Insurance Regulation 2013: What the Future Holds...

A couple of industry observers, Arthur D. Postal and Elizabeth D. Festa, speculate on the future of state and federal insurance regulation in 2013.

Assuming the Mayans just got tired of calendaring out the centuries and the world doesn't end on December 21, 2012, Arthur D. Postal of Lifehealthpro.com has consulted the augurs and put together his federal regulatory forecast for the life and health insurance industry in Washington Regulation: 6 Things to Look for in 2013.

Postal's article is worth the read, but a few highlights:

• Although speculation previously suggested that the report on insurance modernization by the Federal Insurance Office (FIO) would finally arrive, a year after its original deadline, in January of 2013. Postal says that now appears unlikely "with signs emerging that the administration will delay the release of the report until after a new Treasury secretary is confirmed sometime early next year."

One reason for the apparent delay is that the administration doesn’t want Republicans in Congress to use the report to embarrass the administration through the confirmation process if it contains proposals calling for greater federal regulation, a politically sensitive issue.

• Although consolidated regulation of insurance companies that operate savings and loans is mandated under the Dodd-Frank Act, "members of Congress have made clear through recent hearings that they won't support strong oversight of these institutions." As the designated regulator, however, the Federal Reserve Board may have its own ideas.
• American International Group (AIG) could be designated a "systemically important" non-bank financial institutional by the Federal Stability Oversight Council before the end of the year, and other insurers could face similar designation next year.
• Taxes are going up, including estate taxes. But Postal suggests that "with the certainty likely to be generated by knowledge that the government is coming to terms with the need for increased revenue and lesser expenditures, the stock market is likely to rise...".[1]

Also tempting the Mayan fates is Elizabeth D. Festa, who crystal-balls 2013 with respect to state regulation in State Regulation: 4 Things to Expect in 2013 at Lifehealthpro.com.

Again, Festa's article is definitely worth the read, but consider a few of her points:

• Like Postal, Festa also predicts the emergence of the long overdue FIO report on insurance modernization.

While there is plenty to speculate about, only when it is finally issued by the Federal Insurance Office will we have an idea of the FIO’s intent toward a more modern regulatory regime, including whether it intends to act purely as a fact-finding body, or if it will lay the groundwork for more substantive action.

• New NAIC President, Louisiana Insurance Commissioner James J. "Jim" Donelon will have his hands full after the retirement of current NAIC CEO Terri Vaughn at a time when the NAIC has "an ambitious agenda and no small number of critics."
• To the extent the various states have elected to participate, state regulators will be busy setting up and working with the health care exchanges under the Patient Protection and Affordable Care Act. Regulators may also be occupied with trying to push the principles-based reserving provisions of the recently adopted NAIC Valuation Manual through their state legislatures. [2]

1. Washington Regulation: 6 Things to Look for in 2013, Arthur D. Postal, Lifehealthpro.com, December 19, 2012.
2. State Regulation: 4 Things to Expect in 2013, Elizabeth D. Festa, December 19, 2012.

Insurance Industry Supports Legislation Designed to Restrict Federal Insurance Office's Regulatory Authority

The proposed Insurance Data Protection Act would require the FIO and other federal regulators to obtain information about insurance companies from state regulators rather than directly.

A panel of the House Financial Services Committee approved the Insurance Data Protection Act[1], legislation designed to restrict the ability of federal regulators to get financial information from insurance companies.[2]

As currently configured, the Insurance Data Protection Act is intended to clearly delineate the FIO's role as an "information-gathering entity" and restrict its ability to act as a regulator.

The bill would revoke the authority of the FIO and the Office of Financial Research (OFR), two new entities created by the Dodd-Frank Act, to subpoena data from insurance companies.

The bill also would require the FIO, the OFR, the Financial Stability Oversight Council, and any other federal entity that seeks data about insurance companies to obtain that data through the insurance company's state regulator, another federal agency, or a public source.[3]

Further, the Act would require both federal entities and state regulators to preserve the confidentiality of private information collected from other state and federal agencies.[4]

The Property Casualty Insurers Association of America (PCI), an insurance industry trade association composed of more than 1,000 member companies nationwide, issued a press release last week applauding the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity for passing the Insurance Data Protection Act.

According to Ben McKay, senior vice president of federal government relations at PCI:

This commonsense bill will help reduce costly, duplicative information requests on insurers... The Insurance Data Protection Act reinforces the Dodd-Frank Act that specifically required the Federal Insurance Office to seek data from state regulators first before imposing burdensome data demands on insurance companies.[5]

R.J. Lehmann, deputy director of the Heartland Institute's Center on Finance, Insurance and Real Estate, suggests that the bill increases the protection afforded insurer information from the restrictions on sharing "confidential" information to a higher level because the bill includes limits on the sharing of "non-publicly available data" by or among state and federal regulators. While Lehmann has his own theories about the who and why behind this provision, he makes an important point:

The bill’s language refers not to “confidential” information, but to non-public information. That’s a key distinction. The statutory financial reports that insurers file with their state regulators and the NAIC are not confidential... That data is not confidential. It just isn’t made available to the public.[6]

1. H.R. 3559
2. New Legislation Tries to Pose Serious Threat to Federal Insurance Powers, Elizabeth D. Festa and Arthur D. Postal, LifeHealthPro, December 9, 2011.
3. New Legislation..., Id.
4. New Legislation..., Id.
5. PCI Supports Insurance Data Protection Act, December 8, 2011. 6. The Insurance Data Protection Act’s hidden sop to the NAIC, R.J. Lehmann, Out of the Storm News, December 9, 2011.

FIO to Develop and Coordinate Insurance Policy at the Federal Level

The Federal Insurance Office will be able to develop and coordinate insurance policy at the federal level, but Treasury says insurance regulation is still fundamentally state-based.

Deputy Treasury Secretary Neal Wolin says that the newly created Federal Insurance Office, under the leadership of its first director Michael McRaith, will have the "institutional capacity to develop and coordinate insurance policy at the federal level more effectively than in past," according to a recent article by Business Insurance.[1]

Insurance regulation "is not one of FIO's responsibilities."

The creation of the FIO by the Dodd-Frank Act corrected the "glaring omission" of the lack of such capacity, according to Wolin. But the regulation of the insurance industry "is not one of FIO's responsibilities," said Wolin. He also added that:

Nothing in the Dodd-Frank Act alters the fact that insurance is fundamentally regulated by the states.[2]

For his part, McRaith said that the FIO "will not be driven by any ideology" in its study of improvement and modernization of insurance regulation. The study is due to be submitted to the Treasury Department in January, but McRaith has indicated the first report will cover only the most important points, such as transparency in financial statements and consumer relations.[3]

FIO recently held it's first conference: "Insurance Regulation in the United States: Modernization and Improvement."

Both McRaith and Wolin made their comments at the first FIO conference recently held in Washington D.C., entitled, "Insurance Regulation in the United States: Modernization and Improvement." The conference was attended by insurance regulators and industry representatives. McRaith was clear that the conference was not intended to be a panacea to the ongoing debate about FIO's role in insurance regulation:

The question is not whether, but how, we can improve and modernize the insurance regulation in the U.S. We don't expect to reach agreement today. We don't expect everyone to walk out holding hands. What we do expect is a lively discussion of the issues facing the industry.[4]

Generally, the insurance representatives agreed that the FIO was important as a "single point of contact" for insurance issues at the federal level, and especially international insurance issues. With the development of the Solvency II insurance regulatory standards in Europe and emerging markets around the world, many insurers recognize that a global outlook is vital.[5]

FIO must understand the insurance industry and not merely assume that it's like the banking industry.

One of the insurance representatives, Michael Grier, vice chairman of Prudential Insurance, stressed the importance of the federal government gaining, through FIO, a true understanding of the insurance industry, and that it not merely assume insurers are like banks or other financial institutions for regulatory purposes.[6]

A transcript of Deputy Secretary Wolin's remarks is available here.

1. Ideology Won't Drive Insurance Regulation Changes: McRaith, Mark A. Hofmann, Business Insurance, December 9, 2011.
2. Ideology won't drive..., Id.
3. Ideology won't drive..., Id.
4. Industry Reps Agree FIO Important, but Disagree on Role it Should Play, Elizabeth D. Festa and Arthur D. Postal, Property Casualty360, December 9, 2011.
5. Industry Reps Agree..., Id.
6. Industry Reps Agree..., Id.

The Broccoli Question: Can the Supreme Court Make You Eat Your Vegetables?

In analyzing the constitutionality of Obamacare's individual mandate, the Supreme Court must address just how far it's authority under the Commerce Clause extends.

David Fisher from Forbes asks an interesting question in one of his recent articles, a question he says the United States Supreme Court must answer when analyzing the constitutionality of the individual insurance mandate under the healthcare reform legislation enacted by the Obama administration:

If Congress can order you to buy health insurance, why can't it order you to buy (and eat!) broccoli?

As discussed in a previous article, the Supreme Court has just agreed to hear legal challenges to Obama's health care reforms, including the provision that requires individuals to purchase and maintain a minimum level of health insurance coverage. Fisher explains that the answer to the broccoli question isn't quite as simple as it seems:

If the Supreme Court finds the insurance mandate in the healthcare reform act is constitutional, it is endorsing a very expansive view of Congress’ power to regulate interstate commerce under Article I of the Constitution.

Those arguing for the individual mandate assert that Congress is authorized under the so-called Commerce Clause to regulate the business of health insurance because it is an interstate industry in which almost every American will participate at some point in his or her life. Additionally, proponents argue that the millions of the uninsured significantly impact all American citizens because of the billions of dollars of costs created by those who go without health insurance, according to Fisher's article.

But that same argument works for broccoli, the eating of which is believed to protect against colon cancer. Reducing the rate of colon cancer would reduce healthcare costs and thus have a direct economic impact on the interstate healthcare market.

Fisher quotes David Kopel, a constitutional law expert with the Cato Institute, who suggests that Obamacare advocates have "had trouble articulating anything that makes the health-care insurance market special." Kopel suggests that there are lots of products that almost every Amercan consumes, such as clothing and food, about which the same kind of argument can be made.

In fact, health insurance is one of the few products that by law can’t be purchased on an interstate basis (the states zealously protect their power to regulate the insurance industry). So on that basis, Kopel said, healthcare might be one of the least interstate markets Congress can regulate, Kopel said.

Fisher cites Michael Dorf of Cornell University Law School to help proponents of the individual mandate bolster their arguments with jurisprudence:

The key cases are U.S. vs. Lopez and U.S. vs. Morrison, two modern decisions that set limits on Congress’s Commerce Clause powers. In Lopez, the court struck down a law prohibiting guns near schools as being too disconnected from any reasonable concept of interstate commerce. And in Morrison, the court did the same. Congress tried to tie both laws to the aggregate effects of criminal acts on the economy, but in Morrison the majority held that was constitutional overreach.

"Petitioners’ reasoning …will not limit Congress to regulating violence but may …be applied equally as well to family law and other areas of traditional state regulation since the aggregate effect of marriage, divorce, and childrearing on the national economy is undoubtedly significant."

In Morrison, Justice Steven Breyer penned a dissent making the very point Obamacare critics make. It’s impossible to formulate a rule, he wrote, that allows Congress to, say, outlaw growing marijuana for your own consumption but not violence against women. “Virtually every kind of activity, no matter how local, genuinely can affect commerce, or its conditions, outside the State,” Breyer wrote. Instead of being a defect, the idea of almost unlimited Commerce Clause powers is a fact of the modern world.

"Since judges cannot change the world, the “defect” means that, within the bounds of the rational, Congress, not the courts, must remain primarily responsible for striking the appropriate state/federal balance."

But Breyer lost that fight. The majority “wanted a limiting principle” on Congress, Dorf said, and came up with one by deciding that federal laws can regulate a lot of seemingly uneconomic activity but must have a firm economic basis at their core. Even the Civil Rights Act of 1964 was passed under Commerce Clause powers because it targeted employers, schools and businesses, all arguably economic actors.

Thus, because the pro-individual mandate is directed at the person engaging in the behavior, it's more constitutionally palatable, according to Dorf's reasoning. Further, proponents could successfully argue that requiring citizens to buy health insurance is part of an overall interstate regulatory scheme including health insurance and the health care industry.

A particular "oddity" about the health care reform legislation, according to Fisher and Dorf: if Congress had made the mandate a tax, then it would have been clearly valid under congressional taxing authority. However, the political liability of asserting a health care tax in the economic climate of Obamacare's passage made proponents of the mandate classify it as anything but a tax, leaving it subject to constitutional attack.

Read the full article:

Obamacare Judges Must Answer The "Broccoli Question"
Daniel Fisher | Forbes
November 18, 2011

The $195 Million Man and the Woman with $1 Billion Legs

Valuable and unique assets mean unique and high-dollar insurance coverages

The insurance industry is no stranger to providing unique coverages for specific and individual risks. Not surprisingly, many of the larger and more noteworthy of these specialized risks come from the world of Hollywood. Typically these specialty lines transactions are incredibly complex and highly customized, in large part because so much money is at stake.[1]

With that in mind, 24/7 Wall St. has listed nine of the more striking insurance policies taken out by or on behalf of celebrities.

Some of the more notable entries as reported by Daily Finance:

• Singer Mariah Carey's $1 billion insurance policy covering her famous legs;
• International soccer star David Beckham's $195 million policy covering his entire body;
• Football great Troy Polamalu's $1 million policy on his trademark hair;
• Musician Bruce Springsteen's $5.5 million policy covering his vocal chords; and
• Baseball slugger Mark McGwire's $120 million policy on his fragile left ankle.[2]

Some honorable (but not entirely confirmed) mentions:

• Dutch winemaker Ilja Gort's $7.8 million policy on his nose;
• Actress and singer Jennifer Lopez's $1 million policy on her famed rear-end; and
• Artist Andy Warhol's $1 million policy on his eyes.[3]

1. Insuring the Absurd, Matt Villano, InsWeb, August 2, 2010.
2. The 9 Craziest Celbrity Insurance Policies, Douglas McIntyre, Daily Finance, November 28, 2011.
3. Insuring the Absurd, Id.

U.S. Insurance Regulators Seek Solvency II Equivalence Without Major Changes to Current System

Although major reforms aren't likely, the NAIC and the FIO continue to push both sides of the Atlantic to achieve Solvency II equivalence for the U.S. state-based regulatory system.

The United States insurance regulatory system will likely be deemed equivalent to the European Union's Solvency II Directive, according to Therese Vaughan, CEO of the National Association of Insurance Commissioners ("NAIC"). Solvency II, a uniform system of insurance regulatory standards adopted by the EU that is scheduled to go into effect in 2013, requires foreign insurance companies operating in the EU to have "functionally equivalent" regulation. [1]

The U.S. risk-based capital solvency system gives policyholders the same protection as Solvency II, according to experts.

Despite "fundamental differences in the underlying methodologies," the long-established risk-based capital solvency system in the United States gives policyholders the same protection as Solvency II, according to Fitch Ratings Ltd as reported by Business Insurance. U.S. regulators began a solvency modernization initiative in 2008 in response to the development of Solvency II.[2]

Regulatory cooperation already has begun between Europe and the United States. For example, several U.S. states recently relaxed rules on the collateral that overseas reinsurers must post to be able to underwrite reinsurance. This, Fitch said, is a "positive sign that cooperation will lead to an agreement on equivalence." [3]

The European Insurance and Occupational Pensions Authority ("EIOPA") is the body charged with determining Solvency II equivalence, and whether the United States is granted equivalence is a political issue according to Paul Clarke of PricewaterhouseCoopers, L.L.P., in London. There are significant differences between the US insurance regulatory system and Solvency II which could make an equivalence determination difficult, especially since U.S. authorities will likely be reluctant to make widespread changes to the U.S. system just to meet equivalence requirements.[4]

The U.S. continues to have one of the world's most respected regulatory systems, and the NAIC is firm in its view that there is more to equivalence than identical methods, processes and philosophies…[5]

NAIC CEO Vaughan says Solvency II "equivalence should be assessed on an outcomes basis," and on that basis, the U.S. "should be found equivalent." Additionally, Vaughan indicated that the NAIC is not pushing a Solvency II agenda here at home:

We've made it clear we're not going to adopt Solvency II. We have a system. We think our system works. We're engaged in continuous improvement.[6]

Strict Solvency II compliance would not work in the U.S. according to Howard Mills, chief adviser of Deloitte LLP's insurance industry group, as reported by InsuranceNewsNet.com. One of the main reasons is the state-based regulatory system in the U.S. While the newly-created Federal Insurance Office ("FIO") represents the U.S. in international insurance affairs, it currently has very little authority over the regulatory practices of the individual states.[7]

Nevertheless, representatives of the NAIC and the FIO continue to work with European insurance regulatory officials to reach understanding and compromise on insurance industry oversight under both the U.S. and the EU systems.[8]

The NAIC has also been diligently working on the U.S. Own-Risk and Solvency Assessment proposal to close some of the gaps between Solvency II and current U.S. standards. While the proposal has no formal implementation date as yet, the NAIC expects ORSA to be implemented prior to 2014 when the U.S. financial solvency equivalence assessment process review by the EIOPA is expected.[9]

1.  NAIC CEO: US Will Gain Solvency II Equivalence, Sean P. Carr, A.M. Best Company, Inc., InsuranceNewsNet.com, November 14, 2011.
2.  Solvency II equivalence likely for U.S., Sarah Veysey, Business Insurance, November 6, 2011.
3.  Solvency II equivalence likely…, Id.
4.  Solvency II equivalence likely…, Id.
5.  NAIC Fall Meeting Highlighted Challenges, Tom Sullivan, PropertyCasualty260.com, November 14, 2011.
6.  NAIC CEO…, Id.
7.  NAIC CEO…, Id.
8.  NAIC CEO…, Id.
9.  NAIC Fall Meeting…, Id.

Supreme Court Agrees to Hear Health Care Reform Challenges, But Health Care Reform Already Fundamentally Changing the Health Care and Health Insurance Industries

Although the Supreme Court has agreed to hear challenges to health care reform, the debate is unlikely to be settled by the high court's decision, and the landscape of health care and health care insurance is already undergoing major and lasting changes.

As reported by a number of news outlets, the United States Supreme Court has indicated that it will hear legal challenges to the Obama administration's health care reform initiatives, which were set forth primarily in the Patient Protection and Affordable Care Act of 2010 and related legislation ("PPACA"). Arguments before the Supreme Court justices in the health care reform matter are scheduled for March of 2012.

The justices announced they will hear an extraordinary five-and-a-half hours of arguments from lawyers on the constitutionality of a provision at the heart of the law and three other related questions about the act.[1]

PPACA includes a number of different reforms relative to the health insurance industry as well as public health programs with the stated goal of increasing individual health insurance coverage while decreasing health care and health insurance costs.

The law's "individual mandate" is a principal point of contention.

A number of states and other parties have filed challenges to PPACA, with one of the principal points of contention being the so-called "individual mandate" under PPACA that legally requires individuals to obtain a minimum level of health insurance coverage. However, other issues will also be before the Supreme Court when it hears the matter in March.

The questions the Supreme Court asked lawyers to argue when the justices consider appeals of President Barack Obama’s health care overhaul in March:

• Does Congress have the power to mandate that Americans buy health insurance or pay a penalty?
• If the requirement to buy insurance is unconstitutional, is the whole law unconstitutional? What other parts of the law, if any, could survive?
• Is Congress illegally coercing states to expand Medicaid, the subsidized health care for the poor and disabled, by threatening to withhold funding from states that refuse?
• Since the penalty for not buying health insurance doesn’t go into effect until federal income taxes are due in 2015, are legal arguments currently brought against the health care overhaul premature?[2]
  

Observers are predicting a Supreme Court decision on President Obama's health care reform sometime next summer, just before the November presidential election. As such, health care reform is expected to become a major political issue in the presidential race.

The Supreme Court's decision on the constitutionality of the individual mandate is unlikely to finally settle the matter.

However, both sides of the argument agree that the Supreme Court's decision on PPACA and the constitutionality of the individual mandate is unlikely to finally settle the matter. Opponents of the health care reform initiatives say that, even if the Supreme Court upholds the individual mandate and other matters at issue, they will continue to challenge other provisions and seek repeal of the Obama administration's health care reform legislation in Congress.

But if the Supreme Court strikes down the individual mandate as unconstitutional, proponents have indicated their commitment to continue pressing forward with the rest of Obama's health care reform agenda.[3]

The health insurance industry has already begun to change because of these initiatives and other forces.

Additionally, the health insurance industry has already begun to shift as a result of legislative initiatives such as PPACA and other forces, including economic pressures and consumer demands. Consider the following from a recent New York Times article suggesting that health care in the United States is inexorably changing, despite the legal uncertainties:

No matter what the Supreme Court decides about the constitutionality of the federal law adopted last year, health care in America has changed in ways that will not be easily undone. Provisions already put in place, like tougher oversight of health insurers, the expansion of coverage to one million young adults and more protections for workers with pre-existing conditions are already well cemented and popular.

—

From Colorado to Maryland, hospitals are scrambling to buy hospitals. Doctors are leaving small private practices. Large insurance companies are becoming more dominant as smaller ones disappear because they cannot stay competitive. States are simplifying decades of Medicaid rules and planning new ways for poor and rich alike to buy policies more easily.

—

Other changes influenced by the legislation may leave some patients and doctors lost in the new land of giants. As medicine moves from a cottage industry to one dominated by large organizations, some patients with insurance will probably find their choices more limited. But their care may be better coordinated, as hospitals, doctors and even insurers join to streamline services.

—

Even if the Supreme Court upholds the law’s requirement for many employers to offer coverage to workers, it is not clear that Congress will want to keep the requirement in its current form or see it vigorously enforced. With the nation’s unemployment rate stubbornly stuck around 9 percent, businesses often cite the costs of providing health care coverage as one of the reasons they cannot hire or expand their work force.

—

Despite opposition in some corners and lukewarm reception in others, a wholesale repeal of the law by Congress may be unlikely. Lawmakers may find it unpalatable to abandon the entire effort, given the fact that critics of the law have not agreed on one comprehensive proposal that would offer coverage to anywhere near the 50 million Americans who are still without coverage. Even if the law goes into effect, an estimated 20 million will still be without insurance. [4]

1. Supreme Court Will Hear Health Care Case This Term, Jesse J. Holland and Mark Sherman, Associated Press, Business Week, November 14, 2011.
2. A Quick Look At The 4 Questions At Issue In The Supreme Court’s Health Care Overhaul, Associated Press, November 15, 2011.
3. Justices Unlikely To Have Last Word On Health Care, Ricardo Alonso-Zaldivar, Associated Press, November 15, 2011.
4. Whatever Court Rules, Major Changes in Health Care Likely to Last, Reed Abelson, Gardiner Harris and Robert Pear, New York Times, November 14, 2011.

Election Impact on the Insurance Industry: More of the Same – A LOT MORE

Recent articles and opinions suggest that the recent election means a lot more of the same for the insurance industry – including a new flood of regulations.

A number of insurance industry observers and pundits have recently discussed the potential impact of the recent election upon the insurance industry and insurance regulation.

FIO is likely to play expanding role in insurance regulation

An article from Insurance Networking News, for example, suggests that the Federal Insurance Office (FIO) will likely play an expanding role in insurance regulation, particularly on the international front. The article quotes industry observers who agree, including the following comments from Peter Kochenburger, executive director of the Insurance Law Center at the University of Connecticut:

The federal government absolutely has the right to regulate insurance. That has been decided since 1944, but it has consistently declined the opportunity to do so. * * * It’s a long overdue office, but it has not exercised its jurisdictional authority in any kind of way that assumes it’s going to override the states.[1]

Kathy Burger, Editorial Director of Insurance & Technology, predicts that "for the insurance industry the results appear to be... more of the same."

With Barack Obama reelected, continuation of a Republican House and Democratic Senate, and the so-called "fiscal cliff" looming, it looks as if insurers will be facing pretty much the same kinds of challenges as before the elections. The Affordable Care Act will stay in place, meaning health insurers must navigate the transformation of their industry. Dodd-Frank isn't going away, which means stepped up efforts around reporting, risk management and navigation of "too big to fail" definitions. The world hasn't gotten any less risky, as evidenced by the devastation caused by Superstorm Sandy and this week's Nor'easter. And the competitive landscape in financial services continues to be unsettled, with new kinds of competitors and consumer-driven channels creating new opportunities for education, interaction and service.[2]

Healthwatch, the Hill's Healthcare Blog, seems to agree but also seems to emphasize more.

The new waiting game in healthcare isn’t about the political future of the Affordable Care Act, but rather the huge amount of work that still has to be done to implement it. As expected, the Health and Human Services Department is moving ahead quickly on several key regulations that had been held until after the election.

Since Election Day, HHS has submitted regulations to the Office of Management and Budget on essential health benefits, insurance regulations, wellness programs and quality initiatives.

* * *

With the healthcare law’s political future now assured, the focus over the next few months will be on the states and the rule-making process, and all signs indicate that a new flood of regulations is about to begin.[3]

Unfortunately, according to the Hill and Moody's, more of the same is not good news for insurers:

President Obama’s reelection is... bad news for insurance companies, according to the latest analysis from Moody’s. The Affordable Care Act “will have negative credit implications for insurers based mainly on the additional regulations and restrictions it imposes on insurers,” Moody’s wrote. [4]

PropertyCasualty360 also sees the status quo continuing, and that means that the Affordable Care Act (ACA) is here to stay. However, some insurance industry analysts suggest the health insurance exchanges required under the ACA may be delayed:

Beth Mantz-Steindecker, a health regulatory analyst at Washington Analysis, is suggesting that implementation of the exchanges may be pushed back because so few states are prepared to implement the program.[5]

Other implications of the 2012 elections on the insurance industry, according to the PropertyCasualty360 article, potentially include the following:

Designation of certain insurers as systematically significant by the FSOC could happen soon.

• The release of the FIO's report on proposals to modernize the regulation of insurance regulation is likely imminent;
• The Financial Stability Oversight Council will likely begin designating certain non-banks such as insurers as systemically significant, and potential insurer candidates include American International Group, MetLife and Prudential Insurance;
• Implementation of consolidated regulation of insurance companies which operate thrift holding companies will move forward, although it could be delayed due to insurer objections; and
• The Terrorism Risk Insurance Act may not survive, at least in its current form.[6]

1. Election Brings New Faces and an Expanding Role of the FIO, Chris McMahon, Insurance Networking News, November 8, 2012.
2. Impact of 2012 Election on Insurance: More of the Same?, Kathy Burger, Insurance & Technology, November 9, 2012.
3. Overnight Health: HHS Moving Quickly on Key Regulations, Sam Baker and Elise Viebeck, The Hill, November 12, 2012.
4. Overnight Health..., id.
5. The Election's Impact on Insurance Issues, Arthur D. Postal, PropertyCasualty360.com, November 7, 2012.
6. The Election's Impact..., id.

The Global Federation of Insurance Associations Forms to Address International Regulatory Concerns Such as ComFrame and Systemic Risk

Insurance Associations from around the world have formed the Global Federation of Insurance Associations (GFIA) to address the concerns of the insurance industry on an international scale.

The newly-created Global Federation of Insurance Associations (GFIA), which held its inaugural meeting on October 9, 2012 in Washington, D.C., was formed by thirty-one (31) insurance industry associations from across the world.

The GFIA will coordinate the legislative, regulatory and public relations work of its members.

The GFIA was formed as a global conglomeration of associations representing insurance companies, reinsurance companies, professional associations and other entities in the insurance industry to coordinate the various legislative, regulatory and public relations work of its member associations. According to a GFIA press release:

The GFIA will be active in commenting on a broad range of issues affecting the international insurance industry, including developments in the systemic risk debate; the work of the IAIS in developing ComFrame, the common framework for the supervision of international groups; market conduct and trade issues; and initiatives in relation to financial inclusion and anti-money laundering.[1]

The GFIA appears to be an industry complement to the International Association of Insurance Supervisors (IAIS) that was established in 1994 and which now represents insurance regulators and supervisors in approximately 190 jurisdictions worldwide.[2]

The IAIS appears to support the new GFIA:

Welcoming the creation of the global federation, Peter Braumüller, chairman of the executive committee of the International Association of Insurance Supervisors (IAIS), said: “As the global insurance standard-setter, the IAIS values greatly the contributions of IAIS observers — who represent international institutions, professional associations and insurance and reinsurance companies — to the development and implementation of IAIS supervisory material. We look forward to working with GFIA and its members as we all continue to promote effective and globally-consistent supervision of the insurance industry.”[3]

The GFIA represents about 87% of the global insurance industry.

The GFIA member associations are not themselves in the business of writing, issuing and selling insurance policies; rather, they are trade associations, advocacy groups and similar organizations that are themselves composed of individual participants including insurance companies, producers and other entities in the insurance business. Together, the GFIA member associations claim an aggregate membership representing approximately eighty-seven percent (87%) of the global insurance industry.[4]

Founding associations of the GFIA include a number of associations based in the United States, such as the American Council of Life Insurers (ACLI), the American Insurance Association (AIA), the Reinsurance Association of America (RAA) and the Property Casualty Insurers Association of America (PCI).[5]

Members from other countries include, among others, the All-Russian Insurance Association (ARIA), the Association of British Insurers (ABI), the Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE), the Canadian Life and Health Insurance Association (CLHIA), the Federación Interamericana de Empresas de Seguros (FIDES), the General Insurance Association of Japan (GIAJ), the German Insurance Association (GDV), the Insurance Council of Australia (ICA), Insurance Europe and the South African Insurance Association (SAIA).[6]

At its inaugural meeting, the GFIA elected its first officers: Frank Swedlove, chair; Recaredo Arias, vice-chair; and Michaela Koller, secretary. Swedlove currently serves as president of the Canadian Life and Health Insurance Association; Arias is the secretary general of the Federación Interamericana de Empresas de Seguros; and Koller is the director general of Insurance Europe.[7]

As the secretariat, Insurance Europe will undertake the significant work that will be required to support the GFIA’s initiatives in key areas of concern to the global insurance industry.[8]

One of those issues, as mentioned in the GFIA Press Release, is ComFrame – the Common Framework for the Supervision of Internationally Active Insurance Groups. ComFrame is a project driven by the IAIS to establish a "common framework" to guide insurance regulators and supervisors around the globe in working together to supervise holding companies and corporate groups that include entities engaging in business that is regulated by insurance regulators on an international scale.[9]

Another important topic for the GFIA is the "systemic risk" issue.

Another important topic for the GFIA is the "systemic risk" issue. Systemic risk is a general concept associated with systemic financial risk, or the risk that an event, or series of otherwise unrelated events, could have a substantial adverse impact on an entire financial system.[10]

In more practical terms, systemic risk involves the concern that a financial weakness or breakdown in one entity (such as a large, multi-national conglomerate) or several such entities, or even in one financial sector or industry, could spread – because of correlation, interdependence, public confidence or other financial or economic forces – to put an entire financial system at risk. The financial system at issue could be regional, national or even international.[11]

Recent efforts to address systemic risk by lawmakers and regulators in various countries around the world, including most prominently the United States and Europe, have been a significant concern of companies in the insurance business and the associations that represent them.

The GFIA press release announcing its formation is available here.

Propertycasualty360.com has a full list of the GFIA's founding members available here.

1. Global Federation of Insurance Associations established, Press Release, Global Federation of Insurance Associations, October 9, 2012.
2. About the IAIS, International Association of Insurance Supervisors, October 17, 2012.
3. GFIA Press Release.
4.  Global Federal of Insurance Associations Launched, Insurance Journal, October 10, 2012.
5. New Global Insurer Association Seeks to Present Unified Industry Voice on International Matters, Elizabeth Festa, PropertyCasualty360.com, October 9, 2012.
6. New Global Insurer Association..., id.
7. GFIA Press Release.
8. GFIA Press Release.
9. Common Framework for the Supervision of Internationally Active Insurance Groups, National Association of Insurance Commissioners, Index of Insurance Topics, July 24, 2012.
10. What is systemic risk, anyway?, macroblog, Federal Reserve Bank of Atlanta, November 6, 2009
11. What is systemic risk…, id.

The Beginning of the End of State-Based Insurance Regulation... Or Another Layer of Regulatory Hurdles?

The Hill's Congress Blog explains that the Affordable Care Act is the latest in a series of federal intrusions into the state-based insurance regulation system.

As previously discussed on Insurance Regulatory Law, the Hill's Congress Blog has recently recognized that the Patient Protection and Affordable Care Act, also known as Obamacare, is the latest trench in the ongoing "struggle between the states and Federal government as to who should regulate insurance products, and who is best positioned to protect consumers."[1]

The Hill opinion, written by Matthew S. Brockmeier of the States Alliance for Balanced Insurance Regulation (SABIR), notes that even before the recent decision by the United States Supreme Court upholding the constitutionality of the Affordable Care Act, the insurance industry and insurance regulation has been a subject of heightened public concern.

The issue of insurance has always been one of great economic importance. It is one of the largest segments of our economy. It is a multi-billion dollar industry that provides us with peace of mind and helps get us get back on our feet in times of crisis. It is also a source of solid, stable, career-track jobs: just walk down Main Street in any town in the nation, and you will see insurance offices of all sizes, providing jobs for thousands and thousands of Americans.[2]

Historically, the insurance industry in the United States was regulated almost exclusively by the individual state governments, but federal encroachment on the primacy of the state-based insurance regulation system has become more prevalent in recent decades, as previously outlined by Insurance Regulatory Law.

Federal legislation threatens to fundamentally alter the business of insurance.

Brockmeier highlights the 140-year history of state-based insurance regulation, but warns that the federal "threat to state-based regulation comes from several pieces of legislation that, taken together, threaten to fundamentally alter the business of insurance as we know it."[3]

Essentially, these bills and regulations would confiscate the states’ ability to regulate not just health insurance but virtually any type of insurance. It’s the “Washington Knows Best” attitude that we have seen time and time again, and Americans from all walks of life should be alarmed by this power grab. [4]

The first attempt at federal encroachment on the state-based regulatory scheme can be traced back to the seminal case of Paul v. Virginia in 1869, when a coalition of insurance companies sought to escape an inconsistent web of dissimilar rules and requirements imposed by the state-based insurance regulation system by arguing that insurance regulation was the province of the federal government.[5]

The Supreme Court held that there was no constitutional basis for the federal regulation of insurance.

At that time, there was very little in the way of federal regulatory framework, and thus this coalition was less about promoting federal regulatory primacy and more about avoiding the morass that the state-based system had become. Ultimately, the Supreme Court held that insurance was not commerce, and thus, there was no basis for the federal regulation of insurance under the U.S. Constitution.[6]

The Hill's piece focuses on the modern era, however.

The first bill to threaten state-based regulation was the Dodd-Frank financial reform bill, which turned two in July. Title V of the bill created the Federal Insurance Office. The FIO is the first ever federal body involved with virtually all aspects of insurance. The statute does not technically confer the power to regulate insurance on Federal Insurance Office - yet. But history counsels that it is only a matter of time before the Office begins to expand its scope and reach.

More notoriously, the Patient Protection and Affordable Care Act (PPACA) mandated the insurance exchanges that have been the subject of heated debate. These exchanges, though they would be regulated by the individual states, would have to comply with federal rules and regulations and would be subject to federal fines and penalties for failure to comply. Any claim, then, that the federal government has not effectively usurped the regulation of health insurance, is illusory.[7]

The federal government has "effectively usurped" the regulation of health insurance.

Arguments for and against the federal regulation of insurance abound in both political circles as well as industry concerns. The National Association of Insurance Commissioners, formed in 1871 – in part in reaction to the issues that led up to the Paul v. Virginia case – has been a vital resource that has allowed the various state insurance regulators to coordinate their activities and develop similar models of insurance regulation in order to reduce the inconsistency affecting multi-state insurance companies.[8]

Brockmeier trumpets the state-based insurance regulation system that "has proven its value over and over again..." with state insurance regulators that "have proven that they have the ability to provide sound, competent, and effective regulation of the insurance industry."[9]

State regulation saw the insurance industry through both the Great Depression and the Great Recession relatively unscathed.

Considering that the insurance industry, due in part to careful and consistent regulation by the state-based insurance regulators, survived both the Great Depression in the 1930s and the Great Recession in the late 2000s with significantly less financial destruction in comparison to other financial industries such as banking and securities, Brockmeier and proponents of the state-based system may have a point.[10]

Brockmeier lauds "having 51 sets of eyes on the insurance industry" versus having "one set of eyes – in Washington, D.C. – looking over the industry."[11]

In a similar vein, many have suggested that large, multi-state (even multi-national) businesses and industries would prefer to deal with "a single 800-pound gorilla, rather than 50 monkeys."[12]

A prime example... is insurance regulation. Insurance companies have always been regulated solely by the states, but most now argue that they need a regulatory framework in Washington to compete with banks and other financial service entities that have been given more flexibility by the feds.[13]

The insurance industry is increasingly answerable to both federal and state regulation.

However, proponents of either state or federal insurance regulation should realize that the insurance industry is increasingly answerable to both one 800-pound gorilla and 50 monkeys. That's because the federal insurance regulatory scheme is not so much usurping the state-based system as it is putting another regulatory layer on top of it.

And potentially more troublesome to the insurance industry is another gorilla beating its chest just across the pond: Solvency II and the rising influence of European Union regulation on the U.S. insurance industry.

1. Beginning of the end of state-based insurance regulation, Matthew S. Brockmeier, SABIR, The Hill's Congress Blog, September 24, 2012.
2. Beginning of the end..., id.
3. Beginning of the end..., id.
4. Beginning of the end..., id.
5. A Brief Chronicle of Insurance Regulation in the United States, Part I: From De Facto Judicial Regulation to South-Eastern Underwriters Ass'n, Van R. Mayhall, III, Insurance Regulatory Law, May 16, 2011.
6. A Brief Chronicle..., id.
7. Beginning of the end..., id.
8. A Brief Chronicle..., id.
9. Beginning of the end..., id.
10. The Insurance Industry and the Great Recession, Part I - Rising Federal Involvement in Insurance Regulation, Van R. Mayhall, III, Insurance Regulatory Law, February 20, 2012; A Brief Chronicle..., id.
11. Beginning of the end..., id.
12. The Washington Offensive, Governing, Alan Greenblatt, January 2005.
13. The Washington Offensive, id.

HUD "Disparate Impact" Rule and the Insurance Industry

The "disparate impact" doctrine is a tenet of employment law that prohibits a facially neutral employment practice which is deemed to have an unjustified or disproportionate adverse impact on members of a minority group or a class protected by Title VII of the Civil Rights Act. Recently, however, the disparate impact doctrine has been the basis of a new encroachment of federal authority into the realm of state-based insurance regulation.

The U.S. Supreme Court championed the disparate or adverse impact doctrine in the landmark employment rights case of Griggs v. Duke Power Co., 401 U.S. 424 (1971). In Griggs, the Supreme Court held that the "absence of discriminatory intent" was not enough to redeem employment procedures if those procedures nevertheless acted as impediments to employment that disproportionately affected minorities or protected classes. Thus, Griggs signaled that not only was intentional discrimination unlawful under the Civil Rights Act, but unintentional discrimination was prohibited as well. If a certain rule or procedure can be shown to have an adverse or disparate impact on a protected class, whether it was intended as discriminatory or not is irrelevant.

The HUD Rule imposes liability for discrimination regardless of intent.

In early 2013, the Department of Housing and Urban Development (HUD) enacted a final rule (the "Rule") implementing the discriminatory effects standard of the Fair Housing Act. As stated in the Rule, the Fair Housing Act prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. HUD, statutorily charged with enforcing the Fair Housing Act, has interpreted it to prohibit practices with an unjustified discriminatory effect, regardless of whether there was an intent to discriminate.[1]

The Rule provides that liability may be established under the Fair Housing Act based on a practice's discriminatory effect, even if the practice was not motivated by a discriminatory intent. Further, the Rule includes a three-part burden-shifting test for determining when a practice with a discriminatory effect violates the Fair Housing Act.[2]

The Rule could expose virtually any factor used by insurers to assess risk or price coverage to challenge on the "disparate impact" basis.

The Rule specifically notes that HUD has long interpreted the Fair Housing Act to prohibit discriminatory practices in connection with homeowners insurance. This means that the "unintentional discrimination" prohibition could reach insurance practices, and insurance companies could face "disparate impact" challenges to virtually any factor used to assess risk or price insurance coverage if such factors have a disproportionate adverse affect on protected classes.

Insurance industry insiders objected to the Rule before it was even finalized, asserting that it was a violation of the McCarran-Ferguson Act's prohibition against federal law interference with state insurance regulation. HUD dismissed these assertions in the final Rule publication, stating that McCarran-Ferguson does not preclude it from issuing regulations that may apply to insurance policies.

The American Insurance Association and the National Association of Mutual Insurance Companies recently filed suit against HUD, asserting that the Rule is a violation of the McCarran-Ferguson Act and challenging the "unintentional discrimination" liability imposed by the Rule.

Additionally, the United States Supreme Court has agreed to hear another case involving a challenge to the Rule. The Supreme Court granted certiorari in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc., in June of 2013, putting the issue of disparate impact claims under the Fair Housing Act squarely before the Court.

1. 24 CFR Part 100 – Discriminatory Conduct under the Fair Housing Act.
2. 24 CFR Part 100 – Discriminatory Conduct under the Fair Housing Act.

Federal Flood Insurance Program Extended... At Least Until November 18th

The Insurance Journal is reporting that the United States House of Representatives passed legislation that will extend the federal flood insurance program until at least November 18, 2011. The Senate passed the legislation last week, and President Obama is expected to sign it today.

From the Insurance Journal:

The House and Senate are currently working on legislation that would extend the program for five years and make needed reforms to the program. The House passed its version of the legislation in July and the Senate Committee on Banking has passed a version. But the bill must still be considered by the full Senate.

Read the full article:

Federal Flood Insurance Program Extended Until Nov. 18
Insurance Journal
October 4, 2011

Pending FIO Insurance Regulatory Modernization Report Still Pending

Already well past the deadline for its insurance regulation modernization report, the FIO faces a looming deadline on its global reinsurance report.

The Federal Insurance Office ("FIO") was authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") in 2010, and the first Director of FIO, former Illinois Insurance Director Michael McRaith, took office in June of 2011.[1]

At the time, proponents of FIO insisted that insurance regulation was not among its responsibilities.

At the time, Deputy Treasury Secretary Neal Wolin said the creation of FIO would correct the "glaring omission" of any federal "institutional capacity to develop and coordinate insurance policy...". Regulation of the insurance industry was not part of FIO's responsibilities, according to Wolin and others who indicated that neither FIO nor the Dodd-Frank Act altered the fact that insurance is primarily regulated by the states.[2]

Under the Dodd-Frank Act, FIO was directed to study and prepare a report to Congress regarding the improvement and modernization of insurance regulation in the United States. This report was initially due in January of 2012.[3]

In February, 2012, FIO was hard at work and expected the report in "the coming weeks."

In February of 2012, a spokesperson for the U.S. Treasury indicated that FIO was "hard at work preparing [its] first report on how to improve and modernize the system of insurance regulation in the U.S." According to the Treasury spokesperson, FIO expected "to send the report to Congress in the coming weeks."[4]

As Insurance Regulatory Law discussed at the time, many in the insurance industry were watching FIO with interest and expecting the modernization report to potentially be a critical indicator of the future of federal involvement in domestic insurance regulation.[5]

In July of 2012, an opinion piece in Business Insurance noted that FIO's insurance modernization report was still overdue.

Those with long memories will recall that the report was supposed to be presented to Congress by the end of January. And those with an understanding of how Washington too often works know that such deadlines often aren't met. We said in March that we weren't “troubled” that the report was a little late.

Well, now it's more than a little late. The insurance industry and its customers—including risk managers—ought to know what FIO has in mind for improving the regulation of insurance.[6]

While the Business Insurance piece did not expect the FIO report to call for significant direct federal involvement in insurance regulation, it did indicate that the report, and FIO itself, could have a major impact on the future of insurance regulation:

Still, the FIO can greatly influence how insurance is regulated. It can prod states to reform and modernize regulatory practices. As the first-ever federal-level insurance authority, the FIO also should play a critical role in presenting U.S. views in international insurance regulatory forums.

The report will give a clear indication of how the FIO plans to approach its job. With elections looming, we hope the report is issued soon, and the sooner the better.[7]

Also as noted by Business Insurance in July, the FIO set its sights "on crafting another report—this one on reinsurance." That report is due to Congress no later than September 30, 2012.[8]

This refers to the report to Congress that the Dodd-Frack Act requires FIO to make regarding the global reinsurance market and the critical role it plays in the U.S. insurance industry.[9]

There are no signs of FIO's reinsurance report yet, but from a political angle, FIO may have an easier time making the reinsurance report deadline than the insurance modernization report deadline.

"Sources with knowledge" allege that the FIO modernization report has been delayed for political reasons.

In April, the Insurance Insider reported that the FIO modernization report could be delayed until after the U.S. presidential elections in November of 2012, citing "sources with knowledge of the situation" that said the "White House is unlikely to risk a confrontation with states and governors over state rights as well as a potential gridlock in Congress at a time when the US legislation process has ground to a halt...".[10]

Missing a federally-legislated deadline by 9 months (and counting) may not have a significant effect on the future of insurance regulation, but it could illustrate a weakness in the arguments of those proponents of increased federal insurance regulation who decry the inefficiencies of the state-based system.

1. The First Director of the Federal Insurance Office Takes the Reins, Insurance Regulatory Law, June 13, 2011.
2. FIO to Develop and Coordinate Insurance Policy at the Federal Level, Insurance Regulatory Law, December 12, 2011.
3. The Dodd-Frank Act, Title V, Subtitle A, Section 502.
4. FIO Still Working on Overdue Modernization of Insurance Regulation Report, Insurance Regulatory Law, February 7, 2012.
5. FIO Still Working..., id.
6. Opinion: Federal Insurance Office regulatory report looks to be MIA, Business Insurance, July 15, 2012.
7. Opinion: Federal Insurance..., id.
8. Opinion: Federal Insurance..., id.
9. The Dodd-Frank Act, Title V, Subtitle A, Section 502.
10. FIO report could be delayed post-US election date, Insurance Insider, April 23, 2012.

Idaho Reclaims Review of Health Premium Rate Increases from Feds

The Idaho Governor has issued a waiver to the Idaho Department of Insurance, allowing it to comply with the Affordable Care Act despite his previous executive order stopping the Act's implementation; subsequently, federal officials have approved the state's request to resume its own rate review process.

The Associated Press is reporting that Idaho has reversed the federal takeover of health insurance rate increase reviews in the state.

Federal officials stepped forward to assume rate review of health insurance premium rate increases earlier this year

Earlier this year, Idaho Governor C.L. "Butch" Otter issued an executive order prohibiting the implementation in the state of the Patient Protection and Affordable Care Act, also known as "Obamacare," as well as the laws and regulations associated with federal healthcare reform. As a result of that executive order, federal officials indicated that they would usurp rate review of health insurance premium increases of ten percent (10%) or more by private insurance companies in Idaho as authorized by the Affordable Care Act.

From the Associated Press article:

The Idaho Statesman reports (http://bit.ly/qc8rci) the state Department of Insurance was already was reviewing some health plan rates filed by insurance companies, as part of its regular procedures, but the executive order Otter issued in late April had made it impossible for the Idaho Department of Insurance to meet new standards under the federal health care law.

The Associated Press indicates that Governor Otter has now issued a waiver allowing the Idaho Department of Insurance to comply with the provisions of the Affordable Care Act, thereby preventing the federal takeover.

The Director of the Idaho Department of Insurance, Bill Deal, indicated that the Department established a premium reporting and review process according to the Affordable Care Act after Governor Otter issued the waiver.

Subsequently, the federal Center for Consumer Information and Insurance Oversight granted the state's request to operate its premium reporting and review process in lieu of federal oversight.

Read the full article:

Idaho reclaims insurance rate reviews from feds
Associated Press | Deseret News
September 11, 2011

Quantifying the Unquantifiable: Some Perspective on Terrorism Risk

A brief commentary from a terrorism model expert on classifying terror risks after September 11, 2001.

In Jack Seaquist’s article Perspectives: Trying to Quantify Terror Risks at BusinessInsurance.com, the terrorism model expert, and Assistant Vice President at the catastrophe modeling firm AIR Worldwide Corporation, gives a brief overview of what he considers the most significant issues in terrorism risk assessment, as well as a look at the impact of terrorism on the insurance industry in general. Seaquist describes the terrorism threat in the United States as "highly dynamic" considering the "evolving political situations" overseas.[1]

The impact of Sept. 11, 2001, on the insurance industry was immediate. Once covered in most standard all-risk commercial policies, reinsurers either refused to renew terrorism coverage or began charging exorbitant rates. Unable to purchase reinsurance or to otherwise raise sufficient capital, insurers adopted new policy forms with terrorism exclusions. For a time, terrorism coverage was virtually nonexistent.[2]

Until the devastation from Hurricane Katrina in 2005, the 9/11 attacks in 2001 were "the largest cumulative claims payout in global insurance history." The attacks brought about insured losses of $32.5 million across multiple lines of insurance "including property, business interruption, aviation, workers compensation, life and liability."[3]

But terrorism insurance per se did not exist. Insurers paid claims on a loss for which they had collected no specific premiums. Because of its nature, terrorism was a risk considered impossible to underwrite, and insurance dried up for areas—such as Manhattan and Washington—deemed likely targets for future attacks. As a result, risk managers, insurers and business groups pushed for some sort of federal terrorism insurance response.[4]

Seaquist explains that the U.S. government responded by passing the Terrorism Risk Insurance Act ("TRIA") in November of 2002. TRIA was meant to stabilize the insurance market and it established the Terrorism Risk Insurance Program ("TRIP"), which provides "government-furnished reinsurance for direct terrorism losses" for most commercial lines above the company’s deductible. The Terrorism Risk Insurance Program Reauthorization Act, passed in 2007, extended TRIP through 2014 to give insurers "the sense of stability needed for a viable market."[5]

The future of the federal backstop for terrorism coverage is set to expire in 2014 as the administration considers limiting its exposure as part of deficit-reduction efforts. While the current appetite for terrorism coverage is healthy, many insurers have begun to make longer-term plans for terrorism risk management in the absence of the TRIP.[6]

As Seaquist points out, the insurance business model functions best when losses are relatively small, uncorrelated and random, even if those losses are relatively frequent. However, catastrophic losses are generally the opposite: "large, infrequent and highly correlated." Additionally, while catastrophe modelers have been able to use historical data and other methods to overcome many of the obstacles to estimating future losses with respect to natural disasters, estimating losses from terrorist attacks is much more challenging.

Historical data on terrorist attacks is much more limited and may not be representative of the current threat. Even more importantly, while scientists and engineers can achieve mastery over the physical science underlying natural catastrophes and their impact on the built environment, terrorist activity resists scientific quantification. In addition, while natural catastrophe risk remains relatively stationary over time, terrorist threat is highly dynamic.[7]

1. Perspectives: Trying to Quantify Terror Risks, Jack Seaquist, BusinessInsurance.com, September 11, 2011.
2. Perspectives..., Id.
3. Federal Terrorism Coverage Backstop Remains Vital Tool, Mark A. Hofmann, BusinessInsurance.com, September 11, 2011.
4. ;Federal Terrorism..., Id.
5. Perspectives..., Id.
6. Perspectives..., Id.
7. Perspectives..., Id.

LifeHealthPro: AIG on the Verge of Federal Regulation

AIG, because of pending transactions and the Dodd-Frank Act, may soon become the first insurance holding company ever regulated by the federal government.

According to an article by Arthur D. Postal at LifeHealthPro.com, American International Group, better known as AIG, is "on the verge of becoming the first insurance holding company ever regulated by the federal government."

The Treasury Department is launching a public offering of $18 billion of AIG stock.

A few days ago, the United States Treasury Department announced that it is preparing to launch a public offering of $18 billion of AIG stock. At the same time, AIG announced that it plans to purchase up to $5 billion of that stock, according to the LifeHealthPro article.

Assuming the U.S. divests enough stock such that it no longer holds a majority interest in AIG, industry observers speculate that the Federal Reserve Board will step in and regulate AIG as a thrift holding company under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The decline of U.S. ownership below 50 percent would trigger federal regulation, according to a bevy of securities analysts and industry lawyers, some of whom formerly worked at the Federal Reserve Board.[1]

The LifeHealthPro article quotes Ray Schoen of Washington Analysis, a securities analytical firm, as suggesting that "the company is poised to face real regulatory supervision of its non-insurance financial business for the first time in its history."

AIG may face new restrictions on dividend payments, share buybacks, minimum leverage and risk-based capital.

Schoen also indicated that, because of the new federal regulation, AIG may face "a litany of new restrictions... including minimum leverage and risk-based capital requirements, as well as restrictions on dividend payments and share buybacks."

Robert Benmosche, President and CEO of AIG, suggested in early August that it was preparing for federal regulation as well as state regulation moving forward.

According to Benmosche and the analysts, AIG will be subject to federal regulation both because it owns a savings and loan holding company based in Wilton, Conn. now regulated by the Fed, and/or through its designation by the Financial Stability Oversight Council as systemically significant.[2]

Schoen also suggests that AIG may be required to separate its financial activities from its non-financial activities, with new restrictions between the two holding companies.

Read the full article:

AIG on the Verge of Federal RegulationArthur D. Postal | LifeHealthPro.com September 10, 2012

1. AIG on the Verge of Federal Regulation, Arthur D. Postal, LifeHealthPro.com, September 8, 2012.
1. AIG on the Verge..., id.