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FIO, Part 4: Insurers wait, consumers wonder

We are wrapping up our discussion of the responsibilities, accountabilities and jurisdiction of the Federal Insurance Office. The FIO was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and insurance companies are wondering what exactly to make of it.

The FIO is not a regulator, but it can influence regulators. It is not a reformer, but it is in the process of evaluating the insurance industry's practices and making recommendations on how to "modernize" them. It is not the voice of the American insurance industry in the international marketplace, but it can participate in some ways.

In Florida, consumers may be worried that the FIO will shut down one of the few remaining property insurance companies doing business here. We have so few choices as it is, and we have seen more than our share of insurers leave the state or close up shop altogether. The truth is, though, that the FIO does not have the authority to order an insurer to liquidate.

Dodd-Frank does give the Department of the Treasury, the FIO's parent organization, the authority to put an insurer that is in default or close to default into receivership. The FIO may recommend liquidation, but not without the blessing of the Federal Reserve Board and only if the insurer is "too big to fail." That is, only if the insurer's collapse would affect the U.S. financial system as a whole.

Oh, and the FIO may act only if the state insurance commissioner fails to act; the state commissioner has 60 days to act from the date of the Treasury Department's decision that the insurer's failure would affect the country's financial markets as a whole.

The timeline and the procedural hoops set the odds against the FIO ever having to recommend that an insurer liquidate. The FIO's authority in the matter, as one analyst puts it, adds suspenders to the belt that is included in other Dodd-Frank provisions.

While the industry worries that the FIO will butt in and make their compliance obligations more burdensome, consumer advocates worry that the FIO will be a toothless watchdog, the kind that barks when the burglar breaks the window, only to lick his hand when he starts cleaning out the jewelry box.

The answer may or may not be clearer after the modernization report comes out. 

Source: Carrier Management, "Myths About The Federal Insurance Office," Michael R. Nelson and Lawrence H. Mirel, July 10, 2013