Remarks by Michael McRaith, Director, Federal Insurance Office Property/Casualty Insurance Joint Industry Forum

Good afternoon. 

 

Thank you, Bob Hartwig, for the opportunity to join you today.

 

2011 was quite a year.

 

I spent the first 5 months as the Director of Insurance in Illinois and as an officer of the NAIC. Then I arrived at Treasury in June to head the new Federal Insurance Office, or FIO, as we call it, which was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

 

FIO has a broad scope of responsibility: to monitor all aspects of the insurance industry, including the accessibility and affordability of insurance to traditionally underserved communities; to develop and coordinate federal policy on international insurance regulatory matters; and to advise the Secretary on insurance issues of major national or international importance. I’m proud that in just seven months time, we’ve made progress constructing a foundation for FIO, paving the way for increased activity and engagement in the early months of 2012.

 

Before I begin, I want to acknowledge Secretary Geithner, Deputy Secretary Wolin, and so many others at the Treasury Department who support the work we have undertaken, are committed to the mission of the Office, and have been instrumental in helping to shape the vision for FIO as we move forward. 

 

Make no mistake, Treasury understands, appreciates, and respects the importance of the insurance sector to the U.S. economy, both as a risk transfer mechanism for individuals, families, and businesses, and an important participant in the capital markets.

 

The Federal Insurance Office is a significant development in the insurance world – and I mean that literally. In a role that will continue to expand, the United States, through FIO, for the first time, has a central, federal point of contact for the international insurance sector and for insurance supervisors from around the world. 

 

It has been gratifying that supervisors from every continent have warmly welcomed me and have shown a fantastic desire to work with FIO on major international issues.

 

For our country, this contact point could not arrive at a better time. Excluding health insurance, the United States constitutes more than 27 percent of global premium volume and an enormous concentration of revenue for internationally active insurance groups.

 

But the development of middle classes and increased market sophistication in many emerging economies suggest that our proportionate share of the world insurance market may decline over the next 10 years.  

 

FIO is well-positioned to express U.S. views, to assert appropriate U.S. leadership, and to work effectively with our international counterparts as these world dynamics continue to change.

 

The U.S. insurance marketplace is, itself, growing more international. The Reinsurance Association of America published a study in 2011 that reported that 60 percent of the U.S. reinsurance market was ceded to non-US reinsurers.

 

A recent McKinsey study showed that insurers are far more global today than ever before. Fifty years ago, insurers generated 5 percent or less of revenues from non-domestic countries. Today, insurers generate an astounding 33 percent of premium revenue from outside the insurer’s home country.

 

As you’d expect, this number varies by continent, with European insurers collecting approximately 65 percent of revenue from outside their home countries. In 2009 in the United States, that number was only 12 percent, which can be explained, in part, by the magnitude of the U.S. market compared to others.

 

But all of these marketplace insights tell us that we need to be attentive to, and engaged in, the development of international supervisory standards and regulatory changes.

 

FIO became a full member of the International Association of Insurance Supervisors (IAIS) this past October. The IAIS is engaged in some major initiatives.

 

Its Financial Stability Committee, chaired by Peter Braumueller of Austria, is developing a formula or methodology to identify globally significant insurance institutions. FIO has been engaged in this discussion since July, and we have developed a solid working relationship with our international counterparts in this effort.

 

We – FIO – are working to develop an international process for designating globally systemically important insurers that aligns with the criteria and timing laid out by the U.S. Financial Stability Oversight Council. 

 

I’m pleased to report that the consensus appears to be moving in that direction. As you may have observed, the IAIS has pushed back the date by which it will identify and recommend specific insurers to the Financial Stability Board.

 

The IAIS also is engaged with the Common Framework initiative, or “Com Frame,” led by Monica Machler of Switzerland. We’ve had initial and productive discussions about Com Frame with state regulators and our friends through the IAIS, and we’ll become increasingly engaged in the Com Frame during the first few months of this year. Monica is a very capable leader, and we look forward to working with her.

 

Of great interest to many here today, the EU’s Solvency II initiative calls for it to assess whether the quality and rigor of insurance regulation in the United States is equivalent to that of Solvency II. Solvency II has some excellent components, as does the U.S. system, and we look forward to providing national leadership in the discussion about equivalence in the near term. 

 

It is important to note the uncertainty within the insurance industry about the impact of Solvency II, and whether it will lead to any changes in the regulation of U.S.-based insurers at home. Insurers based overseas that generate significant revenue from the United States also express concern – to what extent do U.S. operations need to change?

 

Dating back to Treasury’s 2009 white paper entitled “Financial Regulatory Reform: A New Foundation,” a key role envisioned for FIO is to enhance the international competitiveness of the American insurance industry and to expand opportunities for the insurance industry to export its services. In this context, continuing priorities for FIO will be to ensure that the regulatory systems of one country or continent do not disadvantage insurers based elsewhere, and that we not pursue “reform” without fully understanding the impact on the U.S.-based insurance industry and consumers.  

 

With these priorities in mind, we look forward to working closely and frequently with our international counterparts in 2012.

 

To be clear, FIO is not a regulator – that remains the province of the states. 

 

In June, I concluded more than six years as the Illinois insurance commissioner and have great respect for the work of state regulators. State regulators have broad daily responsibilities, including solvency oversight, product form approval, consumer complaints, and producer licensing. 

 

In fact, with the advent of the new year, I reflected on the first half of 2011, which I spent mostly in Springfield helping to draft, analyze, and negotiate bills that, among other things, improved mental health parity, entitled an insured patient to an independent third party review of a denied claim, and overhauled the state’s approach to workers compensation with the objective of reducing the underlying cost drivers. 

 

The leadership of the state regulators, the NAIC officers, is a diverse, thoughtful and extremely competent group, all of whom deal each day with state legislative or regulatory matters similar to complex daily myriad with which I dealt.

 

The incoming president, Kevin McCarty of Florida, is appropriately recognized as an experienced, capable leader and regulator, just as was his predecessor, Susan Voss of Iowa. Kevin and Susan, and the other state regulatory leaders, are not only former colleagues, they are also good friends. 

 

While we have laid the groundwork for an excellent and mutually complementary relationship, together we will continue to confront entirely new situations and uncharted territory. I am entirely confident that we will continue to find our way, to collaborate professionally, and to focus on what’s best for the U.S. insurance industry and consumers.

 

This collaboration is essential as we fulfill FIO’s statutory mission to develop and coordinate federal policy on international insurance regulatory matters. In fulfillment of that mission, we will, of course, also work with other agencies of the federal government.

 

As you well know, systemic risk is an issue of interest to the insurance sector. The Financial Stability Oversight Council was created, among other things, to identify and respond to threats to financial system stability, including the identification and designation of systemically important non-bank financial institutions. FIO is an advisory member of the Council, and I enjoy working with all members of the Council, including Roy Woodall, the Council’s independent insurance expert, and Director John Huff of Missouri, the state insurance commissioner. 

 

A couple months ago we announced the membership of our Federal Advisory Committee on Insurance, a committee subject to the diversity mandates of the Federal Advisory Committee Act. The Federal Advisory Committee on Insurance represents the wide range of interests and experts within the insurance sector.

 

To that end, seven of the 15 Committee members are currently serving as state commissioners, and we selected eight additional members from an excellent pool of applicants representing consumers, academia, reinsurance, a mutual property and casualty insurer, a publicly traded property and casualty insurer, a life insurer, an independent agent, a consumer, and the CEO of perhaps the largest insurance producer firm in the world.

 

I look forward to working with and receiving the insights of the Advisory Committee. 

 

Another key responsibility of the FIO is to “monitor all aspects of the insurance industry.” Of course, different people have offered different views about what monitoring will look like and what constitutes an “aspect” of the insurance industry. 

 

Circumstances will largely influence our focus at times, but it definitely does not mean that FIO will sit idly by while the world spins. 

 

FIO is poised to be flexible enough to not only be responsive to current events affecting the insurance industry, but also to take the lead in facilitating dialogue and direction regarding the insurance sector both nationally and internationally.

 

FIO will be increasingly well-suited to be engaged and assertive, when necessary, to offer views, leadership, and guidance on insurance in the United States. We intend to become a source of expertise within the federal government, expertise that understands all aspects of the marketplace, regulation, and international matters. 

 

Of course, much of our effort will involve data analysis. I understand some in the industry question the need for FIO’s authority to ask for and receive information. Some have reported, in fact, that something of a cottage industry has developed around concerns that FIO will duplicate the data and document requests that insurers receive from state regulators.

 

These concerns are not well-founded.

 

The law is clear that FIO must first seek any information it needs from a public source or from another regulator, including the states. Only if the information is unavailable from either of those sources does FIO then directly ask an insurer for information.

 

In that same vein, FIO’s subpoena authority is an important component of our mission. Remember that authority will be exercised only if (1) the information is not publicly available, and (2) the information is not available to FIO from a regulator. 

 

Subpoena authority is an authority to use as a last resort for critical information that the office may need, and is intended to be used only in the absence of another viable source to obtain that information.

 

We are aware of the reasons that the statute explicitly defines when information can be requested directly from an insurer, and I respect those reasons.

 

***

 

You may have heard that FIO is preparing a report on how to improve and modernize the system of insurance regulation in the United States. Of course, for the reasons I mentioned earlier, the U.S. system should be evaluated in the context of the international marketplace and international regulatory developments.

 

For purposes of developing this report, on October 17th, we published a Federal Register Notice seeking comment from interested parties, and the comment period closed on December 19th. We welcomed comments on all relevant topics from any interested party. We are grateful for every one of the nearly 150 comments received, all of which are posted on the internet at Regulations.gov. 

 

In addition to the comments, we held dozens of meetings with interested parties, including consumer advocates, industry representatives, agent and broker associations, academics, and state government associations.

 

On December 9th, we held a conference at the Treasury Department in Washington. 

Given the limitations of space we were not able to host even a fraction of all who expressed interest in attending, but we did broadcast the conference online and a video of the conference is available on the Treasury web site.

 

In the conference we sought panelists’ views on marketplace regulation, prudential oversight and international matters. On international matters, we reached agreement: all panelists agreed that FIO’s leadership role is a tremendous step forward and of critical importance. On the other hand, marketplace and prudential oversight stimulated a robust discussion, but rather little agreement. 

 

Indeed, the conference highlighted the diversity within the insurance sector on even the most basic questions. Issues such as product approval, producer licensing and group supervision all generated healthy debate. Many of the alternative views offered in the conference are also reflected in different ways through the written comments received in reply to the Federal Register Notice.

 

Now, we know that you are very interested in the report. It goes without saying that this first report of FIO is a significant and broad undertaking. But while the report is one big task, and an important platform for future FIO efforts, it is also a small slice of our total responsibility. 

 

As I said during the conference on December 9th, we could write until the Cubs win the World Series and still not address every issue that warrants improvement or modernization. That’s simply a fact.

 

You should assume that this will not be FIO’s last report. We will continue to study, report on and discuss a variety of issues important to the insurance sector, to the industry, and to insurance consumers.

 

We will be active and engaged. We will provide the single point of contact, and voice, for the United States on international insurance regulatory matters. We will be in regular contact with all aspects of the sector – the states, industry, and consumers – as we define and fulfill our statutory authority.  And we expect to be prolific.

 

At every point, our priorities will be a strong American economy, the creation of jobs for the American people, protection of our insurance consumers, and the fairness and efficiency of both the national and international insurance marketplaces.

 

Thank you for your attention. I look forward to working with all of you as we develop and build FIO. I hope you enjoy the rest of the conference.