	Insurance and the Financial Crisis

Under the McCarran-Ferguson Act of 1945, insurance regulation is generally left to the individual states. For several years prior to the recent financial crisis, some Members of Congress had introduced legislation to federalize insurance regulation along the lines of the regulation of the banking sector, although none of this legislation reached the committee markup stage. The recent financial crisis, particularly the involvement of insurance giant American International Group (AIG) and the smaller bond insurers, changed the tenor of the debate around insurance regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. Federal Insurance Office

Title V, Subtitle A of the Dodd-Frank Act creates a Federal Insurance Office (FIO) inside of the Department of the Treasury. 5840 in the 110 th Congress, and in H.R. 2609 in the 111 th Congress. FIO is to monitor all aspects of the insurance industry and coordinate and develop policy relating to international agreements. It has the authority to preempt state laws and regulations when these conflict with international agreements. In addition to the language on annuities, Section 913 of the act may affect some insurance producers who also sell security products. Systemic Risk Provisions12

The Dodd-Frank Act provides for systemic risk provisions that affect the insurance industry primarily through oversight of firms deemed systemically significant and through specific financial resolution authority. Surplus Lines and Reinsurance15

Title V, Subtitle B of the Dodd-Frank Act is entitled the Nonadmitted and Reinsurance Reform Act of 2010 and includes essentially the same language as H.R. This language addresses a relatively narrow set of insurance regulatory issues pre-dating the financial crisis. In the area of nonadmitted (or "surplus lines") insurance, the act harmonizes, and in some cases reduces, regulation and taxation of this insurance by vesting the "home state" of the insured with the sole authority to regulate and collect the taxes on a surplus lines transaction. For reinsurance transactions, it vests the home state of the insurer purchasing the reinsurance with the authority over the transaction while vesting the home state of the reinsurer with the sole authority to regulate the solvency of the reinsurer.
In the aftermath of the recent financial crisis, broad financial regulatory reform legislation was advanced by the Obama Administration and by various Members of Congress. Ultimately Congress passed, and the President signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203).
The Dodd-Frank Act largely responded to the financial crisis that peaked in September 2008, but other efforts at revising the state-based system of insurance regulation also pre-date this crisis. Members of Congress previously introduced both broad legislation to federalize insurance regulation along the lines of the regulation of the banking sector, as well as more narrowly tailored bills addressing specific perceived flaws in the state-based system.
The financial crisis, particularly the role of insurance giant American International Group (AIG) and the smaller bond insurers, changed the tenor of the existing debate around insurance regulation, with increased emphasis on the systemic importance of some insurance companies. Although it could be argued that insurer involvement in the financial crisis suggested a need for full-scale federal regulation of insurance, the Dodd-Frank Act did not implement such a federal regulatory system for insurance.
Title V of the Dodd-Frank Act addressed specifically insurance, with a subtitle creating a Federal Insurance Office (similar to language originally contained in H.R. 2609) and a subtitle streamlining the existing state regulation of surplus lines and reinsurance (similar to language originally contained in H.R. 2572/S. 1363). The Federal Insurance Office is to monitor all aspects of the insurance industry and coordinate and develop policy relating to international agreements. It also has limited authority to preempt state laws and regulations when these conflict with international agreements. The act harmonizes, and in some cases reduces, regulation and taxation of surplus lines insurance by vesting the "home state" of the insured with the sole authority to regulate and collect the taxes on a surplus lines transaction. For reinsurance transactions, the act vests the home state of the insurer purchasing the reinsurance with the authority over the transaction while vesting the home state of the reinsurer with the sole authority to regulate the solvency of the reinsurer.
In addition to Title V's specific insurance provisions, various other parts of the act may affect insurers and the insurance industry, including provisions addressing systemic risk, consumer protection, investor protection, and securities regulation.
This report explains how insurance markets were affected by the financial crisis and summarizes the provisions of the Dodd-Frank Act that pertain to insurance. It will not be updated.