Dodd-Frank

Study guide: Exam 6U

The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) is the federal response to the 2008 financial crisis. For insurance it left state regulation in place but added a federal monitoring office (the Federal Insurance Office), a systemic-risk council able to put a nonbank financial company — an insurer included — under Federal Reserve supervision, and a home-state rule for surplus lines and reinsurance credit.

\text{Title V (Insurance)} = \underbrace{\text{Subtitle A}}_{\text{FIO}} + \underbrace{\text{Subtitle B}}_{\text{NRRA}}

• Federal Insurance Office (in Treasury). It monitors all lines except health insurance, most long-term care and crop insurance; identifies regulatory gaps that could contribute to a systemic crisis; monitors access to affordable insurance for traditionally underserved communities; can recommend insurers to FSOC for designation; assists in administering the terrorism program (TRIA); coordinates federal policy on international insurance matters, including at the IAIS; and, with the U.S. Trade Representative, negotiates covered agreements. It reports annually to Congress. It has no general supervisory, licensing or rate authority.
• FSOC (Title I) has ten voting members, one of them an independent member with insurance expertise; the FIO director and a state insurance commissioner sit as non-voting members. It can designate a nonbank financial company for Fed supervision and enhanced prudential standards. AIG, Prudential and MetLife were designated; a federal court rescinded MetLife's designation in 2016, and by 2018 no insurer remained designated.
• The Nonadmitted and Reinsurance Reform Act (Subtitle B, effective July 2011). Only the insured's home state may regulate and tax a nonadmitted placement; eligibility standards for surplus lines insurers are made uniform; exempt commercial purchasers may be placed without a diligent search of the admitted market (Excess and Surplus Lines). For reinsurance, an accredited ceding insurer's domiciliary state alone decides credit for reinsurance, and an accredited reinsurer's domiciliary state alone regulates its solvency.
• Other titles touching insurers. The Federal Reserve took over supervision of savings and loan holding companies — including insurance groups that own a thrift — when the Office of Thrift Supervision was abolished; the orderly liquidation authority (Title II) leaves insurance companies to state receivership; and the Consumer Financial Protection Bureau was given no general authority over the business of insurance.
• Covered agreements in practice. The U.S.–EU (2017) and U.S.–UK (2018) agreements remove reinsurance collateral requirements for qualifying reinsurers from the other jurisdiction and limit the reach of foreign group supervision over U.S. groups. The states amended the NAIC credit-for-reinsurance models to conform rather than face preemption.
• Dodd-Frank also made smaller public companies' exemption from Sarbanes-Oxley §404(b) auditor attestation permanent. For the regulatory history around it, see History of Insurance Regulation and State and Federal Insurance Regulation.

One Home State, One Tax A surplus lines property policy with premium \$400{,}000 covers locations in states H (50\% of the exposure), B (30\%) and C (20\%). The insured's principal place of business is in H. Hypothetical surplus lines tax rates: H 5\%, B 4\%, C 6\%. Compare a pre-NRRA allocation of tax by location with the NRRA home-state rule, absent any interstate compact.

Answer Allocated by location (the usual pre-2011 approach):

\begin{align*}
\text{H: } 0.05 \times 200{,}000 &= \$10{,}000 \\
\text{B: } 0.04 \times 120{,}000 &= \$4{,}800 \\
\text{C: } 0.06 \times 80{,}000 &= \$4{,}800 \\
\text{Total} &= \$19{,}600
\end{align*}

Home-state rule:

\text{H: } 0.05 \times 400{,}000 = \$20{,}000

The tax bill barely moves; the compliance burden collapses. One state's broker licensing, diligent-search rules, filings and tax replace three. The Act allowed states to share tax through a compact, but such compacts never became widespread.

What Can FIO Actually Do? FIO concludes that one state's homeowners rate regulation is suppressing rates to the point of threatening availability. What can it do?

Answer Report and recommend — not act. FIO has no authority to disapprove or order rates; it can describe the problem in its annual report to Congress and in its monitoring work.

Its one preemptive power runs through a covered agreement, and even then the statute protects state measures governing rates, premiums, underwriting, sales practices and coverage requirements. State capital or solvency measures can be preempted only to the extent they treat a non-U.S. insurer less favourably than a U.S. one. Rate regulation stays with the states.