The regulatory system in the United States has best been described as a national system of state-based regulation consisting of state insurance departments from all 50 states, the District of Columbia and five territories (1). Although there have been questions raised about the system and challenges to it over the years, its regulation remained primarily within the purview of the state regulators through the protection afforded under the McCarran-Ferguson Act of 1945, which expressly provided that “Acts of Congress” that do not expressly purport to regulate the “business of insurance” will not preempt state laws or regulations that regulate the “business of insurance.”
However, developments in the past several years since the financial crisis have resulted in significant involvement by the Federal Government in the insurance sector. More specifically, The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173 (commonly referred to as “Dodd-Frank”)) created, among other things, the Federal Insurance Office (FIO) within the Treasury Department, which has the authority to monitor all aspects of the insurance sector, represent the United States on prudential aspects of international insurance matters (including at the IAIS) and advise the Secretary on important national and international insurance matters (2).
Dodd-Frank also gave the Federal Reserve Board (FRB) consolidated oversight over any non-bank entity designated by the Financial Stability Oversight Council (FSOC) as systemically important, and of any insurance holding company that operates a federally chartered thrift. It has been reported that the insurance entities that the FRB has under supervision hold approximately “one-third of the U.S. insurance industry assets (3).” In November of 2013, the FRB joined the FIO and their state supervisory colleagues from the National Association of Insurance Commissioners (NAIC) as members of the IAIS, and in June of the following year hired former Connecticut Insurance Commissioner, Tom Sullivan, to be a senior advisor on insurance matters to the Board. In addition, the FRB has recently indicated that it is also considering a proposal for a new nationwide Insurance Capital Standard, so it is quite obvious that the involvement of the FRB in the insurance sector is increasing in a significant way.
In 2008, through the NAIC, state insurance regulators in the United States embarked on the Solvency Modernization Initiative (SMI) to perform a critical self-evaluation to improve the insurance solvency regulatory framework in the United States, which included a review of international developments in insurance supervision, banking supervision and international accounting standards to determine their potential use in U.S. insurance supervision. The SMI focused on the following key components of the solvency framework: capital requirements, governance and risk management, group supervision, statutory accounting and financial reporting and reinsurance (4). Some of the major initiatives of the SMI (as noted by the NAIC) have included:
- The Insurance Holding Company System Regulatory Act (Model #440) and Model Regulation (with Reporting Forms and Instructions – Model #450)
- The Credit for Reinsurance Model Law (Model #785) and the Credit for Reinsurance Model Regulation (Model #786)
- The Standard Valuation Law (Model #820) and the Standard Non-forfeiture law for Life Insurance (Model #808), completion of the industry impact study for life insurance principles-based reserving and adoption of the Valuation Manual
- The Corporate Governance Annual Disclosure Model Act and supporting Model Regulation
- The Risk Management and Own Risk and Solvency Assessment Model Act (#505) and the Own Risk and Solvency Assessment (ORSA) Guidance Manual
- Increasing scheduling of, and participation in, supervisory colleges (and creation of supervisory tracking documentation to monitor the activity of supervisory colleges) (5).
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1. NAIC White Paper: The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative, August 14, 2013.
2. U.S. Department of the Treasury: About, Federal Insurance Office.
3. Board of Governors of the Federal Reserve System: Testimony by Mark E. Van Der Weide, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 28, 2015.
4. NAIC White Paper: The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative, August 14, 2013.
5. NAIC: SMI Roadmap, December 21, 2012.