How To Modernize And Improve The System Of Insurance Regulation In The United States Table of Contents I. INTRODUCTION .................................................................................................................1 Structure of the Report ......................................................................................................4 Recommendations for Modernization of Insurance Regulation in the United States ...........................................................................................................5 Areas of Near-Term Reform for the States........................................................................6 Areas for Direct Federal Involvement in Regulation .......................................................7 Potential Federal Solutions to States’ Failure to Modernize and Improve ....................8 II. A BRIEF HISTORY OF THE REGULATION OF THE UNITED STATES INSURANCE INDUSTRY .................................................................11 Early Era of Insurance Regulation and the Limitation on Federal Authority ..............11 Box 1: The National Association of Insurance Commissioners (NAIC) ..................11 Early Calls for Federal Regulation of Insurance ...........................................................13 The Case of South-Eastern Underwriters, Federal Authority to Regulate Insurance, and the McCarran-Ferguson Act ...................................................14 The Crises of Insurer Insolvencies, Congressional Reaction, and State Regulatory Responses ......................................................................................15 Recent Proposals for Federal Regulation of Insurance to Promote Uniformity ..........16 The Financial Crisis ..........................................................................................................18 Box 2: AIG ....................................................................................................................18 Box 3: Assistance to the Insurance Industry during the Financial Crisis .................20 Financial Regulatory Reform ..........................................................................................21 III. PRUDENTIAL OVERSIGHT ...........................................................................................23 The Solvency Framework .................................................................................................23 Box 4: Europe’s Insurance Regulatory Regime – Solvency II ...................................26 Capital Standards .............................................................................................................28 Box 5: Credit Rating Agencies, Financial Guaranty Insurance, and the Financial Crisis ...............................................................................................30 Reserving ..........................................................................................................................35 Credit for Reinsurance ...................................................................................................37 Corporate Governance – Director and Officer Suitability and Fitness .........................38 Group Supervision ...........................................................................................................39 Resolution of Insolvent Insurers ....................................................................................42 Federal Insurance Office, U.S. Department of The Treasury iii How To Modernize And Improve The System Of Insurance Regulation In The United States Receivership .....................................................................................................................43 Guaranty Funds ................................................................................................................44 IV. MARKETPLACE OVERSIGHT, CONSUMER PROTECTION AND ACCESS TO INSURANCE .....................................................................................................................46 Producer Licensing .........................................................................................................46 Box 6: Marriage and Insurance ................................................................................48 Product Approval .............................................................................................................48 Box 7: Personal Auto Policies for Service Members .................................................49 Box 8: Sale of Annuities to Suitable Consumers .....................................................51 Market Conduct Regulation ............................................................................................52 Rate Regulation ................................................................................................................54 Box 9: Forms of Rate Regulation ................................................................................55 Risk Classification .............................................................................................................56 Box 10: Access of Native Americans to Insurance .....................................................57 Nonadmitted and Reinsurance Reform Act of 2010 ....................................................58 Natural Catastrophes .......................................................................................................59 V. TAKING ACCOUNT OF REGULATORY REFORM .......................................................62 VI. CONCLUSION..................................................................................................................65 Federal Insurance Office, U.S. Department of The Treasury iv How To Modernize And Improve The System Of Insurance Regulation In The United States Glossary of Acronyms Actuarial Guideline 38 .......................................................................................................................................AG 38 AIG Financial Products ....................................................................................................................................AIG FP AIG Securities Lending Corporation ...........................................................................................................AIGSLC American Council of Life Insurers .................................................................................................................... ACLI American International Group, Inc .................................................................................................................... AIG Board of Governors of the Federal Reserve System .......................................................................Federal Reserve California Earthquake Authority ................................................................................................................Authority Capital Purchase Program ....................................................................................................................................CPP Commercial Paper Funding Facility ..................................................................................................................CPFF Common Framework for the Supervision of Internationally Active Insurance Groups ...................ComFrame Consumer Financial Protection Bureau ...........................................................................................................CFPB Council of Insurance Agents and Brokers ........................................................................................................CIAB Credit Default Swap ...............................................................................................................................................CDS Credit Rating Agencies ........................................................................................................................................CRAs Defense of Marriage Act ..................................................................................................................................DOMA Department of Housing and Urban Development .........................................................................................HUD Department of the Treasury ..........................................................................................................................Treasury Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ....................................Dodd-Frank Act European Insurance and Occupational Pensions Authority ....................................................................... EIOPA European Union ......................................................................................................................................................EU Federal Deposit Insurance Corporation ........................................................................................................... FDIC Federal Emergency Management Agency ......................................................................................................FEMA Federal Insurance Office .......................................................................................................................................FIO Federal Insurance Office Act of 2010 ............................................................................................................FIO Act Financial Analysis Working Group ..................................................................................................................