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The Dodd-Frank Act and insurers

Much has been written about the Dodd-Frank Wall Street Reform and Consumer Act (the Dodd-Frank Act) and how it applies to the banking industry, but there are also many implications for the insurance industry. The insurance industry survived the financial crisis in far better shape than the banking industry. It can even be argued that the problems faced by AIG, with its credit default swap business, were not strictly insurance-business related. However, AIG’s problems gave the impression that the insurance industry was implicated along with other financial services sectors, and so reform is required for the already heavily regulated industry.

State versus federal regulations

Title V of the Dodd-Frank Act spells out the changes for the insurance industry, in particular the creation of a Federal Insurance Office (FIO). The initial reaction to the act is that it does not impose undue burden on the insurance industry, since the FIO does not have any regulatory authority per se. The regulation of the insurance industry will remain at the state level. Nevertheless, the act could mean significant changes in the future since it represents the possible first steps toward a transfer of regulatory authority from the individual states to the federal government.

The argument of state versus federal regulations for the insurance industry has been debated for years by many people within the industry. While there are many pros and cons for either system, the general consensus is that the ability for insurance companies to introduce new products can be extremely cumbersome and costly as they must track and conform to regulations across 51 separate environments. This time-consuming process has resulted in a lack of innovation and caused the US insurance market to lag behind many other countries. As the insurance market becomes more global and Europe begins to implement Solvency II, US insurance companies need to make sure that they are not left behind. They need to ensure that the US is represented by a single, authoritative body when future discussions take place on regulations affecting the global insurance industry. Hence, the FIO will represent the US in any upcoming negotiations.

Responsibilities of the Federal Insurance Office

The first responsibility was to find a leader for this new organization. In March, Michael McRaith was named as the new Director of the FIO. He had previously been the director of the Illinois Department of Insurance. In addition, McRaith will sit on the Financial Stability Oversight Council that was also created as part of the Dodd-Frank Act.

The first mandate for the director of the FIO is to submit a report to Congress within 18 months after enactment of the Dodd-Frank Act, assessing the current state regulatory system and recommending improvements to the regulation of insurance in the United States. The FIO will apply to all insurance companies except those that sell health insurance, long-term care insurance and crop insurance. In addition to this report, other functions of the FIO include:

  • Data collection and analysis.
  • Systemic risk monitoring.
  • Advising on the Terrorism Risk and Insurance Act.
  • Monitoring the affordability and availability of insurance in underserved areas.
  • Recommending insurers for systemic risk supervision.

The Dodd-Frank Act may also affect insurance companies that sell registered securities products, such as variable life and variable annuity products, as the act recommends a move toward a fiduciary standard for retail broker-dealers. Plus, those insurance companies that own banks or thrifts will now be subject to additional requirements aimed broadly at the bank holding companies.


As with most regulations, it will be many years before the Dodd-Frank Act has been deemed a success or just another compliance burden. However, if the FIO manages to streamline the rules and regulations of the industry, enabling product innovation and global competition, it can only be a good thing.

Read more about the regulatory changes and insurers.

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