Legal Alert: Federal Insurance Issues We Are Watching During Fall 2013

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The United States Congress has returned from its summer recess. On its first full day back in session, the U.S. House of Representatives passed (by a vote of 397-6) long-stalled legislation that would fundamentally alter the U.S. system for licensing insurance producers ("NARAB II"). While the House has passed similar legislation twice before, this year is the first time the full Senate is also preparing to take up NARAB II. Whether or not producer licensing tops your priorities list, House action on this bill is just the first step in what promises to be an active period of insurance public policy discussions at a national level. Indeed, while Syria, the debt ceiling, and budget showdowns are grabbing headlines, there is arguably more insurance activity occurring in Washington since before the enactment of the Dodd-Frank Act. In addition to activity on NARAB II, committees in both the House and Senate are preparing to hold hearings on the reauthorization of the Terrorism Risk Insurance Act and hearings to reevaluate the impact of last year’s reauthorization of the National Flood Insurance Program.

Against this backdrop, the enduring debate over whether the federal government should have a greater involvement in regulating insurance will have fresh life when the long-expected Federal Insurance Office ("FIO") report on the modernization of insurance regulation is issued, possibly as soon as this month.

Excluding the ongoing activities surrounding healthcare reform, the following are highlights of federal activity impacting insurers that we will be following this Fall.

The Terrorism Risk Insurance Act1 (“TRIA”) – Last reauthorized in 2007, TRIA is set to expire on December 31, 2014, unless extended by Congress. TRIA was enacted following the September 11, 2001 terrorist attacks to address the near complete withdrawal of private terrorism coverage and provides commercial property and casualty insurers access to a federal backstop for certain large terrorism events. The trade-off for the backstop is that insurers of certain “covered lines” must make coverage available for losses resulting from certified Acts of Terrorism.

In 2002, the first-term Bush Treasury Department and a Republican-controlled Congress designed TRIA as temporary program to be in place for several years while a private terrorism coverage market developed. After an initial two-year extension in 2005, the second-term Bush Treasury Department and a then-Democratic Congress enacted compromise legislation that reauthorized TRIA for an additional seven years, expiring at the end of 2014.

Six years later, the current split Republican/Democratic Congress and the Obama Administration are skeptically reevaluating TRIA, seemingly hoping to find ways to increase private participation in the terrorism coverage marketplace.

The House Financial Services Committee is scheduled to begin its formal TRIA deliberations with a public hearing on September 19. The first panel of witnesses will be one or more members of Congress. This unusual witness panel could signal that politics may be more overt as the debate begins. The second panel of witnesses, however, will likely include a well-balanced variety of stakeholders, such as a catastrophe modeling expert, a TRIA-impacted policyholder, and advocates in favor of and opposed to TRIA reauthorization. The Senate Banking Committee indicates that it will have its own TRIA hearing as early as September 24, but in any event no later than Thanksgiving.

The House and Senate committees may approach TRIA from different perspectives, but their inquiries will likely start by asking whether the private market can take on more terrorism risk and what the possible impact would be were TRIA to expire. The 2005 reauthorization resulted in an increase in insurers’ deductibles and dropping some lines from the program. These steps were intended to start weaning the market from a public backstop. If history is a guide, those in favor of greater private market involvement could press for different TRIA triggers, higher deductibles, and more aggressive recoupment provisions.

While Congress schedules an initial round of TRIA hearings, the Treasury Department (on behalf of the President’s Working Group on Financial Markets) is required, statutorily, to perform many of the same inquiries and issue a report in 2013. On July 16, 2013, the Treasury Department published a request for comments to assist the President’s Working Group in preparing the third of three reports required under TRIA (earlier reports were published in 2006 and 2010).2 Interested parties wishing to comment on TRIA and the terrorism coverage market need to submit comments to Treasury by September 16, 2013.

Finally, the Federal Advisory Committee on Insurance (“FACI”) that was created in 2011 to provide input to FIO is scheduled to meet on September 18.  FACI’s tentative agenda includes a discussion of “perspectives on the Terrorism Risk Insurance Act of 2002.”3

This activity does not mean that either Congress or the Administration is likely to reach a conclusion on TRIA reauthorization much before the December 2014 expiration date. It does, however, mean that Washington officials are about to enter 15 months of discussing the role of insurance in the larger economy, the role of the federal government in catastrophic risk management and, unavoidably, the role of FIO in national insurance public policy development. This last topic will be fueled by the expected release of several highly anticipated reports from FIO (see discussion below).

National Flood Insurance Program (“NFIP”) – In contrast to the man-made peril underlying TRIA and the statutorily driven deadline to address TRIA reauthorization, the natural peril that underlies the NFIP has driven Congress to reexamine the program just 14 months after it voted overwhelmingly to reauthorize the NFIP for five years in the Biggert-Waters Flood Insurance Reform Act of 20124 ("Biggert-Waters"). Serious re-examination of the NFIP usually follows a major flooding event and while Superstorm Sandy certainly qualifies as a major event, the flood both the House and Senate are responding to by scheduling committee hearings this fall on NFIP reform implementation is not the kind of flood that motivated Noah.

Instead, Congress is reacting to a flood of constituent and state/local government complaints about the series of rate increases mandated when Congress reauthorized the NFIP last summer in Biggert-Waters. The rate increases, intended to end rate subsidies and relieve the much beleaguered, 40-year-old program of its $20+ billion debt, enjoyed considerable bipartisan and bicameral support until homeowners began receiving notice of new or increased flood insurance premiums required under the legislation their members of Congress supported just last summer.

Congress has a long history of supporting fiscally-responsible NFIP reforms while not wanting flood insurance requirements or rates to increase for their constituents. While it may be interesting to see members of Congress bash the implementation of legislation they overwhelmingly supported just last year, the real story to watch is how members reconcile their concerns about rate increases with the provisions of Biggert-Waters, that seek to expand private participation in the flood insurance and reinsurance market. In response to  explicit instructions from Congress, the Federal Emergency Management Agency (“FEMA”) has more actively engaged private insurers and reinsurers to explore increased private participation in the flood coverage market than at any time since the late 1970s when the federal government expelled private insurers from the public-private flood risk pooling arrangement permitted by the original 1968 NFIP Act.

The Biggert-Waters debate will continue as Congress examines the role of the federal government in catastrophic risk management and insurance during the TRIA reauthorization process.

NARAB II

In 1999, as part of the Gramm-Leach-Bliley Act ("GLBA"), Congress enacted a law intended to force states to remove perceived obstacles to nationwide licensing of insurance producers. GLBA incentivized states to improve and increase the uniformity of insurer licensing laws and regulations by threatening the establishment of a national licensing authority that would preempt state authority if at least 29 states did not adopt uniform laws by November 2002. In response, the National Association of Insurance Commissioners (“NAIC”) created several programs to standardize licensing requirements and to make the licensing process for non-resident agents and brokers more efficient. The states met the GLBA deadline, and the establishment of a National Association of Registered Agents and Brokers under the GLBA (so-called NARAB I) was avoided. However, the perception persists that nationwide uniformity has not been achieved, and that agents and brokers operating on a multistate basis face costly and unnecessary paperwork as a result of overlapping and inconsistent licensing requirements.

Industry response has been to press for federal legislation notwithstanding the work done by several states to achieve uniformity on their own. If enacted, the National Association of Registered Agents and Brokers Reform Act of 2013 (“NARAB II”) would create a private, not-for-profit corporation to serve as an interstate clearinghouse for non-resident producer licensure. The corporation would be governed by a panel dominated by current and former state insurance regulators who would establish standards for membership. An approved NARAB member would be able to utilize the clearinghouse for non-resident licenses in any other state. States would retain their regulatory jurisdiction over consumer protection, market conduct and unfair trade practices. States also would retain the right to license resident producers and to supervise, discipline, and set licensing fees for insurance producers. The bill is supported by the NAIC – not surprising given the bill’s preservation of the primacy of the state system in an area where there has been the loudest cry for national uniformity.

FIO Report

When Congress established FIO as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it charged FIO with evaluating and reporting to Congress on how to modernize and improve the system of insurance regulation in the U.S. Among other things, the report was to consider the degree of national uniformity of state regulation. The report remains unissued and is now more than 20 months beyond the due date set under Dodd-Frank. FIO Director Michael McRaith reportedly announced during a closed-door session with state insurance regulators in August that the report could be released as early as late September or early October.

Meanwhile, the Financial Stability Board (“FSB”) issued its Peer Review of the United States which, among other things, calls for U.S. authorities to promote greater regulatory uniformity in the insurance sector, including conferring additional powers and resources at the federal level where necessary. The FSB’s findings and other recommendations highlight fragmentation in the supervision of insurance groups under the current state system and favor an expanded role for FIO. It will be difficult for FIO to ignore the FSB’s findings and recommendations.

FIO also has two  unissued reports related to reinsurance: (1) a report describing the global reinsurance market and the role this market plays in supporting insurance in the U.S. (due September 30, 2012); and (2) a report describing the impact of the Nonadmitted and Reinsurance Reform Act on state regulators’ access to reinsurance information for regulated companies in their jurisdictions (due January 1, 2013).

HUD Disparate Impact Rule

Earlier this year, the Department of Housing and Urban Development ("HUD") promulgated a rule establishing a standard of liability for practices under the Fair Housing Act5 ("FHA") that have a disparate impact on a protected class, even if these practices are not motivated by discriminatory intent. The new rule provides that a practice has a discriminatory effect if it “actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.”6

Because HUD has interpreted the FHA to apply to the provision of homeowners’ insurance,7 the rule has raised significant concerns for insurers. The insurance industry has opposed HUD’s FHA interpretation on the basis that the imposition of disparate impact liability to insurers would severely disrupt long-established actuarial and ratemaking practices and would impair existing state regulation of insurance. The industry contends an essential element of setting insurance rates is the classification of insureds into groups through an accurate assessment of risk factors. This process necessarily differentiates among classes of individuals based on the level of risk of each class. In this process, insurers contend they have multiple incentives not to discriminate based on protected characteristics, because these characteristics have no bearing on risk factors for insuring property, and because state law typically prohibits insurers from considering such factors in their classification and rating decisions. However, the specter of disparate impact liability that could result from the unintended discriminatory effect of an insurance classification could force insurers to incorporate factors not linked to risk into their rating and classification practices. This would result in rates that are not rooted in sound insurance principles. Industry advocates further contend that because many states prohibit insurers from considering factors, such as race or religion in their rating decisions, insurers would be faced with the dilemma of either violating state law, or being subject to disparate impact liability. These perverse incentives would frustrate the operation of state laws regulating the business of insurance, in contravention of the reverse-preemption principle of the McCarran-Ferguson Act.

The issue of whether a disparate impact claim is cognizable under the FHA is currently before the United States Supreme Court in the case of Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc.8 HUD promulgated its disparate impact rule while the petition for writ of certiorari in this case was pending, so the rule itself is not specifically at issue in this case. However, HUD’s rule has been the focus of multiple amicus briefs in the Mt. Holly case in which the above arguments were laid out, including a joint brief filed by the major U.S. property/casualty trade associations. The United States Solicitor General filed a brief in which he argued a review of disparate impact liability under the FHA was unwarranted because HUD’s new rule had addressed the issue. The Court granted review, and a decision that disparate impact liability is unavailable under the FHA could effectively invalidate the rule. Oral arguments have not yet been scheduled. 

The Federal Housing Finance Agency and Force-Placed Insurance

The Federal Housing Finance Agency ("FHFA"), which oversees the operations of Fannie Mae and Freddie Mac, recently proposed restrictions on force-placed insurance. Specifically, in a notice dated March 29, 2013, the FHFA proposed rules that would prohibit the use of commissions and reinsurance by Fannie Mae and Freddie Mac in the force-placed insurance market. The notice provides 60 days for comment, and further states that, four months subsequent to the receipt of such comments, Fannie Mae and Freddie Mac will provide “aligned guidance to sellers and servicers, including implementation schedules related to these particular lender placed insurance practices.” Although the FHFA held a private meeting with “stakeholders” (i.e., banks, insurers, brokers, regulators, and representatives of trade and consumer groups) in June, reports indicate that the FHFA may delay enacting any reforms until next spring.10

The FHFA’s proposed restrictions came at approximately the same time that the New York Department of Financial Services ("DFS") entered into settlement agreements with the country’s largest force-placed insurers.  As a condition to the settlements, all force-placed insurers in New York agreed to implement reforms, which include restrictions on affiliate reinsurance transactions and commissions. In April 2013, Benjamin Lawsky, Superintendent of the DFS, sent a letter to other state insurance commissioners urging them to implement New York’s force-placed reforms nationwide.

FRB Gearing Up for Insurer Supervision Post-FSOC Designations

The Federal Reserve Board (“FRB”) remains an entity of much interest and concern for the insurance community as it moves closer to explaining just what Dodd-Frank “enhanced supervision” will mean to those insurers designated as systemic by Financial Stability Oversight Council.


1Pub. L. 107-297, 116 Stat. 2322.
2The Treasury Department’s July 16, 2013 request for comments can be found at the following link: http://www.gpo.gov/fdsys/pkg/FR-2013-07-16/pdf/2013-16977.pdf. The 2006 report can be found at http://www.treasury.gov/resource-center/fin-mkts/Documents/report.pdf, and the 2010 report can be found at http://www.treasury.gov/resource-center/fin-mkts/Documents/PWG%20Report%20Final%20January%2013.pdf.
3The Treasury Department’s notice of this meeting can be found at the following link: https://www.federalregister.gov/articles/2013/09/03/2013-21362/open-meeting-of-the-federal-advisory-committee-on-insurance.
4Pub. L. No. 112-141, 126 Stat. 405 (codified as amended at 42 U.S.C. §§ 4001-4129).
542 U.S.C. §§ 3601-3631.
6See 24 C.F.R. § 100.500(a).
7See 24 C.F.R. § 100.70(d)(4).
8See Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., 658 F.3d 375 (3d Cir. 2011), cert. granted, 80 U.S.L.W. 3711 (U.S. June 17, 2013) (No. 11-1507).
9The notice can be found at the following link: https://webapps.dol.gov/federalregister/PdfDisplay.aspx?DocId=26746.
10See Jeff Horwitz, FHFA to Hold Private Meetings on Force-Placed Insurance, American Banker (June 10, 2013).