FIO Insurance Modernization Report: Sound and Fury or a Thrown Gauntlet?

The Federal Insurance Office’s Modernization Report characterized the state-based insurance regulatory system as inadequate and said that federal involvement was necessary, but observers differ over the likely impact of the Report.

Appearing after a two-year delay, the Federal Insurance Office’s (FIO) Modernization Report characterized state insurance regulation as inadequate and insisted that some kind of federal insurance regulation was necessary. Given that the FIO was mandated by the Dodd-Frank financial reform law to report on state-based regulation’s limitations, some findings of inadequacy were virtually necessary. The tone of the Report was more forceful and unequivocal than it might have been, but estimates of the  likely practical import of the FIO Modernization Report’s significance range from an interesting but toothless commentary to a watershed moment for insurance regulation.

The Report’s findings were mostly unsurprising, according to Howard Mills, chief advisor of Deloitte’s Insurance Industry Group. “The report was pretty much in line with what we’ve been talking about for years – problems with fragmentation, the lack of consistency inherent to a system with so many jurisdictions, etc.,” he comments.

Bill Spinard, Ernst & Young.

Bill Spinard, Ernst & Young.

With the publication of the Report, FIO Director Michael McRaith may have made a good case for improvements to insurance regulation, but his ability to impose it is non-existent, Mills continues. “There was a ‘bully pulpit’ aspect to this, but I don’t think there will be any immediate impact,” he says. “[McRaith] will continue to carve out a more prominent role in international affairs, but with Congress’ attention focused elsewhere, there’s no reason to expect any significant change.”

As ominous as the Report’s call for federal involvement may sound, that involvement already exists, Mills stresses. “The FIO and other agencies of the federal government were already involved,” he asserts. “That doesn’t mean it will supersede the supremacy of state regulation.”

Whether the FIO has any formal supremacy over state regulators or not, policy recommendations within the Report could lead to significant changes in how insurance is regulated, according to Mike Nelson, a partner with law firm Nelson Levine de Luca & Hamilton.

“The Report suggests the necessity of a higher degree of transparency in the things states regulate, a higher degree of uniformity because it’s an inefficient system, and a need for a U.S. government voice as it concerns relationships in the international regulatory community,” Nelson says. “These suggestions create a framework for change without the necessity of the federal government carrying it out.”

Bill Spinard, executive director, Ernst & Young, calls the appearance of the FIO Modernization Report a “milestone event.” The Report may have been delayed, but it showed very careful and thorough deliberation about the need to improve on the status quo of U.S. insurance regulation, Spinard opines. And while Director McRaith showed tact and diplomacy in the composition of the Report, it was also an example of “speak softly and carry a big stick,” according to Spinard.

“This was not just some kind of scholarly study,” Spinard comments. “It was a strong case about the need to change, seen through the prism of both national and international trends, with very direct commentary about current weaknesses, and with very specific recommendations for change.”

Spinard stressed the Report’s calculation that the complexities of the U.S. insurance regulatory system cost insurers operating 6.8 times as much as the cost of operating in the U.K. and increase costs for P&C insurers by $7.2 billion annually and for life insurers by $5.7 billion annually.

The FIO Report avoided the mistake of recommending what have been criticized as “bank-centric” recommendations for insurance regulation and therefore avoided accusations of failing to be on-point, Spinard suggests. “It was a well-reasoned, very insightful document, and every recommendation was thoroughly supported by the facts,” he says.

Direct federal regulatory involvement aside, the FIO Report’s recommendations, such as the need for supervisory colleges of insurance regulators, are likely to provide an impulse for state regulators to act domestically, and to acquiesce in international matters, Spinard suggests. “The rest of the world is pushing us for common accounting and capital standards, for more consistency in regulations and greater uniformity in enforcement,” he notes.

Outside of changes to international regulation, which is already the FIO’s bailiwick, no great changes will happen in the absence of some crisis, Deloitte’s Mills contends.  “Events will largely drive what happens subsequently,” he says. “History shows that Congress responds to crises.”

However, Mills acknowledges the possibility of change, even as he questions its likely pace.  “I don’t think there will be any immediate impact,” he reiterates. “Anything that comes subsequent to [the Report] will evolve over a very long period of time.”

Anthony R. O’Donnell // Anthony O'Donnell is Executive Editor of Insurance Innovation Reporter. For nearly two decades, he has been an observer and commentator on the use of information technology in the insurance industry, following industry trends and writing about the use of IT across all sectors of the insurance industry. He can be reached at or (503) 936-2803.

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