Moderator Charles Richardson, a partner in the Washington, D.C. office of Faegre Baker Daniels, moderated a discussion among several industry association leaders regarding current changes, challenges, and opportunities facing the insurance industry, and what actions might be taken with regard to the pending FIO report.
Kim Dorgan, senior executive vice president, American Council of Life Insurers (ACLI): Ms. Dorgan noted that a review of the 2008-09 financial upheaval yields lessons, especially with regards to the GSEs. However, she noted that the insurance sector proved to be well managed and that state solvency standards were very strong. On the downside, she noted that the NAIC was unable to move on a uniform basis because it had to rely on individual regulators deal with troubled companies. Another challenge was a Treasury Department equipped with very few resources and limited attention.
The DFA and international organizations established a much broader range of entities participating in the regulatory environment, including FSOC, FIO, the Financial Stability Board (FSB) and an increased role for the IAIS. The expansion isn’t unique to insurance as Ms. Dorgan observed that the G-8 has evolved to a G-20. Such sprawl has subsequently created a heightened focus on international standards for regulating insurance, and concern about the trickle down effects from global to federal and state levels. Ms. Dorgan stopped short of saying ACLI feels good about the result of the DFA, but noted that the industry as a whole was not severely impacted by the DFA. However, for insurance companies that offer "bank-like" financial services such as thrifts, the DFA imposes additional restrictions and may create confusion for regulators.
Life insurers are very focused on the economic outlook. As job growth has been unsteady, many people are delaying buying life insurance policies. Additionally, a low interest rate environment presents challenges for an investment-focused industry. Still another concern is the growing number of Americans who are not saving for retirement, and thus not taking advantage of the savings products provided by insurers.
Ms. Dorgan noted that the industry still spends a lot of time educating federal authorities about the differences between insurance and banking.
Brady Kelley, executive director, National Association of Professional Surplus Lines Offices, Ltd. (NAPSLO): Mr. Kelley stated that NAPSLO continues to strongly support a state-based system of insurance regulation and that any federal policy aimed at strengthening insurance should be coordinated with the state-based regulatory system.
The DFA’s Nonadmitted and Reinsurance Reform Act (NRRA) provides a national framework for uniform regulation and taxation of the industry. The good news is that taxation has been somewhat of a success story within the industry. Nearly eighty percent of insurance premiums are now taxed and retained by the home state of the insurer, a dramatic improvement from past years. States are migrating to the home state tax and the system is working remarkably well. Concerns about the lack of allocating taxes across states has proven not to be an issue. Insurers have found that the multi-state sharing component amounts are small and that the cost of allocating and paying across the country tend to be more than the tax revenues taken in.
In addition to the NRRA, other NAPSLO priorities include insurance eligibility standards and ensuring that provisions for forms, filing dates, tax requirements, and tax filing dates are implemented uniformly nationwide.
Mr. Brady concluded by noting that legislation introduced on March 19 in the House and Senate regarding the National Association of Registered Agents and Brokers would significantly streamline the licensing process. He added that NAPSLO is watchful of federal Fannie Mae and flood insurance forced place insurance, given that their members provide coverage in those areas. NAPSLO is also carefully monitoring TRIA and the Insurance Data Protection Act.
Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA): Ms. Pusey noted that while some people might view the current environment of a slow growth economy and a yet-to-be-published FIO report as stagnant, several changes have occurred since 2012.
These changes include the potential for domestic SIFIs to be subjected to more federal oversight. Additionally, companies that maintain a thrift or savings and loan as part of their holding structure will be subject to more federal oversight through the DFA. The focus on international group supervision and capital standards continues to build momentum and internationally active insurance groups are exploring how they may work together under a common framework. Ms. Pusey touched on recent natural disasters such as Super Storm Sandy, recognizing that in spite of losses exceeding $100B, the industry emerged strong.
Like others on the panel, Ms. Pusey indicated that the AIA is focused on the expiration of TRIA in 2014 and warned that other issues in queue may detract from this looming expiration, even as policies are being written that will extend past the current TRIA timeframe.
David Sampson, president and CEO, Property Casualty Insurers Association of America (PCI)
As a group, Mr. Sampson noted that property and casualty (P&C) insurers have fared relatively well under the DFA. Individually, insurers are facing more diffuse threats on a number of fronts, especially within the international marketplace. As international entities seek regulations for a more complex and interconnected market, there is a tendency to create regulatory proposals without a clear definition of the problems they seek to address. Mr. Sampson referred to this regulatory behavior as "tyranny in motion."
Among PCI’s priorities is a focus on Department of Housing and Urban Development (HUD) policies and the Fair Housing Act. PCI is looking at the practical impact of housing on various protected groups and the potential defense litigation costs that insurers might face.
Protecting product certainty is another PCI goal, particularly in the wake of devastating natural disasters and the consequent costs. Mr. Sampson noted that a rush to make uniform decisions in advance of actual losses is undermining reinsurer conversations now. The pressure to uniformly overhaul products based on select events could result in higher pricing, wreaking havoc on consumers and the industry.
Mr. Sampson also expressed concern about the trickle down effects that may result from international regulatory convergence. A fundamental concern is that U.S. and EU markets are very different and imposing an EU model in the US would fundamentally alter the competitive model that is in the best interest of US markets and consumers.
As TRIA is posed to expire, Mr. Sampson urged the industry to work with Congress to make the case that TRIA meets a private market need that can’t be met on its own and that TRIA is a fiscally responsible program in terms of structure and management.
Advice for FIO Director McRaith
Moderator Charles Richardson asked each of the panel participants what advice they might offer to FIO Director Michael McRaith.
ACLI: Ms. Dorgan expressed that the ACLI is pleased that the FIO will give insurers a voice at the table when it comes to taxation, international regulation and a broad range of matters. From an international perspective, ACLI expects FIO to be a lead voice for insurers, but with the caveat that the FIO does not act as a regulator.
NAPSLO: Mr. Kelley referenced the August 2011 A Report to the Federal Insurance Office report prepared by Networks Financial Institute at Indiana State University as an example of solid advice for the FIO. He added that the FIO can serve the industry most effectively by focusing on international roles, educating lawmakers about the nature of insurance and strong educational leadership. A vocal proponent of the state-based system, NAPSLO believes that any new work initiated by the FIO should strengthen the state-based system.
AIA: Because no single state regulator can speak for the nation, the AIA believes that the FIO can fill a void where a national voice is lacking. States face some inherent limitations when it comes to efficiency at the global level and the FIO provides a means for state regulators to effectively partner with the FIO. AIA recognizes that Director McRaith has been influential in representing US insurers in The Way Forward process, as the industry looks for solutions beyond equivalence capital models. AIA also recognizes Director McRaith’s efforts in representing insurers in the EU-US Dialogues Technical Committee’s conversations. AIA does not view the IAIS ComFrame project as a tool for setting a single, global standard or as a tool for duplicating what is working well, but as a voice for insurers at the global table.
PCI: Mr. Sampson noted that Director McRaith has listened to the industry and established credibility within the Executive branch. PCI encourages Director McRaith to keep FIO’s focus on international matters and use its presence at the table to speak on behalf of U.S. insurers. He concluded that PCI encourages the FIO to provide prompt attention to the reauthorization of TRIA.
Our partners for this event, Faegre Baker Daniels, have also published a brief report of the Summit.