FIO Focus, Issue No. 45: The Modernization Report: Federal Action May be Warranted


Devoted to exploring the progress of the modernization of the insurance industry, FIO Focus provides information and insights about the organizations and issues that are driving change and influencing the future of the industry.

In its report, "How to Modernize and Improve the System of Insurance Regulation in the United States" (Report), the Federal Insurance Office (FIO) identifies numerous areas of insurance regulation where federal action may be warranted. In making certain recommendations, the FIO went beyond the concept of monitoring states' actions and suggested that federal action could become necessary.

Suitability in Annuities Transactions

The FIO expressed concern about the lack of uniformity in consumer protection for the sale of annuity products noting that the suitability of a purchase should not be based upon the state in which a consumer resides. The FIO recommended that all states adopt the Annuity Transactions Model Regulation, which was adopted by the National Association of Insurance Commissioners (NAIC) in 2013, and has already been adopted, in whole or in part, by 22 states. The FIO explained that if national uniformity is not achieved in the near term, federal action may become necessary.

Producer Licensing

According to the FIO, the existing state-based system of producer licensing lacks uniformity despite "explicit Congressional direction" through the Gramm-Leach-Bliley Act (GLBA). The result is duplicative obligations and barriers for producers wanting to place insurance for risks in multiple states. The FIO recommended that Congress pass legislation establishing a National Association of Registered Agents and Brokers (NARAB) to create a system of full reciprocity for producer licensing and eliminate the need for insurance producers to maintain licenses in multiple jurisdictions. As NARAB members, licensed producers and business entities would be permitted to sell, solicit and negotiate insurance in non-resident states where they have paid a licensing fee.

The House of Representatives passed NARAB II legislation, HR 1155, on September 10, 2013. It was approved by the Senate Committee of Banking, Housing and Urban Affairs on June 6, 2013. On January 16, 2014, NARAB II legislation was merged with Senate Bill 1926, which would also delay rate increases for some policyholders in the National Flood Insurance Program (NFIP). A vote in the full Senate is expected soon. FIO Focus Issue 30 provides an overview of the NARAB II legislation.

Covered Agreement for Reinsurance Collateral Requirements

State insurance laws require non-U.S. reinsurers to post collateral if the ceding insurer wants to receive balance-sheet credit for the reinsurance. In many states, the collateral must be equal to 100% of the liabilities ceded. Non-U.S. reinsurers argue that this requirement places them at a competitive disadvantage compared to U.S. reinsurers that do not have to post collateral. In the Report, the FIO recommended that the U.S. Department of the Treasury and the United States Trade Representative (USTR) pursue a covered agreement for reinsurance collateral requirements to promote nationally uniform treatment of reinsurers. The effect of a covered agreement is likely to be the preemption of state laws that require such collateral.

In 2011, the NAIC adopted a revised Credit for Reinsurance Model Law and Regulation, allowing a "sliding scale" for collateral requirements. The model permits non-U.S. reinsurers domiciled in a "qualified jurisdiction" to post less than 100% collateral depending on their financial strength.

While the model has been adopted by 18 states, the FIO expressed concern that even if it is adopted in all states, its implementation may not be uniform. The FIO explained that a state's determination of the adequacy or equivalence of another nation's regulatory system will not bind other states. Through the NAIC, states have begun the process of collectively identifying "qualified jurisdictions" for purposes of lowering collateral requirements. However, the FIO suggested that a covered agreement should permit it to make qualified jurisdiction determinations.

FIO Focus Issue 7 provides a discussion regarding the FIO's authority to assist the Treasury Secretary in negotiating covered agreements. FIO Focus Issue 2 provides an overview of the FIO's preemption authority.

Surplus Lines Premium Tax Collections

Enacted in 2011, the Nonadmitted and Reinsurance Reform Act (NRRA) changed the rules for the collection and allocation of premium taxes on multistate risks sold in the surplus lines market. Under the NRRA, only the home state of an insured may collect premium taxes on surplus lines business, but the law allows states to develop national standards for allocating those revenues for multistate risks. The FIO suggested that the NRRA could be a model for insurance regulatory reform because it preserves state regulation and provides incentives for states to act in a manner consistent with federal guidelines. However, the FIO noted that "[a] compact seems no more likely than before the NRRA became law." While the FIO said it would continue to monitor the progress of the states, it also indicated further federal action on this issue may be warranted in the near term.

Standards and Oversight for Mortgage Insurers

In the Report, the FIO indicated that it is "necessary to establish federal oversight of federally developed standards applicable to mortgage insurance." State regulatory oversight of mortgage insurance varies and only 16 states impose specific regulatory requirement on private mortgage insurers. It was noted that three of the country's eight mortgage insurers failed following the financial crisis. Mortgage insurance is interconnected with aspects of the federal housing finance system and is an issue of national interest. The FIO suggested that establishing federal oversight of federally developed standards applicable to mortgage insurance would help foster confidence in housing finance.

Product Approval Process

The FIO described the variations in product review and approval processes among states, the inefficiencies created by a lack of uniformity and the potential for regulatory arbitrage. It recognized the states' efforts in creating the Interstate Insurance Product Regulation Commission (IIPRC), which currently has 43 members, but noted that California, Florida and New York do not participate. Other shortcomings, according to the FIO, are insurers' ability to circumvent the IIPRC standards by filing directly with individual states and the IIPRC's lack of approval standards for group products, including annuities, long-term care and disability. With respect to commercial lines, the FIO stated that while there have been important strides in the last 15 years, there continue to be inconsistencies in standards, particularly for exempt policyholder status and filing requirements in the System for Electronic Rate and Form Filing (SERFF). The FIO stated that the absence of a uniform national standard for approving policies creates inefficiencies for insurers, delays product releases and prevents nationwide simultaneous product launches.

The FIO specifically recommended that all states should participate in the IIPRC and more products should be included in the IIPRC process. For commercial lines, the FIO recommended the development of standardized forms or an interstate compact. Noting the "the importance of efficiency and consistency in the product approval process for many insurance products," the FIO stated that if "the current, and long-standing, shortcomings are not improved in the near term ... [f]ederal action may become necessary."

Accessibility and Affordability of Insurance on Sovereign Native American and Tribal Lands

The FIO's concerns about the availability and affordability of insurance on sovereign Native American and Tribal lands stems, in part, from the absence of a regulatory framework despite Tribal governments' legal authority to establish one. State insurance laws generally do not apply to policies sold on Native American and Tribal lands. According to the FIO, the lack of a regulatory and legal framework makes insurers reluctant to conduct business on such lands. The FIO explained that of the 566 federally recognized Tribes, less than 90 reside on lands that are mapped by the Federal Emergency Management Agency. Only land that is mapped is eligible for coverage under the NFIP. The FIO indicated that it will initiate a "consultation with Tribal leaders, including tribally-owned risk pools, and involve relevant federal agencies and state regulators, with the objective of identifying alternative courses of action to improve the accessibility and affordability of insurance on sovereign Tribal lands." 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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