Federal Regulatory Reform of Insurance - The First Salvo

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19 June 2009
Michael Fitzgerald

The Obama administration published its white paper on financial services industry reform this week, Financial Regulatory Reform: A New Foundation, Rebuilding Financial Supervision and Regulation (http://www.financialstability.gov/docs/regs/FinalReport_web.pdf) .This will now serve as a baseline against which the legislative process can act.So, while this is not law yet, there are some broad trends which can be noted in the approach which will have implications for insurance firms and their technology response.

A high level review of the document reveals the broad goals for insurance industry regulation and the proposal of two regulatory agencies which will directly affect the way business is done.Taken from the report, the principles underlying the recommendations specific to insurance are:

  1. Effective systemic risk regulation with respect to insurance
  2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies
  3. Meaningful and consistent consumer protection for insurance products and practices
  4. Increased national uniformity through either a federal charter or effective action by the states
  5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business
  6. International coordination

I anticipate much angst around points four and five, especially as these directly challenge the state regulatory set up and its effectiveness and efficiency.On a broad level, no one can argue that these are worthy goals, but how they are accomplished will be contentious.

The establishment of two regulatory agencies is proposed -- the Office of National Insurance (ONI) and the Consumer Financial Protection Agency (CFPA).The duties of the ONI are fairly well detailed.From the report: “The ONI should be responsible for monitoring all aspects of the insurance industry. It should gather information and be responsible for identifying the emergence of any problems or gaps in regulation that could contribute to a future crisis. The ONI should also recommend to the Federal Reserve any insurance companies that the Office believes should be supervised as Tier 1 FHCs. The ONI should also carry out the government's existing responsibilities under the Terrorism Risk Insurance Act.” The ONI will also serve as the U.S. representative to the International Association of Insurance Supervisors with “the authority to enter into international agreements, and increase international cooperation on insurance regulation.”

The potential impact on insurance of the CFPA is less clear.The report states that it would “protect consumers across the financial sector from unfair, deceptive, and abusive practices in credit, savings, payment, and other consumer financial products and services”.Insurance products, particularly life instruments such as variable annuities, are not specifically mentioned.The emphasis is on preventing a repeat of the perceived improprieties seen in the mortgage and credit card areas.However, it does not specifically exclude insurance and “other consumer financial products and services” is a very broad area.

Some of these lines will be drawn during as the Congress develops its legislation.Many, especially where Federal responsibility ends and state requirements begin, will only be determined once the Federal system is in place and active. The practical impact to insurance industry is that there is another sheriff in town now and they will be demanding our time and attention.Companies must prepare now for stress on their data management and compliance processes. (See the Celent reports Insurance Data Mastery Strategieshttp://reports.celent.com/PressReleases/20081126/DataMasteryStrategy.asp and Insurance Data Mastery Solution Spectrumhttp://reports.celent.com/PressReleases/20081203/DataMasteryVendors.asp). Pending upgrades to data management tools should happen now and any planned data conversions completed.Companies without a robust reporting environment should invest in these capabilities as the up front investment will be less than the continued expenses associated with a “catch up” approach.In 2010, plan for short timelines for compliance and a more confusing and expensive regulatory landscape.

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