the Federal Insurance Office. Eliminating the FIO, an office that hasn’t received a lot of attention, would be a dangerous error that ignores the lessons learned in the 2007-8 financial crisis.
The FIO was established as part of the Treasury Department by Title V of Dodd-Frank as a response to the lack of insurance expertise at the federal level during the crisis. Most staff and principals in the Bush and Obama administrations, as well as at the financial regulatory agencies, had significant experience with banking and securities policy, but considerably less with insurance. This expertise void was a function of the fact that insurance companies in the U.S. are primarily regulated at the state level—a system codified by the McCarran Ferguson Act of 1945. This structure runs counter to the banking sector, in which all banks insured by the Federal Deposit Insurance Corp. have a federal regulator.
The lack of federal expertise on insurance matters before the financial crisis proved to be a regulatory blind spot. Large insurance companies such as AIG with sprawling domestic and international business lines experienced severe stress. AIG required the largest bailout in U.S. history. If the insurance sector faces similar stress in another financial crisis, federal policymakers and staff need a better understanding of the industry than they had in the lead-up to the 2008 meltdown. In short, the crisis showed that risks outside the banking sector can be systemic, and that the federal government needs more resources and better information to successfully manage these risks.
Dodd-Frank also recognized that, in some cases, enhanced federal supervision and strengthened regulations outside the banking sector were required. The Financial Stability Oversight Council, an innovation of the reform law, monitors these risks across the system and has the authority to designate nonbank firms as systemically important, subjecting them to enhanced supervision by the Federal Reserve. Three insurance companies — AIG, Prudential and MetLife — have been designated thus far by the FSOC, although a judge sided with MetLife in its court challenge over its designation. (The case is being considered by the U.S. Court of Appeals for the DC Circuit.)
The Federal Insurance Office advises the FSOC on insurance issues both as the council analyzes risks in the insurance sector and exercises its designation authority.
Moreover, the global financial crisis demanded a global response. It’s unworkable for insurance commissioners from 50 U.S. states to conduct and coordinate America’s involvement in international regulatory bodies. In America’s constitutional system, foreign policy is conducted by the federal government. The FIO, along with the Fed, represents the U.S. at the International Association of Insurance Supervisors — a standard setting body that serves as the insurance equivalent to the Basel Committee on Banking Supervision.
But as reports indicate, the state commissioners want the new GOP-controlled Congress to abolish the insurance office. Meanwhile, under the regulatory relief bill unveiled last Congress by House Financial Services Committee Chairman Jeb Hensarling — known as the Financial Choice Act — the FIO would be merged with the office of the independent FSOC member who focuses on insurance matters. The bill would also weaken the oversight council’s authority.
The FIO and the Fed certainly consult with and get crucial feedback from the National Association of Insurance Commissioners, and the commissioner group engages at the insurance supervisor group. Yet it is crucial for the U.S. to speak with one federal voice on insurance policy matters, both domestically and on the international stage.
Along the same lines, the FIO in conjunction with the Office of the U.S. Trade Representative were given authority by Dodd-Frank to negotiate insurance regulatory agreements — referred to as “covered agreements” — with other countries. In fact, the trade representative office and the FIO just finished negotiating the first covered agreement with the European Union. Covered agreements preempt state law if a conflict exists. It is appropriate for the executive branch to be able to take regulatory action to address risks across the insurance industry.
The existence of the Federal Insurance Office is also a clear benefit to consumers. The FIO publishes an annual report on consumer protection and access to insurance products, in which the office looks across the industry and across states to analyze various consumer protection and access concerns. In January, the FIO released a report on the affordability of auto insurance for consumers across the country — an important issue for low- and moderate-income consumers given that auto insurance is a mandatory requirement for drivers in 49 states.
Issues pertaining to long-term-care insurance providers or how different states are addressing claims of discriminatory practices in some insurance markets also justify having a federal office paying attention to regulatory matters and the well-being of insurance consumers.
Over the past six years, the Federal Insurance Office has developed into a reliable source of information for policymakers, consumers and the greater public. It is troubling that the NAIC may push for Congress to eliminate the FIO. If anything, policymakers should consider expanding the office and elevating the head of the office to the status of a Senate-confirmed appointment. That would enhance the FIO’s capacity and standing among domestic and international regulators.
Debating the merits of the state-federal balance in insurance regulation is for another day, but the value of having insurance expertise in the federal government is clear. It is important to highlight the significance of these lesser-known elements of Dodd-Frank, so they are not quietly rolled back in the shadows.