On May 9, Treasury announced that it is creating the Federal Advisory Committee on Insurance (FACI) to advise the Federal Insurance Office (FIO) and Treasury. This new Committee comes after consistent criticism by members of Congress, the National Association of Insurance Commissioners (NAIC), and various insurance trade associations regarding the lack of insurance expertise available to decision makers of financial reform measures. The Treasury press release specifically states that the FACI will provide advice to the FIO Director in the Director’s role as a member of the Financial Stability Oversight Council (FSOC). The Committee will function for a two-year period before renewal or termination and is expected to meet at least four times a year in Washington, D.C. The Committee will have 15 or less members, half of which will be state regulators. The remaining members are expected to represent a diverse range of perspectives from the property and casualty insurance industry, life insurance industry, the reinsurance industry, the agent and broker community, pubic advocates, and academia. The application period for interested candidates ended May 31.
On May 18, the SEC voted unanimously to propose new rules and amendments intended to increase transparency and improve the integrity of credit ratings. Under the SEC’s proposal, Nationally Recognized Statistical Rating Organizations (NRSROs) would be required to report on internal controls; protect against conflicts of interest; establish professional standards for credit analysts; provide public disclosure of credit rating methodologies; and enhance public disclosures about the performance of their credit ratings. The proposal also requires disclosure concerning third-party due diligence reports for asset-backed securities. The comment period will end 60 days after publication in the Federal Register which is expected shortly.
On May 25, the OCC issued a proposed rule implementing several provisions of the Dodd-Frank Act, including the transfer of functions from the Office of Thrift Supervision (OTS) and changes to national bank preemption and the OCC’s visitorial authority (i.e., the examination of banks, the inspection of their books and records, the regulation and supervision of banking activities, etc.). The OCC will assume responsibility for the ongoing examination, supervision, and regulation of federal savings associations on July 21. The preemption-related amendments include eliminating preemption for national bank operating subsidiaries, applying preemption standards and visitorial powers to federal thrifts and their subsidiaries, and revising the OCC’s visitorial powers rule to conform to the holding of the Supreme Court’s Cuomo decision recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks. Comments are due by June 27, 2010.
On May 12, the Senate banking committee held another hearing on the progress of Dodd-Frank. Federal regulators shared the progress of the Financial Stability Oversight Council (FSOC) as well as shed light on the Council’s structure and operations. The FSOC has a Systemic Risk Committee and subcommittees on institutions and markets plus five standing functional committees that support the FSOC’s work on specific tasks assigned by Dodd-Frank: designations of systemically important non-bank financial company; designations of financial market utilities and payment, clearing, and settlement activities; heightened prudential standards; orderly liquidation authority and resolution plans; and data collection and analysis. Every two weeks, a Deputies Committee comprised of senior officials from each of the member agencies meets to set the Council’s agenda, and to direct the work of the Council’s committees. In addition to outlining the positive steps the FSOC has made, Acting OCC Comptroller John Walsh offered cautionary notes regarding the Council’s future success. First, he highlighted the need for Council members to be willing and able to have candid discussions including being able to voice dissenting views or assessments to ensure that the Council is considering the full scope of issues. Further, that those types of deliberations be conducted in a confidential manner since they may involve information or findings that will need further verification; that are extremely sensitive either to the operation of a given firm or market segment; or, if misconstrued, that could undermine public investor confidence and thereby create or exacerbate a potentially systemic problem. Lastly, that it would be unrealistic to expect the FSOC to prevent all systemic financial events despite its best efforts since unforeseen events that may result in substantial risks to the system, markets, and industries are inevitable.
The testimonies also provided updates on the Federal Insurance Office (FIO), the Office of Financial Research (OFR), and the Consumer Financial Protection Bureau (CFPB). The Federal Insurance Office has become a provisional member of the International Association of Insurance Supervisors (IAIS), where it will represent the United States, and it is expected to be voted-in as a full member in the fall. The Office of Financial Research (OFR) is investigating how it might act as a central warehouse of data for the regulatory community and other ways in which it could facilitate data sharing. The OFR is currently looking to fill its senior personnel roles including Director, COO, Chief Data Officer, and Chief Business Officer. Economist Richard Berner recently joined Treasury as Counselor to the Secretary to oversee the implementation of the OFR. Current OFR staffers have been promoting the establishment of a global standard for identifying parties to financial transactions: a legal entity identifier (LEI). Deputy Secretary Neal Wolin projected that the OFR would have over 60 full-time employees by the end of September. Elizabeth Warren, Special Advisor to the Treasury Secretary, is leading the Treasury’s effort to build the Consumer Financial Protection Bureau. The CFPB will consolidate existing federal rulemaking authorities with respect to consumer financial products and services, have enforcement and supervision authority for depository institutions with over $10 billion in assets and their affiliates, as well as supervise the consumer financial services activities of many non-bank financial firms that sell consumer financial services. The Bureau has reached agreement with the six agencies with regards to a process for transferring staff to the CFPB that will minimize disruption to existing agencies and the CFPB will assume existing authorities on July 21. Title X of Dodd-Frank excludes select entities from the CFPB’s powers including insurers. Under Dodd-Frank, the Treasury Secretary will lead the CFPB until a director is appointed.
H.B 386 was recently introduced to amend Louisiana’s insurable interest statute to provide that a state retirement systems have an insurable interest in its members and retirees and to authorize a state retirement system to effectuate life insurance on its members and retirees. The bill is intended to benefit Louisiana’s four state retirement systems: the La. State Employees’ Retirement System, the Teachers Retirement System of La., the La. School Employees’ Retirement System, and the State Police Pension and Retirement System. We reached out to members of the legislative committee that is currently considering the bill to express our concerns regarding the bill. We question the efficacy of permanent life insurance plans in the context of tax-exempt entities since tax deferral is a material contributor to the economic attributes of these plans. We find it difficult to believe that such a plan could provide meaningful economic benefits to the state’s retirement systems.
BB&T has filed to voluntarily dismiss their complaint against defendant Clark Consulting. This filing follows a court order granting Clark Consulting a protective order preventing BB&T from obtaining certain documents and testimonies. According to the court order, MassMutual failed to respond to Clark Consulting’s motion for the protective order within the time allowed. The case remains open against MassMutual.
On May 17, it was announced that state regulators, working through the National Association of Insurance Commissioners (NAIC), have formed a special task force to help coordinate regulatory investigations involving the claim settlement practices of life insurance companies. The alleged practices include use of the Social Security Administration’s Death Master File (DMF) by insurers for purposes of terminating payments under annuity contracts, but failing to the use the same information to facilitate the payment of claims on life insurance policies. It is expected that state insurance regulators will push their legislators to amend their states’ claims settlement laws and/or the NAIC will issue model regulations to detail best-practices regarding due diligence for beneficiaries. Members of the newly created task force include California, Florida (chair), Illinois, Iowa, Louisiana, New Hampshire, New Jersey, North Dakota, Pennsylvania, and West Virginia. This month two public hearings were held on the subject; Florida held a public hearing with MetLife and Nationwide on May 19 and California also subpoenaed MetLife for its hearing on May 23.
Earlier this month, California Commissioner Dave Jones announced a market conduct examination of the 10 largest life insurers doing business in the state including John Hancock, MetLife, New York Life, Prudential, and Hartford. John Hancock has already settled with a number of states concerning use of the DMF for claims settlement practices. John Hancock agreed to pay $20 million to settle claims in California and to pay $3 million to three Florida agencies and establish a $10 million fund to help locate lost beneficiaries. Louisiana, 35 states, and the District of Columbia are participants in a settlement to recover approximately $1 million in unclaimed insurance proceeds from John Hancock as well.
It is not yet clear how these investigations and developments will impact the claim settlement practices of life insurance companies underwriting BOLI/COLI. We will track developments and report them accordingly.