State insurance regulators may flex muscles amid federal rollback
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Talk of a lighter regulatory touch out of Washington has many in the financial services industry feeling optimistic; but for insurers, there may be reason to be wary of the ‘law of unintended consequences.’

A potential repeal, or rollback, of the Dodd-Frank Act may seem like a step toward lower regulatory burden, but in reality, only a handful of insurers — those designated as systemically important financial institutions (SIFIs), and those that own a depository institution — would feel its impact.


While few insurers are directly affected by the federal bodies established by Dodd-Frank — notably the Financial Stability Oversight Council (FSOC) and Federal Insurance Office — they are all regulated by the states, which have historically taken the lead on overseeing the insurance industry.


With all eyes on Washington for potential rollbacks of post-financial crisis regulation, some states have already announced an intention to intensify regulatory efforts to offset any perceived federal easing. 

For the U.S. insurance industry, it’s what the states could do in the wake of expected regulatory reform in Washington that is anticipated to have the most impact over the coming years. So what might this refocus on the primacy of state-based regulation of insurance portend?

There are several areas where we may see a more robust state response in the coming months. Among those is the adoption of a framework for the supervision of insurance groups, a key prerogative for advisory bodies, such as the National Association of Insurance Commissioners (NAIC).

Group supervision, which would allow for greater oversight of U.S.-based insurers with subsidiaries overseas, has been discussed for many decades, but until now has not been adopted en masse by state legislators. U.S. insurers would be subject to substantial reporting requirements, licensing oversight, and financial analysis should more states move to formalize the group supervision framework into law.

Cyber regulation is another issue where we may see states become more muscular. While the Federal Reserve Board and other federal financial regulators have issued an advance notice of proposed rulemaking on the issue, some states are already wading into the water.

Notably, New York’s Department of Financial Services was the first to unveil a proposed cybersecurity regulation. As more states follow suit, multiple regulatory structures for cybersecurity may emerge resulting in potential duplication and added costs for insurers. 

There are several existing state-led initiatives that are likely to only strengthen in the coming years. The Own Risk Solvency Assessment (ORSA), a state-based mandate requiring an annual filing of a company’s own assessment of its risk profile, is expected to continue to be fine-tuned and potentially evolve from a mere filing requirement to a basis for judgment by state regulators. 

Consumer protection will also remain a key focus for state regulators, who are likely to increase the frequency and scope of market conduct exams that investigate sales practices — including sales to seniors — as well as insurance products, such as annuities and long-term care insurance.

On the international level, several emerging regulatory initiatives may impact the U.S. insurance industry in 2017, including the International Association of Insurance Supervisors’ (IAIS) International Capital Standards (ICS) framework. However, in light of the January 2017 agreement between the U.S. and EU, which granted equivalency under Solvency II to U.S. insurers operating in the EU, states may have lost some incentive to play ball with international regulators.

The covered agreement greatly limits the effect of EU Solvency II regulations on U.S. insurers and helps equalize the regulatory burden on U.S. and EU reinsurers. These were some of the key issues for the insurance industry.

Now that they are being addressed in a meaningful way, states may be less likely to adopt additional restrictive international proposals. Until the fate of the Federal Insurance Office is clarified as Congress ponders changes to the Dodd-Frank Act, there will continue to be uncertainty in this regard.

While 2017 may bring a lighter regulatory touch from the federal government, it may also herald a heavier regulatory hand from the states. Despite discussion of regulatory relief under the new administration, insurers will continue to face a very challenging regulatory landscape and a potentially uneven marketplace across states. 

However, insurance consumers can rest assured that regulatory relief at the federal level isn’t expected to mean increased exposure, as states have indicated that their regulatory oversight will remain rigorous in ensuring capital adequacy. When all's said and done, insurance is a promise to pay a legitimate claim, which is the ultimate consumer protection.


Howard Mills is the global insurance regulatory leader at Deloitte Services LP. A former New York superintendent of insurance, Mills specializes in regulatory risk, reputational risk, governance, enterprise risk management, growth, and globalization. 

The views expressed by contributors are their own and not the views of The Hill.