UPenn Legal Scholar: FIO Report Is ‘Cautiously Sensible’

The Federal Insurance Office (FIO)’s recent report on how to improve and modernize insurance regulation has received a range of reactions since its publication in December. Recently a business law scholar at the University of Pennsylvania also weighed in on the topic and called for Congressional action to empower the Treasury Department to make a hybrid, federal-state model of financial regulation work.

In an article titled “It Is Time to Rethink Insurance Regulation,” published in The New York Times on Jan. 22, David Zaring, assistant professor of legal studies and business ethics at the Wharton School of Business at UPenn, argued that the financial crisis of 2007–2008 suggested more attention should be paid to the global marketplace and the stability of insurance companies.

But to the extent that U.S. state insurance commissioners focus on the solvency of insurers, they do so “from a consumer protection perspective,” Zaring wrote. That means state regulators consider whether insurers are likely to be able to pay out on their policies, rather than the effect on the financial system as a whole, he argued.

Meanwhile, in Europe, regulators are overhauling the way they oversee the insurance industry, with an emphasis on empowering the continent-wide supervisory authority and more attention given to the insurance companies’ ability to withstand financial shocks, Zaring observed.

Zaring wrote that in that regard, the FIO report’s view of a federal-state hybrid regulatory model might make it possible for the U.S. to “keep up with its international counterparts” in thinking about the stability of insurance companies. “In that sense, the report is cautiously sensible,” he wrote.

He suggested that in this “division of labor,” states might focus on the consumer protection role, while the federal government could worry about the overall systemic stability, and “perhaps some nationwide insurance markets where it makes little sense to give the states a role.”

P/C Industry Supportive But Cautious on Federal Insurance Office Recommendations

Another industry expert who has been reviewing the FIO report’s potential implications said the report brings “a balanced discussion of the strengths and weaknesses” of the current state-based system.

Michael Nelson, chairman of insurance law firm Nelson Levine de Luca & Hamilton in New York, said the industry and many regulators have previously advocated for many of the initiatives in the report, such as a better system of agent licensing, market conduct reform and speed to market reform initiatives.

Nelson pointed to the lack of uniformity in the current system as one of the biggest concerns for the FIO.

He said the report suggests that the structure of the state-based system presents inherent difficulties in achieving uniformity. Further, the FIO has outlined an active role for itself, indicating that the office plans to actively monitor whether and how states implement FIO’s recommendations. While the report does not recommend federal regulation of insurance, it nonetheless does suggest that Congress should strongly consider direct federal involvement if states do not implement the FIO’s recommendations, he observed.

One recommendation in the report that seemed to insert the FIO directly into the regulatory process is the recommendation that it participate in supervisory colleges for large national insurers and internationally active insurers. Nelson said the FIO apparently wants information from those supervisory colleges to assist it in its role as monitor of financial stability for the insurance industry.

Some of the report’s other suggestions might also raise concerns among state regulators and others about the FIO’s longer-term intentions, Nelson argued. For example, regulatory supervision and rate and form regulation are both at the heart of state regulation. And while the FIO said it is simply going to monitor some issues related to these topics, many might worry that this could be the first step towards broader federal involvement, he said.

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