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Title V - Insurance
Part 1 of Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act) establishes the Federal Insurance Office (FIO) in the U.S. Department of the Treasury (Treasury). The FIO will advise the Secretary of the Treasury (Secretary) on major domestic and international prudential insurance policy issues, providing national policymakers with access to key information and expertise on the insurance sector. Title V also amends the Secretary’s duties to include advising the President on insurance policy issues.
The FIO will be headed by a Director, who is appointed by the Secretary to a career-reserved position that does not require Senate approval. The Director of the FIO is authorized to serve in a non-voting capacity on the Financial Stability Oversight Council (Council), the systemic risk regulator. In carrying out the functions of the FIO, the Director is required to consult with State insurance regulators, individually or collectively, to the extent the Director determines appropriate.
The Act gives the FIO the authority to:
- Monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system;
- Recommend to the Council any insurer, including its affiliates (defined as any person who controls, is controlled by, or is under common control with the insurer), as an entity that should be subject to regulation as a Board Supervised Nonbank Financial Company (NFC);
- Represent the United States in the International Association of Insurance Supervisors (IAIS);
- Coordinate Federal efforts and develop Federal policy on prudential aspects of international insurance matters, including assisting the Secretary in negotiating written international agreements on prudential matters with respect to the business of insurance or reinsurance in consultation with the U.S. Trade Representative (covered agreements);
- Determine, in connection with the Administrative Procedures Act, whether State insurance measures are preempted by international insurance agreements;
- Consult with the States, including State insurance regulators, on insurance matters of national importance and prudential insurance matters of international importance; and
- Perform such other duties and authorities as may be assigned to it by the Secretary.
The Act gives the FIO broad authority to gather information from insurers and any affiliates as it may reasonably require in carrying out its functions, and grants the Director of the FIO subpoena power to require production of the data, enforceable in any U.S. District Court. Before collecting any data, the FIO must coordinate in advance with each relevant Federal agency and State insurance regulator (or other relevant Federal or State regulator in the case of any affiliate of an insurer) and any publicly available sources to determine if the information is available from, and may be obtained in a timely manner by, such agency or public source.
The Act pays considerable attention to keeping information privileged and confidential and to enabling information-sharing agreements between the FIO and State insurance regulators, individually or collectively.
The Director must submit an annual report on the insurance industry to the President and to Congress and any information deemed relevant by the Director or by Congress.
Power to Negotiate International Insurance Agreements and State Law Preemption
The FIO is granted substantial authority in the area of international insurance regulatory agreements. Under Title V, the Secretary and the U.S. Trade Representative are jointly authorized to enter into agreements with foreign governments relating to the recognition of prudential measures with respect to the business of insurance or reinsurance.
In implementing such international agreements, the FIO has specific, but limited, authority to preempt State insurance measures inconsistent with international agreements. The FIO must determine that the State law is inconsistent with the international agreement and that a particular State insurance measure treats a non-U.S. insurer less favorably than a U.S. insurer. The Director of the FIO is required to submit an annual report to the President and to Congress on or before September 30th each year regarding any preemptive actions taken by the FIO.
Report on Improving the Insurance Industry
The Director of the FIO must submit to Congress a report within 18 months on how to modernize and improve the system of insurance regulation in the United States The study and report would be based on and be guided by considerations such as:
- Systemic risk regulation of insurance;
- Capital standards, including standards relating to liquidity and duration risk;
- Consumer protection, including gaps in state regulation;
- The degree of national uniformity of state insurance regulation;
- The regulation of insurance companies and affiliates on a consolidated basis; and
- International coordination of insurance regulation.
The report and study must also consider:
- The costs and benefits of potential Federal regulation of insurance across various lines of insurance (except health insurance);
- The feasibility of regulating only certain lines of insurance at the Federal level, while leaving other lines of insurance to be regulated at the State level;
- The ability of any potential Federal regulator(s) to eliminate or minimize regulatory arbitrage;
- The impact that developments in the regulation of insurance in foreign jurisdictions might have on the potential Federal regulation of insurance;
- The ability of any potential Federal regulation or Federal regulators to provide robust consumer protection for policyholders; and
- The potential consequences of subjecting insurance companies to Federal resolution authority, including the effects of any Federal resolution authority on: (1) the operation of State insurance guaranty fund systems, including the loss of guaranty fund coverage if the insurance company is subject to a Federal resolution authority; (2) policyholder protection, including the loss of priority status of policyholder claims over other unsecured general creditor claims; (3) the loss of the special status of life insurance separate account assets and separate account liabilities; and (4) the international competitiveness of insurance companies.
The study and report must contain legislative, administrative and regulatory recommendations, as the Director deems appropriate, to carry out and effectuate the report’s findings. In conducting the study, FIO’s Director must consult with the National Association of Insurance Commissioners (NAIC), consumer organizations, representatives of the insurance industry and policyholders, and other organizations and experts, as appropriate.
Non-Admitted Insurance (Surplus Lines)
Part 2 of Title V of the Act reforms surplus lines (referred to in the Act as non-admitted insurance) and credit for reinsurance aspects of state insurance law.
This portion of the Act applies to property and casualty insurance coverage that is issued by an insurer that is not admitted in a state, and the coverage is placed directly or placed through a surplus lines broker. For the sake of clarity, workers' compensation coverage is expressly excluded from Title V of the Act.
The Act provides:
- Only the “home state” of the insured may regulate the placement of non-admitted insurance, including the licensing of the surplus lines broker(s) involved in the issuance of the coverage;
- Only the “home state” of the insured may impose premium taxes for non-admitted insurance;
- Commercial purchasers of non-admitted insurance have the benefit of a streamlined application process in which the broker need not perform due diligence to determine whether the coverage is available from insurers admitted in the state;
- States are prohibited from collecting surplus lines licensing fees after two years following the enactment of the Act unless the state participates in the NAIC’s national insurance producer database for the licensing of surplus lines brokers, or an equivalent database; and
- The Government Accountability Office (GAO) must submit to Congress a study, within 30 months of the effective date of the Act, on the size and market share of the surplus lines market for providing coverage typically provided by the admitted insurance market.
Study of Non-Admitted Insurance Market. The GAO must submit to Congress a study within 30 months of the effective date of the Act on the size and market share of the surplus lines market for providing coverage typically provided by the admitted insurance market. The study will need to determine and analyze:
- Change in the size. The change in the size and the market share of the non-admitted market; Shifting.
- The extent to which there has been a shift from the admitted market providing coverage to the non-admitted market providing it; Consequences.
- The consequences of the changes discussed above, including pricing and availability of coverage;
- Shifts in volume. The extent to which insurers and insurance holding companies that sell both admitted and non-admitted insurance have experienced shifts in the volume of business between admitted and non-admitted insurance; and
- Change in number of policies. The extent to which there has been a change in the number of individuals who have non-admitted policies, the coverage provided under those policies, the insurers and whether the coverage is available on an admitted basis.
Credit for Reinsurance and Reinsurer Solvency
This portion of the Act applies to the credit that a ceding insurer may take on its statutory financial statements for risks that it ceded (i.e., passed) through reinsurance, and to the amount of financial information that a reinsurer may be required to file with state regulators.
- The Act provides: That only the state of domicile of a ceding insurer may establish whether the insurer will receive credit for reinsurance;
- No other state may deny credit once the domiciliary state has granted it;
- For preemption of the application of the insurance law of a state (that is not the domiciliary state of the ceding insurer) to a reinsurance agreement, including any: (1) restriction on arbitration that is consistent with Title 9 USC; (2) choice of law requirements for the reinsurance agreement; and (3) attempt to enforce the contract on terms different from those in the reinsurance agreement;
- That the domiciliary state of a reinsurer will be solely responsible for regulating its financial solvency; and
- That no state may require financial information to be filed in addition to the information required by the reinsurer’s domiciliary state.
The Act requires the ceding insurer’s domiciliary state to be accredited by the NAIC, or have financial solvency requirements substantially similar to the NAIC, for the first two bullet points (shown above) to apply; and for the reinsurer’s domiciliary state to be accredited by the NAIC, or have financial solvency requirements substantially similar to the NAIC, for the last two bullet points to apply.
As defined, a “Reinsurer”: (1) must be principally engaged in the business of reinsurance; (2) may not conduct significant amounts of direct insurance; and (3) may not be engaged in the business of soliciting direct insurance on an ongoing basis.
If you have questions regarding anything you have read on Title V, please contact any of the attorneys listed below or your regular Sutherland contact.
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Roadmaps
Title V - Key Provisions and Regulatory Rulemakings
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