Treasury Lays Out Far-Reaching Reform if States Keep Insurance Regulation, Resolution
Late Thursday, Treasury’s Federal Insurance Office (FIO) issued a long-awaited report on its recommendations to restructure the U.S. insurance sector.  Following a request for views on this report in 2011 (see FSM Report INSURANCE26), FIO has laid out a sweeping reform agenda.  While it preserves the role of state regulators in concept, FIO proposes standards in many areas state regulators have yet to address – e.g., resolution outside the framework of guaranty associations – or oppose – e.g., standardized principles-based reserving, captive reinsurance.  FIO also discounts the benefit of state regulation for one business line – private mortgage insurance (MI) – recommending federal standards that FedFin notes might be implemented through a Dodd-Frank systemic “activity or practice” designation if FSOC concurs with FIO’s concerns and/or included in pending housing-reform legislation if it provides any statutory role for private MI.  Like Secretary Lew’s testimony before FinServ on Thursday (see Client Report REFORM101), FIO does not press for a federal insurance charter along lines once pushed by Treasury and some large insurance companies (see Client Reports in the FEDCHARTER series).  However, in addition to its proposal for MI, much in the report constructs a federal framework, keeping intact the burden of state-by-state regulation while adding an overlay of federal standards designed to address perceived holes in the current system.  Of course, if states fail to act on many FIO recommendations, then rules will remain largely as is, albeit likely at the cost of more systemic designations for firms and business lines in this sector.  This report analyzes key FIO recommendations and the outlook for action on them.

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