The state versus federal oversight discussion is a “binary debate” that is a relic of a bygone era, the director of the Federal Insurance Office told lawmakers at a Congressional hearing Tuesday.
FIO Director Michael McRaith’s assessment came as House lawmakers pressed him on the next steps that FIO might take toward federalizing regulation of the insurance industry.
In contrast to previous eras, the world of insurance today is vast, complex, diverse and global, McRaith said.
It is “not as it was, or as one might wish it were,” he said.
When one lawmaker specifically asked if McRaith anticipates asking for and getting federal regulatory power from Congress, he answered merely that he supported doing FIO’s job. McRaith’s characterizations of the global insurance market, however, make clear that FIO is unlikely to sit back and be a spectator, and that it will do what it believes is in the “national interest” for such a critical component of the economy and consumers’ lives.
From nationalizing mortgage insurance to forging covered agreements with foreign entities to working with Congress, FIO will be active, according to other comments made Tuesday before the House Financial Services Committee’s subcommittee on Housing & Insurance.
Lawmakers questioned aspects of the FIO’s long-awaited modernization report published in December—How to Modernize and Improve the System of Insurance Regulation in the United States—wondering about future costs, the U.S.’s role internationally and the need for change in insurance regulation. They also questioned FIO’s track record and its potential reach.
These are all matters that have troubled some state regulators and now some in Congress.
Throughout the first panel, which featured McRaith and Connecticut Insurance Commissioner Tom Leonardi, lawmakers probed FIO’s role and intentions, with some suggesting FIO’s involvement and action are unnecessary given state regulation of insurance.
McRaith said it was hard to know if a consolidated national regulator could have prevented the mortgage finance tumult, but it could have had earlier knowledge and mitigated the damage. He noted that half of mortgage insurers failed as a result of the 2008 financial crisis.
McRaith was also critical on the state level of regulatory arbitrage—states pandering to a lower standard in order to win over domiciled business.
Leonardi testified that the FIO report did not have to be as broad as it was, that state regulation is not static, and that one example of the FIO report’s overreach is its stated intention to be part of the insurance “supervisory colleges” that are held. Leonardi said the colleges were designed for regulators only, a situation now threatened by FIO’s inclusion.
Renegade in the House
Lawmakers appeared to embrace Leonardi’s role as a renegade and outspoken state regulator, who has shown little patience for the obfuscation and childishness allegedly rife at the National Association of Insurance Commissioners (NAIC). Indeed, some lawmakers used Leonardi to poke at McRaith.
Several opened with a reference to a letter of disgust written by Leonardi that was circulated at the NAIC national meeting in December (copy embedded below). One lawmaker called it Leonardi’s “Jerry Maguire” moment, referring to the Tom Cruise character in the movie of the same name.
Leonardi’s Dec. 11 letter to state insurance commissioners contained unbridled allegations of shadowy “cabals” at work at the NAIC and accused influential current and former regulators of undermining NAIC processes and shaping the agenda against NAIC’s better interests.
Congress took notice. Indeed, the letter served as the springboard for much of the hearing.
Although Leonardi was not speaking on behalf of the NAIC at the hearing, he was flanked by NAIC CEO (and former U.S. senator) Ben Nelson, with whom Leonardi has traveled and forged a relationship on international issues.
Despite being removed from the helm of the NAIC’s international committee with the ascension of new leadership, Leonardi still remains on the executive committee of the International Association of Insurance Supervisors (IAIS). Leonardi was appointed in January 2013 to a two-year term, so he will continue to be a voice on international matters for the NAIC although some at the NAIC want him unseated from that position as well, according to sources.
A Common Framework?
Subcommittee Chair Randy Neugebauer, R-Texas, prodded Leonardi on the signature IAIS initiative, ComFrame, which was designed for the supervision of internationally active insurance groups.
Leonardi denounced the current incarnation of ComFrame as a “prescriptive, one-size-fits-all” approach with a “reckless timeframe” for completion and a global capital standard “being forced on the IAIS” by the Financial Stability Board (FSB).
“Identify the problem,” said Neugebauer, turning to McRaith. ComFrame seems to be “a solution in search of a problem,” the congressman said.
McRaith responded. First, there was a financial crisis that created a need for such an effort, he said of the ComFrame project which began in 2010.
Second, the international marketplace is growing and changing rapidly and companies are pushing into new markets all the time. Countries want to know the carriers being supervised, whether they can be trusted and what the best practices are, McRaith said.
He said that any internationally-agreed upon standards would not be imposed from without but would instead be processed through each native jurisdiction’s regulatory apparatus.
McRaith repeatedly talked about keeping Congress informed of any proposals while taking time to formulate considerate and thoughtful responses.
For example, with regard to the various overdue reports and other FIO work, such as contemplation of covered agreements—basically future trade agreements involving reinsurance—McRaith let Congress know FIO is working hard and being deliberative.
Covered agreements, international treaties, are “a very serious responsibility,” McRaith said. “We’ve never done it before. We are sorting through it now.” McRaith said the office with its 13 staff members wants to get its “ducks in a row first” on this, and then will work as quickly as possible.
When pressed about last September’s controversial vote of the Financial Stability Oversight Council (FSOC) designating Prudential Financial as systemically important, McRaith said that, in the end, other members did not find the views of the two voting insurance experts— independent expert Roy Woodall and Missouri Insurance Commissioner John Huff— “to be persuasive.” McRaith, a nonvoting member, acknowledged upon questioning that “smart people can disagree.”
In most things, Leonardi’s views were in line with the subcommittee’s Republican leadership. At one point, Leonardi was asked if Connecticut needed the federal government to get the job done.
“Absolutely not,” Leonardi said.
California Republican Ed Royce, once a champion of the optional federal charter and a perennial critic of the NAIC’s transparency issues, openly embraced FIO’s recommendation for auto insurance portability across state lines for military families. Indeed, he said he is working on draft legislation to make that happen and expects to work with FIO and others on a bill.
In response to concerns from some lawmakers, McRaith said that he was also working on availability and affordability issues, and had compiled data from external sources. The former Illinois insurance director turned the conversation to data mining and the use of personal information, raising questions about boundaries of use and whether the states understand how the information collected and used.
The Financial Services Committee’s oversight plan for the 113th Congress published last year stated that the committee will work to ensure that the FIO “does not impose unwarranted or excessive data collection burdens on the insurance sector or on small insurers in particular.”
Leonardi noted there used to be three or four risk factors in underwriting while now there are 50 to 55. Connecticut is one of the few states that demand that insurers “provide their guidelines,” he said.
“If there is a potential for redlining, we don’t allow that and we are very, very strict about that,” Leonardi said.
Rep. Scott Garrett, R-N.J, hammered McRaith on his late submission of the report issued in December, almost two years past due, as well as FIO’s fulfillment of its statutory obligations under Dodd Frank.
“We have done an excellent job at fulfilling our statutory obligations,” McRaith said.
“It’s not an A+ if it’s two years late,” Garrett retorted.
Other reports due up, perhaps soon, are one on catastrophes from FIO and one under the Terrorism Risk Insurance Act. McRaith also said he hopes that by the end of the month that the FIO will have a statutorily required report from the President’s Working Group on Financial Markets on TRIA. Lawmakers asked McRaith to relay to the working group that it should move speedily.
McRaith also championed the National Association of Registered Agents and Brokers (NARAB II)—multi-state licensing legislation that was attached to the flood bill in the Senate, and passed as “an issue in need of a solution.”
Indeed, federal movement is needed now on NARAB and on mortgage insurance, McRaith said.
McRaith also wants to work on a plan to reduce rate oversight to make more products available at a lower cost. He cited pilot projects across the country.
In afternoon testimony, Robert Restrepo, chairman and CEO of State Auto Insurance Companies, representing the Property Casualty Insurers Association of America (PCI), testified that FIO “accurately cites studies finding that rate regulation reduces availability and affordability,” pointing to the success of McRaith’s home state of Illinois in allowing free-market private competition for consumers.