FIO Issues Modernization Report
In December, the Federal Insurance Office (“FIO”) issued its long-awaited report on modernising and improving the system of insurance regulation in the US (the “Modernization Report”).
The relationship between state and federal insurance regulation is one of the key issues addressed. The Modernization Report advocates enhanced federal supervision in certain areas of insurance regulation in response to a lack of uniformity at the state level and the increasingly globally nature of insurance regulation. The Modernization Report argues that regulation at the federal level would improve uniformity, efficiency, and consistency. However, the FIO also acknowledges the important role of state insurance regulators and concludes that a hybrid model, where state and federal regulation complement one another would be the most effective solution.
The Modernization Report makes 18 recommendations with respect to areas of reform that should be undertaken by state insurance regulators. These suggested reforms will largely impact the regulation of licensed insurers. In addition, there are nine recommendations for areas of direct federal involvement in the regulation of insurance. Three of these recommendations are of particular relevance to Lloyd’s:
- Covered Agreement on Reinsurance Collateral – The Modernization Report recommends that, in order to afford nationally uniform treatment of reinsurers, the US Treasury and the US Trade Representative should pursue a covered agreement for reinsurance collateral requirements. The covered agreement mechanism was established as part of the Dodd-Frank Act and authorises Treasury and the USTR to enter into agreements on prudential matters with foreign governments. Lloyd’s believes that a covered agreement is the only method to ensure nationally uniform treatment of credit for reinsurance in the US.
- FIO Oversight of NRRA Implementation – The Modernization Report recommends that FIO continue to monitor state implementation of the Nonadmitted and Reinsurance Reform Act. Although the NRRA has resulted in significant efficiencies in the placement of surplus lines policies, there continue to be areas of inconsistency at the state level.
- Mitigation of Natural Catastrophes – The Modernization Report recommends that states should identify, adopt, and implement best practices to mitigate losses from natural catastrophes. This is aligned with Lloyd’s position on the important role government can play in incentivising mitigation efforts, without distorting insurance rates through subsidies.
Congressional hearing on Modernization Report
On 4 February, the House of Representatives Subcommittee on Housing and Insurance held a hearing on the FIO Modernization report. FIO Director Michael McRaith and Connecticut Insurance Commissioner Thomas Leonardi testified at the hearing along with a several members of the insurance industry and trade associations, including the Property & Casualty Insurers of America, the American Insurance Association and the Reinsurance Association of America. Lloyd’s submitted a comment letter supporting the Modernization Report’s recommendation for a covered agreement on reinsurance collateral. A number of Subcommittee members expressed support for a covered agreement and Director McRaith advised that he would like to start the process “as quickly as possible.”
Lloyd’s will continue to monitor the impact of the Modernization Report and advise the market of further developments.