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.