Promises are made to be broken, right? And campaign promises seem to be broken more frequently than the garden-variety type.
So insurance brokers may breathe a sigh of relief that president-elect Donald Trump’s campaign pledge to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act might, well, never happen.
“Commercial insurance brokerage occupies just a fraction of the entirety of the financial services community, but I’m pretty confident saying we’re the only financial services sector who got good stuff out of Dodd-Frank, not bad stuff,” says Joel Wood, senior vice president of government affairs for The Council.
And fortunately for brokers, complete repeal of Dodd-Frank appears extremely unlikely. Although Republicans retain control of the Senate, they fall far short of the numbers needed to cut off a Democratic filibuster. “Unlike in Obamacare, where there’s a budget bill that can get through on a simple majority in the Senate, you don’t have anything like that in Dodd-Frank,” says R.J. Lehmann, a senior fellow at the pro-free-market R Street Institute in Washington.
“Dodd-Frank is a massive piece of legislation that significantly changed the way finance is regulated,” says Aaron Klein, a fellow in economic studies at the Brookings Institution’s Center on Regulation. “You can’t simply repeal and go back to the way things were. The world has evolved.”
The Nonadmitted and Reinsurance Reform Act
Brokers’ biggest concern is one small part of the massive financial regulation law—the Nonadmitted and Reinsurance Reform Act. The NRRA says a policyholder’s home state has the sole jurisdiction to regulate and collect premium taxes on surplus lines transactions.
Congress made clear the law was intended to enable states to create a uniform national approach to regulating and taxing surplus lines transactions. The Council, along with corporate risk managers, the surplus lines industry and others involved in property-casualty insurance, had long pushed for this simplification. If Congress were to repeal Dodd-Frank in its entirety, including the NRRA, that could throw the surplus lines market back into its version of the Dark Ages.
“While the promises of the NRRA are still in the process of being realized, it unquestionably has improved the marketplace for surplus lines products by applying a single-state standard for multistate placements,” Wood says.
Before Dodd-Frank, “you had 50 states that all had different rules, some of which were mutually exclusive,” says Nancy McCabe, of Willis Towers Watson in New York. The new system is “massively less complicated. It’s way better than what it was.” She says a return to the pre-Dodd-Frank system would be awful. The reform, she says, is a “common-sense solution to a previously overcomplicated structure.”
Prior to Dodd-Frank, brokers dealt with “an arcane system that created entire groups within brokerages just to keep track that fees, taxes and filings were taken care of,” says John Wicher, principal at San Francisco-based John Wicher & Associates. The reform, Wicher says, “rationalized a business that was clunky and parochial with state regulators.”
How They Compare
The Dodd-Frank Wall Street Reform and Consumer Protection Act has relatively few provisions that deal directly with insurance, but even those have stirred some controversy. However, the Financial CHOICE Act, which appears likely to be the template for scaling back Dodd-Frank, addresses some of those directly.
- Created the Financial Stability Oversight Council with the power to designate non-bank financial institutions, including insurers, as “systemically important financial institutions” (too big to fail) and subject to enhanced federal oversight
- Created the Federal Office of Insurance, which has the authority to represent the United States in international insurance forums, advise Treasury on insurance matters, oversee the federal Terrorism Risk Insurance Program and, under limited circumstances, overrule state insurance regulations
- Includes the Nonadmitted and Reinsurance Reform Act, which establishes the home state of a surplus lines policyholder as the sole jurisdiction to collect premium taxes on the transaction.
- Strips the Financial Stability Oversight Council of its power to designate non-bank “systemically important financial institutions” and retroactively rescinds all designations
- Replaces the Federal Insurance Office with a new Office of the Independent Insurance Advocate, which would basically give the office a new name. The new director would become a voting member of FSOC, which he is not under current law. The new office would retain most of its existing authority and responsibilities
- Does not address the Nonadmitted and Reinsurance Reform Act.
Hints of Change
While a repeal of Dodd-Frank appears unlikely, the law might not remain entirely intact. A hint of how Republican lawmakers will approach changing Dodd-Frank emerged in the last Congress in the form of the Financial CHOICE Act, approved by the House Financial Services Committee last September.
The bill, introduced by committee chairman Rep. Jeb Hensarling, R-Texas, targets a wide range of Dodd-Frank’s provisions. Some of those provisions, such as the power of the Financial Stability Oversight Council to designate non-bank financial institutions (including insurers) as “systemically important financial institutions,” could be repealed.
Three major insurers are designated by the Financial Stability Oversight Council as systemically important financial institutions—American International Group, MetLife and Prudential. MetLife, however, successfully challenged the designation in federal court, a ruling the federal government is appealing. These designations mean the organizations are subject to heightened federal regulation.
Being designated as a systemically important financial institution subjects insurers to additional reporting requirements that raise their costs significantly. For example, AIG CEO Peter Hancock said last year complying with the requirements costs the insurer $100 million to $150 million annually.
Not surprisingly, one of the biggest calls for repeal is from the banking community, especially targeting the Consumer Financial Protection Bureau, which was created as part of Dodd-Frank to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.
Another insurance-related area in which the future is somewhat murky is the Federal Insurance Office, which was created by Dodd-Frank as part of the Treasury Department. The office has the authority to monitor all aspects of the insurance sector, evaluate the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, and represent the U.S. in international insurance matters. The office also advises the Treasury on insurance issues and assists the Treasury secretary in administering the federal Terrorism Risk Insurance Program. Yet the office has a very limited regulatory role, maintaining the primacy of state insurance regulation as spelled out in the McCarran-Ferguson Act. Its preemptive authority over state laws applies only to those laws that conflict with international obligations. “And that’s a good thing,” Wood says. “The state-regulated insurance industry needs to have an equal place at the table of international trade negotiations, and the FIO is a welcome addition to the Treasury Department.”
Wood says the office’s support in 2015 for extending the Terrorism Risk Insurance Act through 2020 was critical. Having a single federal representative for the United States when dealing with international insurance issues, Willis Towers Watson’s McCabe says, makes a “great deal of sense.”
Under the CHOICE Act, the Federal Insurance Office would be replaced by a new Office of the Independent Insurance Advocate, which would basically be the FIO with a new name and would retain most of the FIO’s existing authority and responsibilities.
If legislation to abolish, rather than make minor changes to the office, is approved, brokers would feel an impact, says Mark Dwelle, an analyst with RBC Capital Markets in Richmond, Va. The insurance industry would be left without a single federal voice representing it in international forums. And the National Association of Insurance Commissioners or other organizations would probably attempt to fill the void, he says.
“Dodd-Frank didn’t start the dialogue over global insurance standards, and repealing the law won’t stop those discussions,” explains Francis Bouchard, a senior advisor at Hamilton Place Strategies in Washington. “In fact, bringing the clout and stature of the Treasury and Federal Reserve to the IAIS [International Association of Insurance Supervisors] negotiating table has dramatically enhanced America’s ability to protect the underpinnings of the U.S. regulatory model. Policymakers should be careful not to throw out the baby with the bath water, particularly in an era where both risks and capital are increasingly global.”
One provision that was nowhere to be found in the CHOICE Act is the NRRA. Sometimes silence is indeed golden.
If banks are freed from some of the restrictions placed on their lending and business practices by Dodd-Frank, it could be good news for some commercial insurance brokerages that serve them, says Eileen Yuen, a managing director at Arthur J. Gallagher & Co.
Like many observers, Yuen doesn’t believe a total repeal of the law is likely. But she adds, “We might expect to see some of the regulations relaxed in the form of new legislation, particularly with regard to deregulating financial institutions.”
The potential for deregulation coupled with tax reform could give a boost to banks, which would increase lending and therefore improve cash flow, Yuen says. That, she says, could lead to an uptick in merger and acquisition deals among banks.
“From an insurance perspective,” she says, “this means we as brokers may see a rise in purchases of reps and warranties coverage—more transactions mean a greater focus on indemnification, and we can help clients attend to this through a transactional risk product like reps and warranties.” Reps and warranties insurance provides coverage for a breach of a representation or a warranty in a purchase or merger agreement.
“We’ll also be paying close attention to how insurers may respond to a greater volume of M&A transactions,” Yuen says. “Will more deals translate to more claims? If so, we’ll watch for a tightening in underwriting for acquisitive institutions, more prevalent dedicated M&A retentions, and potential changes in other terms as well. Of course, as the legislation shifts, we must keep an eye on how regulatory change might need to be addressed from a coverage perspective.”
Since Dodd-Frank took effect, “there’s been a very direct tightening of the banking system,” says John Ward, founder of Cincinnatus Partners, an Ohio-based private equity firm specializing in the insurance industry. Lending has dried up for small business, which has contributed to the dampening of economic growth, he says.
“That’s had an impact on agents and brokers because their business depends on the headwinds and tail winds. Headwinds hamper organic growth, tailwinds help it,” Ward says. “Whatever dismantling or rollback will have a big positive impact because there seems to be a renewed commitment to a pro-growth economic agenda that will only help” agents and brokers.
Ward projects many smaller agencies will see a “pickup” in their internal perpetuation plans as the reins of lending are loosened.
The impact on captive insurers and the brokers who serve them is less clear, particularly if changes are made to the Nonadmitted and Reinsurance Reform Act provision in the law, says Mark Morris, senior vice president for risk finance at Lockton. The NRRA was really designed to streamline collection of premium taxes on non-admitted insurance transactions, and in most states captives fall under that definition.
“There has been an impact on some captive domiciles in terms of whether the taxes would apply and, if so, what the magnitude of those taxes would be,” Morris says. In some cases, the tax question discourages companies from forming captives or encourages them to move existing captives to another jurisdiction.
Due to the complexity of Dodd-Frank and potential impending changes, “this is where we as brokers earn our stripes,” he says. “It’s made consulting more complex because of all the nuances that have changed recently.”