Promises are made to be broken, right? And campaign promises seem to be broken more frequently than the garden-variety type.
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.
Brokers’ biggest concern is one small part of Dodd-Frank—the Nonadmitted and Reinsurance Reform Act.
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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.
We’re the only financial services sector that got good stuff out of Dodd-Frank, not bad stuff.Tweet
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.”
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.
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.Tweet
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.
You can’t simply repeal and go back to the way things were. The world has evolved.Tweet
“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.