A year after the U.S. House passed legislation that would have eliminated the Federal Insurance Office entirely, not only is it still standing, but recent comments from President Donald Trump suggest it may yet have a role to play in future trade negotiations.
On May 24, Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, bipartisan legislation that looks to roll back some of the most onerous regulatory requirements of the Dodd-Frank Act, particularly as they relate to smaller banks and credit unions.
We at R Street were supportive of the law, on balance. In particular, we welcomed provisions that provide regulatory relief to lenders with less than $10 billion in assets, who have struggled to comply with a regulatory regime designed to constrain the megabanks. Under the law, strongly capitalized small banks with at least 8 to 10 percent tangible equity as a percentage of total assets would be freed from the far more complex “Basel” risk-based capital rules.
But the legislation also poses some areas of concern. We were pleased to see, in his signing statement authorizing the law, the president shares our concern about one section in particular: Section 211, which addresses “international insurance capital standards accountability.”
A late addition to the bill, having been added by the Senate Banking Committee as an amendment in December 2017, this section resembles H.R. 4537, the International Insurance Standards Act of 2017, in that it proposes to require the federal government get a green light from state insurance commissioners before negotiating international insurance agreements. Indeed, it specifically prescribes that the Federal Reserve, the secretary of the Treasury and the Treasury’s Federal Insurance Office “achieve consensus positions with State insurance regulators through the National Association of Insurance Commissioners” before moving forward with any such proposals in international forums.
The proposal is unconstitutional in at least two different ways. As Article VI, Clause 2 of the U.S. Constitution established and the Supreme Court affirmed in its 1819 McCulloch v. Maryland decision, federal law trumps state law. Moreover, Article II, Section 2, Clause 2 makes clear that it is the president who has authority to propose and negotiate agreements with other countries. The notion that that power could be overridden by the states, much less by a private trade association of state officers like the NAIC, is ludicrous on its face.
As Trump’s signing statement makes abundantly clear, he agrees:
Section 211(a) of the Act, though styled as a congressional finding, purports to direct my subordinates in the executive branch to take certain positions before international bodies and to ‘achieve consensus positions’ with State insurance regulators in negotiations before such bodies. These directives contravene my exclusive constitutional authority to determine the time, scope, and objectives of international negotiations. My Administration will give careful and respectful consideration to the preferences expressed by the Congress in section 211(a) and will consult with State officials as appropriate, but will implement this section in a manner consistent with my constitutional authority to conduct foreign relations.
The plain implication here is that the administration does not consider the “consensus” requirement binding. As the White House moves forward with implementation, states could presumably challenge executive rulemaking that violates the statutory text. But the odds are that such a challenge would merely lead to either this particular clause, or the entire section, being struck down.
If the courts found the “consensus” clause isn’t severable from the rest of Sect. 211, it would also mean nullifying language that the states (and a number of insurance trade associations) have sought creating an advisory panel on insurance capital standards within the Federal Reserve. Time will tell whether that’s a scenario the states would be willing to risk.
In the meantime, it’s worth remembering why the Federal Insurance Office was created in the first place. The collapse of American International Group was definitely a major impetus, as it demonstrated the dangers of not having any insurance expertise within the federal government. But the idea actually long predated the financial crisis and had been the subject of legislation sponsored by former Rep. Paul Kanjorski, D-Pa.
Among the problems the office was designed to address is the challenge that long faced federal trade officials when negotiating agreements related to insurance. As a completely state-regulated industry, insurance was one area where federal officials just simply couldn’t credibly commit to the kinds of regulatory changes that often are central to trade negotiations.
FIO created that mechanism, and the covered agreement that the Trump administration finalized last year with the European Union shows that it works. Thanks to that agreement, U.S. insurers will not face local presence requirements in EU jurisdictions, while the states will work to phase out protectionist reinsurance collateral requirements for EU reinsurers over the next five years. The agreement likely will be expanded soon to include Bermuda, providing a model for similar market liberalizations we could see expand to other areas.
None of this is to take away from the need for transparent processes and notice-and-comment rulemaking. State regulators are valuable sources of expertise on the business of insurance and their input absolutely should be welcomed. But it’s the president of the United States who gets the final word, and we’re glad to see he agrees.
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