Insurance Regulation: Legislation in the 115th Congress
Released: 2018-10-19T00:00:00

Background

Insurance companies constitute a major segment of the U.S. financial services industry. The industry is often separated into two parts: life and health insurance companies , which also often offer annuity products, and property and casualty insurance companies , which include most other lines of insurance, such as homeowners insurance, automobile insurance, and various commercial lines of insurance purchased by businesses. In 2017, premiums for life and health insurance companies totaled $592.2 billion with assets totaling $7.07 trillion, and premiums for property and casualty insurance companies totaled $556 billion with assets totaling $1.98 trillion.

Different lines of insurance present different characteristics and risks. Life insurance typically is a longer-term proposition with contracts stretching over decades and insurance risks that are relatively well defined in actuarial tables. Property and casualty insurances typically are shorter-term propositions with six-month or one-year contracts and have greater exposure to catastrophic risks. Health insurance has evolved in a different direction, with many insurance companies heavily involved with health care delivery, including negotiating contracts with physicians and hospitals, and a regulatory system much more influenced by the federal government through Medicare, Medicaid, the Employee Retirement Income Security Act of 1974 (ERISA), and the Patient Protection and Affordable Care Act (ACA). This report concentrates primarily on the regulation of property and casualty insurance and life insurance.

Insurance companies, unlike banks and securities firms, have been chartered and regulated solely by the states for the past 150 years. Legal and legislative landmarks in the state-based insurance regulatory system have included Supreme Court decisions in 1868 ( Paul v. Virginia ) and 1944 ( U.S. v. South-Eastern Underwriters Associa t ion ) and federal legislation in 1945 (the McCarran-Ferguson Act). The McCarran-Ferguson Act specifically preserved the states' authority to regulate and tax insurance and also granted a federal antitrust exemption to the insurance industry for "the business of insurance." There are no federal insurance regulators akin to those for securities firms or banks, such as the Securities and Exchange Commission (SEC) or the Office of the Comptroller of the Currency (OCC), respectively.

Each state government has a department or other entity charged with licensing and regulating insurance companies and those individuals and companies selling insurance products. States regulate the solvency of the companies and the content of insurance products as well as the market conduct of companies. Although each state sets its own laws and regulations for insurance, the National Association of Insurance Commissioners (NAIC) acts as a coordinating body that sets national standards through model laws and regulations. NAIC-adopted models, however, must be enacted by the states before having legal effect, which can be a lengthy and uncertain process. The states have also developed a coordinated system for insurer resolution, including guaranty funds designed to protect policyholders in the event of insurer insolvency.

Since the passage of the McCarran-Ferguson Act, both Congress and the federal courts have taken actions that have somewhat expanded the reach of the federal government into the insurance sphere. The insurance industry has often been divided over the possibility of federal actions affecting insurance. States typically, though not always, have resisted federal actions, arguing that states are better positioned to regulate insurance and address consumer complaints and that states have engaged in concerted actions to address concerns raised at the federal level. The two large legislative overhauls of financial regulation in the past two decades, the Gramm-Leach-Bliley Act of 1999 (GLBA) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), expanded the federal role in insurance, but states continued as the primary regulators of insurance following these acts.

GLBA removed legal barriers between securities firms, banks, and insurers, allowing these firms to coexist under a financial holding company structure. Under the act, such a holding company was overseen by an umbrella regulator—the Federal Reserve for holding companies that included bank subsidiaries or the Office of Thrift Supervision (OTS) for holding companies with thrift or savings association subsidiaries. Within a holding company, GLBA established a system of functional regulation for the bank, thrift, securities, and insurance subsidiaries. This meant that insurance company subsidiaries within a bank or thrift holding company were functionally regulated by state insurance authorities, with limited oversight by the holding company's federal regulator.

The Dodd-Frank Act altered the post-GLBA regulatory structure, but left the basic functional regulatory paradigm largely the same. The act gave enhanced systemic risk regulatory authority to the Federal Reserve and to a newly created Financial Stability Oversight Council (FSOC), including some oversight authority over insurers. The act created a new Orderly Liquidation Authority (OLA), which potentially could result in the Federal Deposit Insurance Corporation (FDIC) overseeing the resolution of insurers. The authority to oversee holding companies, including those with insurance subsidiaries, was consolidated in the Federal Reserve with additional capital requirements added. The Dodd-Frank Act also included measures affecting the states' oversight of surplus lines insurance and reinsurance and created a new Federal Insurance Office (FIO) within the Department of the Treasury.

Following the financial crisis of 2007-2009 and Dodd-Frank, international insurance issues have been of greater interest to Congress. The Financial Stability Board (FSB) named several U.S. insurers as global systemically important insurers (G-SIIs), and the International Association of Insurance Supervisors (IAIS) has been developing a multifaceted set of regulatory standards to apply to G-SIIs and other internationally active insurers. The United States and the European Union (EU) negotiated a covered agreement addressing a long-standing dispute over reinsurance collateral as well as questions about how U.S. insurers would be treated under the EU's new "Solvency II" regulatory regime.

Legislation in the 115th Congress

Possible insurance regulatory issues before the 115 th Congress include

overseeing the implementation of, and possible amendments to, the Dodd-Frank Act, including specific legislation, such as P.L. 115-61 , H.R. 10 , H.R. 3746 / S. 2702 , H.R. 3861 , and H.R. 4483 ; narrowly reforming the current regulatory system, such as H.R. 3363 ; and responding to international developments, such as the development of international standards by the IAIS, with oversight and specific legislation, such as P.L. 115-174 , S. 1360 , and H.R. 3762 / H.R. 4537 / S. 488 .

Enacted Legislation

Financial Stability Oversight Council Insurance Member Continuity Act (P.L. 115-61/S. 1463/H.R. 3110)

S. 1463 was introduced by Senator Mike Crapo on June 28, 2017; it was ordered to be reported favorably on a voice vote by the Senate Committee on Banking, Housing, and Urban Affairs on September 9, 2017. H.R. 3110 was introduced by Representative Randy Hultgren on June 29, 2017; it was reported by the House Committee on Financial Services by a vote of 60-0 ( H.Rept. 115-293 ) on September 5, 2017. H.R. 3110 passed the House by a vote of 407-1 on September 5, 2018, and passed the Senate by unanimous consent on September 19, 2018. President Trump signed the bill on September 27, 2017 ( P.L. 115-61 ).

P.L. 115-61 amends the Dodd-Frank Act's language creating an independent member with insurance expertise, who serves on the FSOC. Specifically, the law adds language allowing the independent member to serve up to 18 months after the end of his or her 6-year term or until a successor is appointed and confirmed. The first independent member, S. Roy Woodall, was confirmed on September 26, 2011. President Trump nominated Thomas E. Workman to the position on January 8, 2018, and the Senate confirmed Mr. Workman on March 21, 2018.

Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174/S. 2155)

S. 2155 was introduced by Senator Crapo and 19 cosponsors on November 16, 2017. The bill was marked up and reported on a vote of 16-7 by the Senate Committee on Banking, Housing, and Urban Affairs in December 2017. It passed the Senate by a vote of 67-31 on March 14, 2018. The House passed S. 2155 without amendment on May 22, 2018, and the President signed the bill into P.L. 115-174 on May 24, 2018. P.L. 115-174 includes a broad range of financial services provisions largely dealing with noninsurance issues. As introduced, it included no provisions focused on insurance, but a new section was added in the Senate committee markup with language similar to S. 1360 (discussed below).

Section 211 of P.L. 115-174 finds that the Treasury, Federal Reserve, and FIO director shall support transparency in international insurance fora and shall "achieve consensus positions with State insurance regulators through the [NAIC]" when taking positions in international fora. It creates an "Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues" at the Federal Reserve made up of 21 members with expertise on various aspects of insurance. The Federal Reserve and the Department of the Treasury are to complete both an annual report and provide testimony on the ongoing discussions at the IAIS through 2022, and the Federal Reserve and FIO are to complete a study and report, along with the opportunity for public comment and review by the Government Accountability Office (GAO), on the impact of international capital standards or other proposals prior to agreeing to such standards. Unlike S. 1360 , however, the enacted law does not have specific requirements on the final text of any international capital standard. After signing S. 2155 , the President released a statement indicating that the congressional directions in the findings contravene the President's "exclusive constitutional authority to determine the time, scope, and objectives of international negotiations" but that the President will "give careful and respectful consideration to the preferences expressed by the Congress in section 211(a) and will consult with State officials as appropriate."

House- or Senate-Passed Legislation

The Financial CHOICE Act (H.R. 10)16

H.R. 10 was introduced by Representative Jeb Hensarling on April 26, 2017, reported ( H.Rept. 115-153 ) by the House Financial Services Committee on May 25, 2017, and passed by the House by a vote of 233-186 on June 8, 2017. H.R. 10 would make a broad range of changes to the financial regulatory system, including some insurance-related regulations, although insurance regulation is not a primary focus of the bill.

Title X of H.R. 10 would amend the Dodd-Frank Act to merge Treasury's FIO and the FSOC's independent insurance expert position, creating the Office of Independent Insurance Advocate, a new independent bureau within Treasury. The Independent Insurance Advocate would be appointed by the President and confirmed by the Senate and an FSOC voting member. The office would take over many, but not all, of the FIO director's duties, including such changes as the advocate would have the authority to observe the insurance industry, rather than FIO's charge to monitor the insurance industry; would not be required to monitor the access of underserved communities to insurances, as FIO currently is; and would not have the authority to require the submission of data from the industry that FIO currently has. H.R. 10 would also add an additional public notice and comment period for any covered agreement.

Section 115(a) of H.R. 10 would repeal the nonbank designation authority and the application of enhanced prudential requirements by the Federal Reserve.

Section 111(a) of H.R. 10 would repeal all of Dodd-Frank Title II, which created OLA, and replace it with a new chapter of the Bankruptcy Code for financial firms, but one that would not apply to insurers. Thus, any insurer failure would be resolved by the state resolution system.

International Insurance Standards Act (H.R. 4537/S. 488, Title XIV)

Representative Sean Duffy along with seven additional cosponsors introduced H.R. 4537 on December 4, 2017. (A substantially similar bill, H.R. 3762 , was previously introduced and addressed in an October 24, 2017, hearing by the House Financial Services' Subcommittee on Housing and Insurance.) H.R. 4537 was marked up and ordered reported on a vote of 56-4 by the House Committee on Financial Services on December 12-13, 2017. It was reported ( H.Rept. 115-804 ) on July 3, 2018. The House considered a further amended version on July 10, 2018, and passed it under suspension of the rule by a voice vote.

S. 488 was originally introduced by Senator Pat Toomey as the Encouraging Employee Ownership Act, increasing the threshold for disclosure relating to compensatory benefit plans. After Senate passage on September 11, 2017, it was taken up in the House and amended with a number of different provisions, mostly focusing on securities regulation. Title XIV of the amended version of S. 488 , however, is nearly identical to H.R. 4537 as it passed the House.

H.R. 4537 as passed by the House and S. 488 as passed by the House would institute a number of requirements relating to international insurance standards and insurance covered agreements. U.S. federal representatives in international fora are directed not to agree to any proposal that does not recognize the U.S. system as satisfying that proposal. Such representatives would be required to consult and coordinate with the state insurance regulators and with Congress prior to and during negotiations and to submit a report to Congress prior to entering into an agreement.

With regard to future covered agreements, the bill would require U.S. negotiators to provide congressional access to negotiating texts and to "closely consult and coordinate with State insurance commissioners." Future covered agreements are to be submitted to Congress for possible disapproval under "fast track" legislative provisions. The Congressional Budget Office's (CBO's) cost estimate on H.R. 4537 as reported from committee found that,

Any budgetary effects of enacting H.R. 4537 would depend, in part, on how often the United States negotiates international insurance agreements and how frequently the negotiators must consult and coordinate with state insurance commissioners. CBO has no basis for predicting that frequency but expects that the cost of such consultations would be less than $500,000 per year.

State Insurance Regulation Preservation Act (H.R. 5059)

H.R. 5059 was introduced by Representative Keith Rothfus with cosponsor Representative Joyce Beatty on February 15, 2018. The House Financial Services' Subcommittee on Housing and Insurance held a hearing on the bill on March 7, 2018, and the full committee marked up the bill on July 24, 2018. An amended version was reported ( H.Rept. 115-937 ) on September 12, 2018, and the House passed the bill by a voice vote on the same day. The Senate has not acted on the legislation.

H.R. 5059 as passed by the House would define a new category of "insurance savings and loan companies" consisting primarily of (1) savings and loan holding companies whose asset holdings are at least 75% in their insurance subsidiaries, or (2) savings and loan holding companies which maintained that status continually since July 21, 2010, and which held 25% or more of their assets in insurance underwriting companies and were thus exempt from the Federal Reserve's Basel III capital requirements promulgated in October 2013. In the Federal Reserve's oversight of such companies, the Fed is directed to "the fullest extent possible" to align record keeping and coordinate examinations with the s tate insurance regulators and to not unnecessarily duplicate the supervision of insurers by the states. The bill also would require the Fed to promulgate rules specifically tailoring its supervisory framework to insurers' unique risks and operations and would exempt insurance assets (except for those assets associated with credit risk insurance) from supervisory assessment fees. CBO's cost estimate on the bill found that,

The exemption for certain supervisory assessment fees, however, would result in a reduction in federal revenues. CBO estimates that in 2016 about 5 percent ($25 million) of such fees were paid by firms that would be exempt under H.R. 5059 . Because the fees reduce the firms' base for income and payroll taxes, CBO estimates that the decline in fees would be partially offset by higher income and payroll taxes and that the net reduction in revenues under the legislation would total $261 million over the 2019-2028 period.

Committee-Reported Legislation

Business of Insurance Regulatory Reform Act (H.R. 3746/S. 2702)

H.R. 3746 was introduced by Representative Sean Duffy with cosponsor Representative Gwen Moore on September 12, 2017. It was addressed in a December 7, 2017, hearing by the House Financial Services' Subcommittee on Financial Institutions and Consumer Credit, was marked up and ordered reported by the House Financial Services Committee by a vote of 37-18 on January 18, 2018, and was reported ( H.Rept. 115-668 ) on May 10, 2018. S. 2702 , a nearly identical bill to the reported version of H.R. 3746 , was introduced by Senator Tim Scott with three cosponsors on April 18, 2018.

H.R. 3746 and S. 2702 would amend the Dodd-Frank Act to "clarify" the authority of the Consumer Financial Protection Bureau (CFPB) over the business of insurance. The bills would add further language to the current statute which limits CFPB authority over the business of insurance and would direct that enforcement should be "broadly construed in favor of the authority of a State insurance regulator." CBO's cost estimate on the House bill found "no significant effect on the agency's costs or operations because the bill would primarily codify current agency enforcement practices" but that it "could reduce civil penalties collected by the CFPB ... by slightly limiting the scope of enforcement cases the agency may pursue."

Introduced Legislation

International Insurance Capital Standards Accountability Act of 2017 (S. 1360)

S. 1360 was introduced by Senator Dean Heller with cosponsor Senator Jon Tester on June 14, 2017, and referred to the Senate Committee on Banking, Housing, and Urban Affairs. Similar language to S. 1360 was added to P.L. 115-174 / S. 2155 as discussed above.

S. 1360 would create an "Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues" at the Federal Reserve made up of 11 members with expertise on various aspects of insurance. It would require both an annual report and testimony from the Federal Reserve and the Department of the Treasury on the ongoing discussions at the IAIS through 2020. The Federal Reserve and FIO would be required to complete a study and report, along with the opportunity for public comment and review by the Government Accountability Office (GAO), on the impact of international capital standards or other proposals prior to agreeing to such standards. Any final text of an international capital standard would be required to be published in the Federal Register for comment and could not be inconsistent with either state or Federal Reserve capital standards for insurers.

Claims Licensing Advancement for Interstate Matters Act (H.R. 3363)

H.R. 3363 was introduced by Representative David Kustoff on July 24, 2017, and referred to the House Committee on Financial Services. This bill would preempt state laws requiring claims adjuster licensing and allow insurance claims adjusters to apply for membership in the National Association of Registered Agents and Brokers (NARAB; created in P.L. 114-1 ) and thus operate in multiple states under NARAB. This preemption would apply four years after enactment and only for states that do not enact laws allowing for uniformity and reciprocity in claims adjuster licensing. It would not apply to states that do not require a license for claims adjusting.

International Insurance Standards Act of 2017 (H.R. 3762)

H.R. 3762 was introduced by Representative Sean Duffy with cosponsor Representative Denny Heck on September 13, 2017. It was addressed in an October 24, 2017, hearing by the House Financial Services' Subcommittee on Housing and Insurance, but has not been the subject of further committee action. The sponsor introduced an identically titled and substantially similar bill, H.R. 4537 , which was ordered reported by the House Committee on Financial Services on December 13, 2017. See the above section on H.R. 4537 for more information on the bill.

Federal Insurance Office Reform Act of 2017 (H.R. 3861)

H.R. 3861 was introduced by Representative Sean Duffy with cosponsor Representative Denny Heck on September 28, 2017. It was addressed in an October 24, 2017, hearing by the House Financial Services' Subcommittee on Housing and Insurance, but has not been the subject of further committee action.

H.R. 3861 would amend the Dodd-Frank Act provisions creating the Federal Insurance Office, generally limiting the focus and size of FIO. It would place FIO specifically within the Office of International Affairs and narrow its function in international issues to representing the Treasury rather than all of the United States and require FIO to reach a consensus with the states on international matters. The bill would remove FIO's authority to collect and analyze information from insurers, including its subpoena power, and issue reports with this information. The authority to preempt state laws pursuant to covered agreements would now rest with the Secretary of the Treasury, and FIO would be limited to five employees.

Federal Insurance Office Abolishment Act of 2017 (H.R. 4483)

H.R. 4483 was introduced by Representative Alexander Mooney along with two cosponsors on November 29, 2017. The bill would abolish FIO, striking the Dodd-Frank Act provisions that created FIO. A section relating to covered agreements would remain in law, however, without the preemption authority vested in the director of FIO. H.R. 4483 would remove the FIO director as a nonvoting member of FSOC and replace the FIO director with the Secretary of the Treasury where the FIO director has a role in nonbank stress testing and orderly liquidation authority.

Fair Auto Insurance Ratemaking Reporting to Allow a Transparent Evaluation of Statistics Act of 2018 (H.R. 4885)

H.R. 4885 was introduced by Representative Mark Takano along with six cosponsors on January 25, 2018. The bill would require the FIO director to collect a variety of data on automobile insurance in order to conduct a study and report on disparities in premiums costs and claims payments between geographical areas having a majority of residents who are racial minorities and those areas having a majority of residents who are not racial minorities. The FIO director is to commence the data collection with federal and state agencies before seeking data from third-party intermediaries and then directly from insurance companies. Upon submission of the report, the collected data are to be made publicly available except for any insured's personally identifiable information.

Prohibit Auto Insurance Discrimination Act (H.R. 5502)

H.R. 5502 was introduced by Representative Bonnie Watson Coleman on April 12, 2018. It was referred to the House Committee on Financial Services and the House Committee on Energy and Commerce. The bill would prohibit insurers from using a number of factors in offering or setting rates for personal automobile insurance, including education, occupation, employment status, home ownership, credit score, and previous insurance purchase. It also would require that all insurer underwriting rules and rate filings be publicly available. The act would be enforced by the Federal Trade Commission and may also be enforced by the states.

Primary Regulators of Insurance Vote Act of 2018 (H.R. 5666/S. 3177)

H.R. 5666 was introduced by Representatives Dennis Ross with cosponsor Representative Denny Heck on April 27, 2018. It was referred to the House Committee on Financial Services. S. 3177 was introduced by Senator Tim Scott with cosponsor Senator Doug Jones on June 28, 2018. It was referred to the Senate Committee on Banking, Housing, and Urban Affairs. The bill would amend the Dodd-Frank Act to add a state insurance commissioner as a voting member of the Financial Stability Oversight Council to be appointed by the President and confirmed by the Senate for a four-year term. The current, nonvoting insurance commissioner position on FSOC would be repealed.