On July 15, 2010, the U.S. Senate passed The Dodd-Frank Wall Street Reform and Consumer Protection Act. The House previously passed it on June 30, 2010. President Obama signed it into law on July 21, 2010.

The legislation is voluminous and extensive. It contains many provisions regulating the financial services industry. Its reach extends to the consumer financial, banking, swaps and derivatives, hedge funds, insurance, and other financial sectors.

In this article, we focus mainly on the impact of the new legislation on the operation of insurance companies and the business of insurance.

The key insurance provisions of the Act, contained in Title V, are summarized below:

• Title I of the Act creates the Financial Stability and Oversight Council (FSOC). The Council' tasks are to identify risks to the financial stability of the U.S., promote market discipline and respond to emerging risks in the U.S. financial system. The Council has the power to require a financial company, including an insurance holding company, to be regulated by the Federal Reserve if its financial distress or its nature, size, scale, concentration, interconnectedness or mix of activities would pose a threat to the country's financial stability. This is the government's attempt to avoid a future AIG situation.
• The Act creates the Federal Insurance Office (F10). The FIO's authority will reach all lines of insurance except health insurance, most long-term care insurance and crop insurance. The FIO will collect information, monitor the insurance industry and make recommendations on modernizing and improving insurance regulation in the United States. Also, the FIO is authorized to preempt state laws if such laws conflict with the objectives of certain international insurance agreements.
• The Act tries to establish national uniformity in two areas of insurance regulation, the non-admitted insurance market and reinsurance.
• The Act gives large commercial purchasers of insurance an easier means to purchase coverage from non-admitted companies, including companies outside the United States.
• The Act requires credit for reinsurance to be recognized for a ceding company if it is allowed by the ceding company's domiciliary state, preempts the extraterritorial application of most laws regarding reinsurance from states that are not the ceding company's domicile, and places the power to regulate reinsurer financial solvency primarily with the reinsurer's domiciliary state.

Creation of the Federal Insurance Office

The Act creates the Office of National Insurance (OFI) within the Department of the Treasury. The authority of the OFI will extend broadly to all lines of insurance, except health insurance, long-term care insurance which is not part of a life or annuity insurance product and crop insurance. The OFI will:

• Monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system;
• Monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance (except health);
• Recommend that the FSOC designate an insurer, including the affiliates of such insurer, as an entity that should be subject to regulation by the Federal Reserve Board on the basis that such insurer or affiliate presents a potential risk to the financial system;
• Assist the Secretary of the Treasurer in administering the Terrorism Risk
  Insurance Program, implemented by the Department of the Treasury;
• Coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors;
• Assist the Secretary in negotiating covered agreements with foreign jurisdictions;
• Determine whether state insurance measures are preempted by covered agreements between the United States and foreign jurisdictions;
• Consult with the states regarding insurance matters of national importance and prudential insurance matters of international importance.

Reports

In addition, the Act requires the FIO to prepare a series of reports, as follows:

• Annually, beginning on September 30, 2011, a report to the Congress on the insurance industry.
• On September 30, 2012, a report to the Congress on the breadth and scope of the global reinsurance market and to update that report on January 1, 2003.
• On January 1, 2015, a report to the Congress on the impact of the reinsurance provisions of the Non-Admitted Reinsurance and Reform Act of 2010 (NARRA) and on the ability of state regulators to assess reinsurance information for regulated companies in their jurisdiction.
• Not later than 18 months following enactment, the Director is required to submit a report to Congress on how to modernize and improve the system of insurance regulation in the United States. That report will address:
  • systemic risk regulation as it pertains to insurance;
  • capital standards and the relationship between capital allocation and liabilities, including standards relating to liquidity and duration risk;
  • consumer protection for insurance products and practices, including gaps in state regulation;
  • the regulation of insurance companies and affiliates on a consolidated basis;
  • international coordination of insurance regulation;
  • the costs and benefits of potential federal regulation of insurance across various lines of insurance (except health);
  • the feasibility of only regulating certain lines of insurance at the federal level while leaving other lines of insurance to be regulated at the state level;
  • the ability of any federal regulation or federal regulators to minimize regulatory arbitrage;
  • the impact that developments in the regulation of insurance in foreign jurisdictions might have on potential federal regulation of insurance
  • the ability of any potential federal regulation or federal regulator to provide robust consumer protection for policyholders;
  • the potential consequences of subjecting insurance companies to a federal resolution authority, including the impact such authority would have on the operation of state insurance guaranty systems (including the loss of guaranty fund coverage), on policy-holder protection (including the loss of priority status of policy-holder claims), and, in the case of life insurance companies, on the loss of the special account status of separate account assets and separate account liabilities, and on the international competitiveness of insurance companies; and
  • legislative, administrative, or regulatory recommendations the Director considers to be appropriate to carry out findings contained in the report.

Requesting Information

To monitor the insurance industry effectively, the FIO is empowered to require any insurer or affiliate to submit requested data and information to the FIO. There is an

exemption for small insurers, as may be later defined by the FIO. Before imposing an information reporting obligation on insurers, the FIO must first seek to obtain the information from other agencies or public sources. Under certain circumstances, the FIO is authorized to issue subpoenas to obtain requested information.

States' Regulatory Authority

The Act generally preserves the ability of state insurance regulators to supervise the business of insurance but authorizes the FIO to preempt state measures that, in the FIO's judgment, are inconsistent with covered agreements or otherwise result in less favorable treatment of insurers domiciled in foreign jurisdictions that are subject to covered agreements than the treatment accorded to United States insurers that are admitted in the state.

Before making a preemption determination, the FIO must notify and consult with the relevant state regulator and the U.S. Trade Representative regarding any potential inconsistency or preemption, publish in the Federal Register notice of the issue regarding the potential inconsistency or preemption, provide interested parties a reasonable opportunity to submit written comments to the FIO and consider any comments received.

Any preemption action must be limited to the subject matter contained within the applicable international insurance agreement and must achieve a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation.

In any event, the FIO's preemptive authority does not extend to the preemption of any state insurance measure that governs an insurer's rates, premiums, underwriting, or sales practices; any state coverage requirements for insurance; the application of state antitrust laws to the business of insurance; or any state insurance measure governing the capital or solvency of an insurer, except to the extent that such state insurance measure results in less favorable treatment of a non-U.S. insurer .

Nonadmitted Reinsurance and Reform Act of 2010

This section restricts states, other than the home state, from charging premium tax for nonadmitted insurance. This section becomes effective 12 months after the effective date of the Dodd-Frank Act. Under this section:

• States can enter into compacts to allocate income from premium taxes imposed by the home state on nonadmitted insurance;
• Surplus line brokers and insureds will be required to deliver reports to assist in the allocation of such premium tax income;
• Placement of nonadmitted insurance and surplus line broker licensing will be handled by the insured's home state;
• A state cannot collect licensing fees from surplus line brokers unless the state has in effect NAIC-compliant surplus line broker regulations (effective two years after effective date of the Dodd-Frank Act)

Workers' compensation insurance is not affected by these provisions of the Dodd-Frank Act.

Reinsurance.

The Act contains several provisions that preempt state law governing reinsurance arrangements. The Act provides that if the state of domicile of a ceding insurer (the insurer purchasing the reinsurance) is NAIC-accredited or has financial solvency standards substantially similar to those mandated by the NAIC, and recognizes credit for reinsurance for the insurer's ceded risk, then no other state may deny such credit for reinsurance. In addition, all laws, regulations or actions on the part of a state that is not the domiciliary state of a ceding insurer, except those having to do with taxes, are preempted under Title V of the Dodd-Frank Act, if they:

• restrict or eliminate the rights of the ceding insurer or the assuming insurer to resolve disputes pursuant to contractual arbitration clauses to the extent such clauses are not inconsistent with the provisions of Title 9, United States Code;
• require that a certain state's law is to govern the reinsurance contract, disputes arising under the reinsurance contract, or requirements of the reinsurance contract;
• attempt to enforce a reinsurance contract on terms different than those set forth in the contract itself; or
• otherwise apply the laws of the state to reinsurance agreements of ceding insurers not domiciled in that state.

With respect to insolvency, the Act provides that states that are NAIC accredited or have financial solvency requirements substantially similar to those imposed by the NAIC are solely responsible for regulating the financial solvency of reinsurers domiciled in their state. In addition, no state may require a reinsurer to file financial information beyond that which the reinsurer is required to file with its domiciliary state. Non-domiciliary regulators are permitted to receive copies of information filed with domiciliary state regulators.

Commercial Purchasers

Surplus lines brokers that place coverage with a non-admitted insurer on behalf of purchasers that meet the statute's definition of "exempt commercial purchaser" are not required to satisfy any state requirement to conduct a due diligence search to determine if the insurance can be obtained from an admitted insurer if:

• the broker placing the insurance has informed the commercial purchaser that such insurance may or may not be available from the admitted market that may provide greater protection with more regulatory oversight
• the commercial purchaser has subsequently requested the non-admitted coverage from the broker in writing

For these purposes, an exempt commercial purchaser is defined as:

• a purchaser of insurance who employs or retains a qualified risk manager to negotiate insurance coverage;
• has paid over $100,000 in property and casualty insurance premiums in the past 12 months; and
• meets at least one of the following criteria:
  • possesses a net worth of $20 million;
  • generates $50 million in annual revenue;
  • employs more than 500 full-time employees or is a member of an
  • affiliated group that employs more than 1,000 full-time employees;
  • is a not-for-profit organization or public entity that generates annual
  • budgeted expenditures of $30 million; or
  • is a municipality with a population in excess of 50,000.

Non-Admitted Market Study

Within 30 months following enactment of the Dodd-Frank Act, the Comptroller General is directed to study, in consultation with the NAIC, the impact that the changes mandated by Title V of the Dodd-Frank Act have on the size and market share of the non-admitted market.

Kaufman Payton & Chapa will continue to monitor further developments with this Act. We are available to assist clients as they prepare to face the new requirements of the Act. Please feel free to contact Augustine O. Igwe, (248) 626-5000; aigwe@kaufmanlaw.com.