Dodd-Frank and Its Impact on the Insurance Industry: FSOC, FIO and - - PowerPoint PPT Presentation

Dodd-Frank and Its Impact

• n the Insurance Industry:

FSOC, FIO and Beyond

Nick Pearson Partner New York, NY Teddy Eynon Partner Washington, DC Geoffrey Etherington Partner New York, NY

Dodd-Frank and Insurance Regulation

Presented by: Nick Pearson, Partner New York, New York

Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)

• The US Government’s most significant law-making

response to the 2008 financial crisis.

• Intended to identify and reduce systemic risk to the

US financial system.

• Largely bypasses insurance regulation – only 16 of

the Act’s 849 pages are directly focused on insurance.

Historical Context: State vs. Federal Regulation of Insurance

• Insurance is primarily regulated by the states.
• The US Supreme Court decided for and then against

state regulation in 1869 and 1944, respectively.

• However, in 1945 Congress preserved state

regulation through enactment of the McCarran- Ferguson Act.

Dodd-Frank does Not Fundamentally Alter State Regulation of Insurance

• Congress reluctant to overturn state regulation of the

insurance industry

• Lobbying efforts of insurers and state regulators
• Effectiveness of state insurance regulation, even

through the financial crisis of 2008-2009

• Creates the Federal Insurance Office (the “FIO”)
• the first permanent federal entity entirely focused on the
• versight of the insurance market
• Addresses aspects of two relatively narrow areas of

insurance regulation:

• Surplus Lines Insurance
• Reinsurance

The Federal Insurance Office

• Part of The Department of the Treasury
• FIO Director is appointed by the Secretary of the

Treasury.

• Michael McRaith has been appointed the first Director of

the FIO and has recently left his position as Illinois Director of Insurance in order to step into his new role.

• The Dodd-Frank Act does not grant the FIO or The

Department of the Treasury any general supervisory

• r regulatory authority over the business of insurance.
• All lines except for:
• Long-term care;
• Crop insurance under the federal crop insurance

program; and

• Health insurance.

Functions of the Federal Insurance Office

• Monitor all aspects of the insurance industry and report
• Report due to Congress in early 2012 on how to modernize and

improve the system of insurance regulation in the US

• Annual reports to the President and Congress on the insurance

industry

• Consult with state insurance regulators on insurance matters of

national and international importance

• Identify insurers that may need supervision by Federal Reserve

due to systemic risk

• Assist the Secretary of the Treasury in administering federal

Terrorism Insurance Program

• Coordinate and develop federal policy on international insurance

issues and assist in negotiating international agreements on insurance or reinsurance

• Perform any other related duties and authorities as directed by

the Secretary of the Treasury

Dodd-Frank Act Title V – Nonadmitted and Reinsurance Reform Act of 2010

• Dodd-Frank Title V - The Nonadmitted and

Reinsurance Reform Act of 2010 (“NARRA”)

• Effective July 21, 2011
• Preempts non-conforming state regulation
• Addresses surplus lines and reinsurance

Changes to the Regulation of Surplus Lines Insurance under the Dodd-Frank Act

• Simplification of Insurer Entry into the Surplus Lines Market
• Non-US Surplus Lines Insurers – No state may prohibit a

surplus lines broker from placing surplus lines insurance with a non-US insurer that is listed on the NAIC Quarterly List of Alien Insurers

• US-Domiciled Surplus Lines Insurers – All states are bound

by the standards of eligibility contained in the NAIC Non- Admitted Insurer Model Act

• Requires all states to exempt qualifying large commercial

insureds from the surplus lines laws, including the broker diligent search requirement.

• Simplifies regulation and taxation of multi-state risks
• Only the insured’s home state can regulate and collect

premium tax on the placement of surplus lines policies

• Result should be more surplus lines business

Changes to the Regulation of Reinsurance under the Dodd-Frank Act

• Does not reduce collateral requirements for alien reinsurers,

but opens the door for reform by making a cedent’s domiciliary state’s determination on credit for reinsurance binding on all other states.

• Should encourage adoption of lower collateral requirements

for unauthorized reinsurers on a state by state basis.

• Lower collateral costs for highly rated reinsurers should make

them more competitive.

• Thus far, Florida, Indiana, New Jersey and New York have

relaxed their unauthorized reinsurer collateral requirements.

• Other Changes:
• Restricts regulation of reinsurance contracts to cedent’s

domiciliary state; and

• Restricts regulation of reinsurer solvency to the reinsurer’s

domiciliary state.

Dodd-Frank and its Impact on the Insurance Industry: Financial Stability Oversight Council (FSOC) and New Developments: Federal Advisory Committee on Insurance (FACI) Presented by: Geoffrey Etherington, Partner New York, New York

What is the FSOC?

• FSOC Authorized—Title I, Subtitle A of Dodd Frank -

Attachment A

• Ten voting members—Chaired by Secretary of the

Treasury—Sec. 111(b)(1)

• Nine are federal banking, securities, housing or commodities

regulators

• On June 27, 2011, President Obama nominated Roy Woodall,

former Kentucky Insurance Commissioner, as the independent member “having insurance expertise.” Mr. Woodall must be confirmed by the Senate—Sec. 111(b)(1)(J)

• Five non-voting (Sec. 111(b)(2)) including:
• Director of Federal Insurance Office—Michael McRaith,

Illinois Insurance Director—assumed position June 13, 2011

• A state insurance commissioner—John Huff, Missouri

Department of Insurance, Financial Institutions and Professional Registration—designated by NAIC

FSOC Mission—Sec. 112(a)(1)

• Identify risks to US financial stability related to

large, interconnected bank holding companies and nonbank financial companies

• Eliminate expectations that any firm is too big to

fail

• Respond to emerging threats to US financial

markets

Regulation of Insurers and Reinsurers that May Pose Systemic Risks

• Nonbank financial company defined (Sec.

102(a)(4)—Attachment B) as a US or foreign company that:

• Engages in the US in
• Activities that are financial in nature under Section

4(k) of Bank Holding Company Act of 1956, 12 U.S.C. Sec. 1843 (BHCA).

• Insurance and reinsurance activities are financial in

nature under Section 4(k) of the BHCA

Regulation of Insurers and Reinsurers that May Pose Systemic Risks (cont.)

• FSOC may direct Board of Governors of the Federal

Reserve (FRB) to regulate an insurance or reinsurance company or holding company as a nonbank financial company

• If its “material financial distress…could pose a threat to

the financial stability of the United States”—Sec. 113(a) and (b)

• FSOC to consider the following factors (Sec. 113(a)(2) and

(b)(2)):

• Leverage
• Off-balance sheet exposures
• Relationships with other significant nonbank financial and

bank holding companies

• Importance as source of credit or liquidity

Regulation of Insurers and Reinsurers that May Pose Systemic Risks (cont.)

• Extent to which assets are managed rather than owned

and whether ownership of managed assets is diffuse

• Nature, scope, size, scale, concentration,

interconnectedness and mix of activities

• Degree of current regulation
• Amount and nature of financial asset
• Amount and types of liabilities, including reliance on short-

term funding

• Other factors deemed appropriate

FSOC Proposed Rulemaking – January 2011

• FSOC proposes to focus on six categories to

determine if nonbank financial company poses systemic risk--1310.10(a) and .11(a) of proposed rule--Attachment C

• Size
• Lack of substitutes for the financial services and

products provided

• Interconnectedness with other financial firms
• Leverage
• Liquidity risk and maturity mismatch
• Existing regulatory scrutiny

FSOC Proposed Rulemaking – January 2011 (cont.)

• In Supplementary Information in the Federal

Register notice, FSOC indicated that (See III. Overview of Proposed Rule):

• Size, lack of substitutes and interconnectedness

measure risk of possible “spillover” from financial distress of a nonbank financial company

• Leverage, liquidity risk and maturity mismatch and

existing regulatory scrutiny measure “how vulnerable” a nonbank financial company is to financial distress

• FSOC wants to develop “quantitative metrics” for

the six categories

FSOC Proposed Rulemaking – January 2011 (cont.)

• Comments as to proposed rule closed on February

25, 2011—See Attachment D for some of these comments

• Industry groups including ACLI, AIA, RAA and PCIA and

the Property and Casualty Insurers Coalition, consisting

• f ACE, Allstate, CNA, Liberty Mutual, Nationwide, State

Farm and USAA

• CEA, a federation of European insurers and reinsurers,

commented

• Most comments sought delay of rule making until voting

member of FSOC with insurance industry expertise and Federal Insurance Office (FIO) director appointed

• Other comments asserted that participants in the

insurance and reinsurance industry are not likely to pose systemic threats

FSOC Proposed Rulemaking – January 2011 (cont.)

• FSOC’s agenda for its meeting on July 18, 2011

included release of further guidelines on determination of firms that pose a risk to the U.S. financial system

• Press reports prior to meeting indicated that FSOC

might not be ready to release the guidelines

Prudential Standards

• FSOC and FRB to develop prudential standards for

nonbank financial companies (Sec. 115 and 165) including:

• Risk-based capital requirements
• Leverage limits
• Liquidity requirements
• Resolution plan and credit exposure requirements
• Concentration limits
• Contingent capital requirement

Prudential Standards (cont.)

• Enhanced public disclosures
• Short-term debt limits
• Overall risk management requirements

Contingent Capital

• FSOC report to Congress on contingent capital

requirements for both bank and nonbank financial companies due July 2012—Sec. 115(c)

• FSOC slated to discuss its various deliverables

under Dodd-Frank at its July 18, 2011 meeting

FRB Regulation by FRB of Insurers and Reinsurers

• FRB to regulate insurers and reinsurers that would pose

systemic risks – Title I, Subtitle C - Attachment E

• Broad authority to gather data and conduct examinations—
• Sec. 161
• Use regulatory reports filed with primary regulators—Sec.

161(a)(2)

• Use examinations by primary regulators—Sec. 161(b)(2)
• Authority can extend to all subsidiaries of insurance or

reinsurance holding company—Sec. 162

• Prior notice and review of acquisitions—Sec. 163
• Management interlocks with unaffiliated bank holding or

nonbank financial companies—Sec. 164

Office of Financial Research (OFR)

• OFR within Treasury—Title I, Subtitle B -

Attachment F

• Can require reporting from insurers and reinsurers

“for purpose of assessing the extent to which a financial activity or financial market in which a financial company participates, or the financial company itself, poses a threat to the financial stability

• f the United States”—Sec. 154(b)(1)(B)(i)
• Collects data, develops models and provides

research and analysis required by FSOC to fulfill its functions—Sec. 153(a)

• Shares data with other agencies—Sec. 153(b)
• Director of OFR has subpoena power—Sec. 153(f)

Federal Advisory Committee on Insurance (FACI)

• Treasury announced creation of FACI to advise Federal

Insurance Office (FIO) - 76 FR 28129, May 13, 2011 - Attachment G

• Up to15 members for two year terms
• Chair selected by FIO and Treasury officials
• Members to be “persons with expertise in the area of

insurance”

• A “diverse and balanced body with a variety of interests,

backgrounds, and viewpoints”

• No lobbyist may serve on FACI
• Membership applications sought by May 31, 2011
• No reports to date on make-up of FACI

Dodd-Frank and Its Impact

• n the Insurance Industry:

FSOC, FIO and Beyond

Presented by: Teddy Eynon, Partner Washington, DC

Republican Control of House

• Shift to Republican majority in the House
• Efforts to overturn and/or significantly change

portions of Dodd-Frank

• Efforts specifically related to insurance
• Federal Insurance Office (FIO)
• Financial Stability Oversight Council (FSOC)

House Committee Action

• House Financial Services Committee hearings
• April 14, 2011: “Oversight of the Financial Stability

Oversight Council”

• Included witness testimony from the NAIC, SEC,

Treasury Department and others

House Legislation

• H.R. 1315 – the Consumer Financial Protection

Safety and Soundness Improvement Act of 2011

• Introduced by Rep. Sean Duffy (R-WI)
• Seeks to improve the FSOC review process by

changing the vote to overturn a CFPB rule from a super-majority of two-thirds of the FSOC to a simple majority

House Committee Action

• House Financial Services Committee markups
• May 4, 2011: Subcommittee markup
• May 12, 2011: Full committee markup
• H.R. 1315 and related legislation reported

favorably at subcommittee and full committee levels

Next Steps in House and Senate

• H.R. 1315 and other FSOC/Dodd-Frank

legislation likely to be approved on the House floor

• However, such efforts are dead-on-arrival in the

Senate, where Democrats remain in power

Political Pitfalls

• House Republican message that Dodd-Frank

causes “Collateral Damage” to the economy

• New composition of the Senate Banking

Committee following Chairman Dodd’s departure

• Concern that the CFPB will suck up all the

political oxygen from the room, leaving rules/regulations surrounding the FIO on the back-burner

• Non-voting status of the FIO Director on FSOC

Contact Us:

Nick Pearson

Partner New York, NY 212.912.2798 NPearson@eapdlaw.com

Teddy Eynon

Partner Washington, DC 202.478.7379 TEynon@eapdlaw.com

Geoffrey Etherington

Partner New York, NY 212.912.2740 GEtherington@eapdlaw.com