By Paul R. Walker-Bright, Partner, Reed Smith LLP
In
his commentary, “Reed Smith LLP on the Dodd-Frank Wall Street Reform
and Consumer Protection Act’s Affect on the Insurance Industry” Paul
Walker-Bright states that on July 15, 2010 the United States Senate
passed the “Dodd-Frank Wall Street Reform and Consumer Protection Act”
(the “Dodd-Frank Act”), the most comprehensive legislative reform of the
financial services industry since the Great Depression.
The
Act has several provisions that directly or indirectly affect the
insurance industry, and may indicate the beginning of greater federal
regulation of insurance after decades of nearly exclusive regulation by
the states.
The
Dodd-Frank Act creates the Federal Insurance Office (“FIO”), the
primary task of which will be to monitor insurance issues of national
importance and give reports to the Secretary of the Treasury and
Congress on such issues. The FIO also will advise the Secretary on major
domestic and international insurance issues. The FIO will submit a
report to Congress on how to modernize and improve the system of
insurance regulations in the United States, and will make
recommendations for legislative, administrative and regulatory changes
that are necessary to carry out the findings in the report. In a March
2008 report, the Treasury Department already came out in favor of a
comprehensive scheme of federal regulation that would replace much, if
not all, of the existing state-based regulatory regime. If the Treasury
Department Blueprint can be considered foreshadowing of the FIO’s report
to be issued 18 months from now, further federal involvement in the
regulation of insurance may be in the cards.
The
Dodd-Frank Act encourages states to adopt uniform requirements and
procedures with respect to nonadmitted insurance (i.e., surplus lines),
including the allocation of premium taxes, the regulation and licensing
of surplus lines brokers, and procedures to make it easier for
commercial insurance buyers to obtain nonadmitted insurance. Other
provisions in the Act attempt to create a more uniform regulatory
environment for reinsurance.
The
Dodd-Frank Act gives the Board of Governors the authority to supervise a
nonbank financial company, including an insurance company, if material
financial distress at the company or the activities of the company could
pose a threat to the financial stability of the United States. An
insurance company subject to the Board of Governor’s supervision will be
required to meet certain “prudential standards” concerning its
operation. The prudential standards will be more stringent than those
applicable to other nonbank financial companies that do not present
similar risks to the nation’s financial stability. The Dodd-Frank Act
provides for the orderly liquidation of companies under the Board of
Governor’s supervision if it is determined that they should be put into
receivership. The prudential standards concerning the operations of
insurers under supervision will be in addition to, or instead of, state
insurance regulations. The prudential standards may limit the ability of
subject insurance companies to operate with the same level of freedom
they now enjoy under the state-based regulatory regime. Overall, the
states’ ability to regulate insurance companies under the Board of
Governor’s supervision may be more limited as a result of the Dodd-Frank
Act.
Paul
Walker-Bright concludes, “The Dodd-Frank Act has opened the door to
federal regulation of the insurance industry, a door that has remained
firmly shut since 1945.”
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Paul Walker-Bright
is a partner at the law firm of Reed Smith LLP. Mr. Walker-Bright’s
practice concentrates on complex insurance recovery and litigation,
primarily on behalf of policyholders.
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