U.S. Department of the Treasury

 

WASHINGTON - Chairman Neugebauer, Ranking Member Capuano, Members of the Subcommittee, thank you for inviting me to testify today on the Federal Insurance Office’s report (Report) entitled “How To Modernize And Improve The System Of Insurance Regulation In The United States.” The Report was released on December 12, 2013 and is available through the web site of the U.S. Department of the Treasury.

 

My name is Michael McRaith, and I am the Director of the Federal Insurance Office (FIO) in the U.S. Department of the Treasury.

 

The Report establishes a framework for the United States to build on the existing federal and state regulatory structure. While states generally perform consumer protection functions, many insurance regulatory issues of uniformity and national interest justify federal engagement. The insurance sector in the United States is both vast and essential, and long-standing prudential and marketplace issues may require a federal solution.

 

By any measure, insurance is a significant sector in the U.S. economy, providing not only essential asset protection tools for families and businesses, but also serving as a critical participant in the capital markets and financial service industries. In 2012, insurance premiums in the life and health (L/H) and property and casualty (P/C) insurance sectors totaled more than $1.1 trillion, or approximately 7% of gross domestic product. In the United States, insurers directly employ approximately 2.3 million people, or 1.7% of non-farm payrolls. More than 2.3 million licensed insurance agents and brokers hold more than 6 million licenses. Moreover, as of year-end 2012, the L/H and P/C sectors reported $7.3 trillion in total assets, $6.8 trillion of which were invested assets.

 

The penetration of the private insurance market is commonly measured as the ratio of premium to a nation’s gross domestic product, a metric which demonstrates that developing economies provide fertile growth opportunities for U.S.-based insurers. By premium volume, the United States remains the world’s largest insurance market: from 2008 to 2012, premium volume grew by $30.2 billion, but declined as a percentage of the U.S. gross domestic product (GDP) from 8.73% to 8.1%. At the same time, emerging and developed economies overseas have seen dramatic spikes in premium volume. From 2008 to 2012, China’s premium volume, for example, increased by $105 billion, even though volume declined as a percentage of GDP (3.11% to 2.94%). Brazil’s premium volume increased by nearly $35 billion and as a percentage of GDP (2.87% to 3.65%). South Korea’s premium volume increased – by $42 billion – and as a percentage of GDP (2.27 to 3.02). With fast-paced international growth, insurance supervisors in countries around the world are pushing for improved consistency of supervisory standards to understand better the operations, solvency, and risk management of firms operating in their markets. Improved consistency of supervisory standards will benefit U.S.-based insurers that operate globally.

 

Notwithstanding the role the federal government has had in some areas of insurance, through FIO, the United States now has an office that holds, among others, the authority to –

 

· monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system;

· monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products; and

· coordinate Federal efforts and develop Federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors and assisting the Secretary in negotiating covered agreements.

 

The states remain the primary regulators of individually licensed entities engaged in the business of insurance, but the federal government also has insurance oversight and supervisory responsibilities. The Federal Reserve Board (Board) serves as the consolidated supervisor of a savings and loan holding company that owns an insurer, and an insurer subject to Board supervision following designation by the Financial Stability Oversight Council (Council).

 

 

The Dodd-Frank Consumer Protection and Wall Street Reform Act directed FIO to, among other things, conduct a study and submit a report to Congress on how to modernize and improve the system of insurance regulation in the United States. As required by statute, the Report is based on and guided by six explicit considerations and factors.

 

In developing the study, beginning in late 2011, FIO consulted extensively with interested parties from across the national and international insurance sector. FIO published a notice in the Federal Register on October 17, 2011, to solicit comments on the statutory factors and considerations. Nearly 150 written comments were provided in reply to that notice, all of which are available online at treasury.gov/initiatives/fio. Additional direct consultations occurred with nearly 40 different insurance sector stakeholders, including state insurance regulators, representatives of the industry and policyholders, advocates, and academics. On December 9, 2011, FIO hosted a conference at Treasury with representatives of the broad diversity within the insurance sector. Through 2012 and 2013, FIO continued to study the issues and consult with interested parties. The Report reflects many of the issues and topics raised by stakeholders throughout the consultation process, including through written comments, at the Treasury conference, and also through FIO’s direct engagement with federal, state and international supervisors.

 

For purposes of the Report, FIO’s analysis began with the predicate to address the world as it is, not as it was or as one might wish it were. Since President Theodore Roosevelt’s annual message to Congress in 1904, the debate about reforming the U.S. system of insurance regulation has foundered on the binary contentions that the business of insurance must be subject to either state or federal authority. That debate is a relic of a bygone era.

 

The federal government has played a role in insurance for years. In addition to market support programs like the Federal Crop Insurance Corporation and the Terrorism Risk Insurance Program, federal agencies like the Securities and Exchange Commission and the Federal Deposit Insurance Corporation have insurance responsibilities.

 

Further, the financial crisis illustrated the deficiencies in a state-based, solo entity approach to the supervision of insurance holding companies, and the potential threat to the national financial system of large, complex and internationally active financial firms. Thus, national and international financial stability initiatives, as well as the expanding international insurance marketplace, have driven regulatory change both in the United States and abroad. Indeed, although the states remain the primary regulators of individually licensed entities engaged in the business of insurance, the federal government now has explicit statutory roles insurance oversight and supervision (e.g., Board supervision of insurance companies designated by the Council).

 

 

FIO’s Report determines that the U.S. should build on the existing hybrid model of insurance regulation, incorporating both federal and state oversight. The question is not whether federal involvement in insurance regulation is necessary, but where and how that involvement should be calibrated. A federal role in insurance regulation would improve uniformity of regulation, address the realities of globally active, diversified insurance firms, and better serve national interests.

 

The business of insurance is primarily regulated at the state level, and while proponents of the current system reasonably assert that the system works well, the absence of uniformity in the U.S. insurance regulatory system creates inefficiencies and burdens for consumers, U.S.-based insurers, and international market participants. This hybrid framework not only reflects today’s reality, but also provides a foundation for Congress and other policymakers to address areas for improvement in the existing hybrid model of insurance regulation.

 

In particular, the Report identifies the following areas for modernization and improvement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In short, the Report concludes that the states generally provide effective consumer protection. The ability of an insurer to pay a policy obligation is the bedrock of state solvency oversight. However, the Report also identifies issues for improvement that have received attention from the states, some for years. For example, state-based market conduct examinations and product approval processes have long been unduly burdensome, costly and redundant, but states have been unable to resolve these challenges with uniform practices. Another example is the proliferation of special purpose vehicles serving as life reinsurance captives, developments which have led to state-by-state variances and raises serious questions about the state-based solvency regime. Nevertheless, the states have not developed a consensus approach to resolving this issue and, as a result, are far from developing a uniform implementation approach. States have also failed to address—much less resolve—the use of data mining technology by insurers offering personal lines insurance products. These are a few examples of long-standing issues in need of a solution: the status quo will not resolve the problems of inefficiency, redundancy, or lack of uniformity.

 

As detailed in the Report, a number of recommendations call for direct federal involvement. For example, the financial crisis demonstrated the importance of the housing finance system to the U.S. national economy. Nevertheless, private mortgage insurers are subject to state regulatory regimes that differ in supervision and in levels of enforcement. Several private mortgage insurers failed or suffered potential financial distress, and the costs of default and foreclosure were shifted to lenders, the government-sponsored enterprises, and ultimately the taxpayer. The Report calls for federal supervision of the private mortgage industry, both in terms of standard-setting and the enforcement of those standards. Under this recommendation, however, it is conceived that a state would still be permitted to impose and retain premium taxes and would retain the authority to license and supervise the conduct of agents and brokers. While the federal government has an unambiguous leadership role in international standard-setting activities, other recommendations call for a direct FIO role in coordinating solutions to existing problems, such as personal auto policies for members of the armed forces, and pilot programs to decrease rate regulation in order to promote competitive markets. In the area of collateral required of non-U.S. reinsurers, the Report recommends the negotiation of an agreement to impose national uniformity in a global market.

 

The Report outlines FIO’s ongoing work to modernize and improve the U.S. system of insurance regulation. Working with all aspects of the insurance sector, including federal supervisors, the states, consumers, and industry, FIO will monitor and report publicly on progress made to effectuate the recommendations. FIO’s Report is only one milestone –status reports will be forthcoming. Whether, and to what extent, necessary improvements will require federal involvement or Congressional action will depend upon the subject matter, circumstances, and ability and willingness of states to resolve the underlying issue. Finally, the Report provides a pragmatic, fact-based framework to move the United States forward and to preserve the U.S. global leadership position in the insurance sector.

 

Thank you, Chairman Neugebauer, for the invitation to discuss FIO’s Report on how to modernize and improve the system of insurance regulation in the United States. I look forward to answering your questions.