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Before the end of January, the newly established Federal Insurance Office (FIO) within the U.S. Department of Treasury is expected to release its highly anticipated report on how to modernize and improve insurance regulation in the United States. The report, as ordered by the Dodd-Frank Act, will guide public policy decision-making in the insurance industry.

Michael Nelson, chairman of national law firm Nelson Levine de Luca & Horst, represents insurers and reinsurers in regulatory matters as well as in complex litigation in multiple jurisdictions throughout the country. His firm publishes a newsletter covering the latest developments at the FIO ( http://www.nldhlaw.com/CM/EmergingTopics/Federal-Insurance-Office.asp ), and below he answers the most pressing questions about the office and its much-anticipated report:

Q1: The FIO is an unprecedented new office within the U.S. Department of Treasury that was created to establish needed insurance expertise at the federal level. But there has been debate about what the true role of the FIO should be. How will the FIO mature into its role?

A1: The Federal Insurance Office is not entirely unprecedented. The federal government has long had a role in various aspects of the insurance industry. The federal government first became involved in crop insurance in the 1930s. In 1968, Congress created the National Flood Insurance Program. In more recent times, the federal government has played a role in providing a guarantee regarding terrorism insurance. The FIO now provides the federal government with a centralized structure to support its macro-level participation in the insurance industry.

Congress may, at a later date, expand the role of the FIO. Public comments submitted to the FIO at Director Michael McRaith's request were laden with suggestions for lines of business and types of regulatory activities that could potentially be handled at the federal level. Still, for now, it is important to keep in mind what the FIO can and cannot do under its authorizing legislation.

The Dodd-Frank Act explicitly states that the FIO does not have regulatory authority. Instead, the Act provides the FIO powers and tasks consistent with its role as an advisor, coordinator, and information repository for the federal government on insurance issues.

What the FIO will advocate for in its role as an advisor and how it will impact the insurance industry is very much an open question.

Q2: Many observers expect the FIO to advocate for an enhanced federal role in the industry. How would this enhanced role be viewed by different industry stakeholders?

A2: The insurance industry's response depends on how this "enhanced federal role" presents itself. The views of the industry stakeholders will undoubtedly be very diverse and quite divergent.

There is almost universal support for the FIO to act as a point of contact and representative on international issues. There is much less consensus regarding whether the FIO should become actively involved in regulatory issues in the domestic market.

Some within the industry are strongly advocating for the FIO to institute an optional federal charter, while others are vehemently opposed to any movement away from the current state-based system. Additionally, concerns have been expressed that data and document requests made by the FIO pursuant to its limited subpoena power may be duplicative of requests from state regulators, which would result in an added burden on the industry.

Actions taken by the FIO will be met with both criticism and support, regardless of how the office exercises its authority.

Q3: Some consumer protection advocates claim there are gaps in insurance regulation and coverage. How will the FIO address these claims in a way that will be approved by the industry?

A3: Insurance is heavily regulated. Consumer advocates, for the most part, support the current state-based regulatory system. Concerns have been raised by consumer advocates regarding the availability of insurance products to poor and minority populations, the transparency in underwriting processes and whether certain underwriting practices are unfairly discriminatory.

Regarding consumer protection, the FIO is tasked under the Dodd-Frank Act with monitoring the extent to which underserved communities and consumers, minorities, and low-to-moderate income persons have access to affordable insurance products. How the FIO will carry out this task is far from certain. Insurers rarely collect information about an insured's ethnicity or minority status. In fact, some states even prohibit the collection of such information.

Additionally, it is not clear how the FIO will define the term "affordable." Affordability is a relative concept--rates are usually determined by risk factors and insurer solvency considerations.

Q4: The FIO's report will recommend changes to modernize and improve insurance regulation in the United States, but many industry representatives and consumer advocates alike have expressed the importance of the agency's role outside of the United States. How important is the FIO's leadership role on international matters?

A4: The FIO's role as an advocate for the United States insurance industry internationally is arguably the office's most important task. Under Dodd Frank, the FIO is specifically tasked with coordinating federal efforts, developing federal policy, and consulting with states regarding the prudential aspects of international insurance matters.

Prior to the FIO, there has never been a single, unified group or organization that could negotiate international agreements on behalf of the country. While the National Association of Insurance Commissioners (NAIC) has been active and involved internationally, it is not a government entity. The NAIC has members with diverse views and it cannot always speak for all members on international matters. Moreover, the NAIC has no authority to enter into binding agreements with foreign countries on behalf of member states.

Both domestically and abroad, regulators are developing methods to monitor insurers beyond their national boundaries to ensure the financial stability of their domestic markets. The International Association of Insurance Supervisors, for example, is developing a framework for interactions and information sharing among regulators called ComFrame. Also, the European Commission is working to develop and implement Solvency II, which will include a group solvency component.

There are some immediate concerns for the industry. For example, the EU will soon determine whether the American regulatory system is equivalent under Solvency II. During the Property/Casualty Insurance Joint Industry Forum that took place on January 10, 2012, Director McRaith explained that a priority for the FIO will be to ensure that the regulatory systems in other countries do not disadvantage insurers in the United States.

Q5: FIO Director Michael McRaith has received close to 150 letters from the industry with recommendations on how to improve the regulatory system. How will these various opinions regarding oversight affect the outcome of the report?

A5: Director McRaith has already expressed his appreciation for the industry's recommendations on how to improve and modernize the national insurance regulatory system. In his statement before the Property/Casualty Insurance Joint Industry Forum, he stated that he was struck by the diversity of views he received regarding the insurance industry.

Director McRaith has also recognized that it was not possible for the modernization report to address every issue that warrants improvement or modernization. While the upcoming modernization report is currently receiving a significant amount of attention, the FIO will issue additional reports in the future. Specifically, the FIO is scheduled to release a report on the reinsurance industry later this year. The FIO is also tasked with reporting annually on the insurance industry. Director McRaith explained at the Property/Casualty Insurance Joint Industry Forum that he expects the FIO will be "prolific."

It seems likely that the comment letters that were submitted will continue to be important after the modernization report is released. The issues raised by the comments may very well form the basis of future discussions or reports. Also, the record will help members of Congress analyze the information in the modernization report.

For more information about the Federal Insurance Office, please visit: http://www.nldhlaw.com/CM/EmergingTopics/Federal-Insurance-Office.asp .

With offices in the United States and London, Nelson Levine de Luca & Horst ( www.nldhlaw.com ) provides comprehensive legal services to the insurance industry in the areas of reinsurance, regulatory, complex litigation, class action, coverage, subrogation, bad faith consulting, and insurance fraud.

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