CRS — Insurance Regulation: Issues, Background, and Legislation in the 113th Congress (September 17, 2014)
Insurance Regulation: Issues, Background, and Legislation in the 113th Congress (PDF)
Source: Congressional Research Service (via Federation of American Scientists)
The individual states have been the primary regulators of insurance since 1868. Following the 1945 McCarran-Ferguson Act, this system has operated with the explicit blessing of Congress, but has also been subject to periodic scrutiny and suggestions that the time may have come for Congress to reclaim the regulatory authority that it granted to the states. In the late 1980s and early 1990s, congressional scrutiny was largely driven by the increasing complexities of the insurance business and concern over whether the states were up to the task of ensuring consumer protections, particularly insurer solvency.
The recent financial crisis refocused the debate surrounding insurance regulatory reform. Unlike many financial crises in the past, insurers played a large role in this crisis. In particular, the failure of the large insurer American International Group (AIG) spotlighted sources of risk that had gone unrecognized. The need for a systemic risk regulator for the entire financial system was a common thread in many of the post-crisis financial regulatory reform proposals. The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), enacted following the crisis, gave enhanced systemic risk regulatory authority to the Federal Reserve and to a new Financial Services Oversight Council (FSOC), including some oversight authority over insurers. The Dodd- Frank Act also included measures affecting the states’ oversight of surplus lines insurance and reinsurance and the creation of a new Federal Insurance Office (FIO) within the Treasury Department.
Reducing Coastal Risk on the East and Gulf Coasts (2014)
Source: National Research Council
Hurricane- and coastal-storm-related losses have increased substantially during the past century, largely due to increases in population and development in the most susceptible coastal areas. Climate change poses additional threats to coastal communities from sea level rise and possible increases in strength of the largest hurricanes. Several large cities in the United States have extensive assets at risk to coastal storms, along with countless smaller cities and developed areas. The devastation from Superstorm Sandy has heightened the nation’s awareness of these vulnerabilities. What can we do to better prepare for and respond to the increasing risks of loss?
Reducing Coastal Risk on the East and Gulf Coasts reviews the coastal risk-reduction strategies and levels of protection that have been used along the United States East and Gulf Coasts to reduce the impacts of coastal flooding associated with storm surges. This report evaluates their effectiveness in terms of economic return, protection of life safety, and minimization of environmental effects. According to this report, the vast majority of the funding for coastal risk-related issues is provided only after a disaster occurs. This report calls for the development of a national vision for coastal risk management that includes a long-term view, regional solutions, and recognition of the full array of economic, social, environmental, and life-safety benefits that come from risk reduction efforts. To support this vision, Reducing Coastal Risk states that a national coastal risk assessment is needed to identify those areas with the greatest risks that are high priorities for risk reduction efforts. The report discusses the implications of expanding the extent and levels of coastal storm surge protection in terms of operation and maintenance costs and the availability of resources.
Reducing Coastal Risk recommends that benefit-cost analysis, constrained by acceptable risk criteria and other important environmental and social factors, be used as a framework for evaluating national investments in coastal risk reduction. The recommendations of this report will assist engineers, planners and policy makers at national, regional, state, and local levels to move from a nation that is primarily reactive to coastal disasters to one that invests wisely in coastal risk reduction and builds resilience among coastal communities.
2014 Consumer Insurance Sentiments
Compared with traditional, tangible goods, insurance is somewhat of an anomaly when it comes to the consumer’s purchasing experience. Unlike a car or box of cereal, insurance isn’t something that a consumer can experience through touch or sight. In the insurance world, consumers are primarily limited to making comparisons about a series of “if/then” statements printed on paper. Furthermore, since consumers can’t interact with their policies, they typically don’t show them off or brag about their coverage limits with their friends or family members.
Given the inherent nature of insurance, Nielsen’s Consumers Insurance Sentiments study highlights how auto and residential policyholders tend to buy their insurance and then forget about it. In that respect, it’s not surprising that more than one in four respondents (28%) currently covered indicated that they have been covered by the same primary policy for 15 years or more for each policy type.
Other highlights include:
- Switching providers is less frequent with age
- Younger generations are harder to please
- The purchase rationale for life insurance is changing
- Older customers may be under-insured
The Future of the Terrorism Risk Insurance Act
Source: RAND Corporation
Since the Terrorism Risk Insurance Act (TRIA) was last reauthorized in 2007, terrorism insurance has remained widely available and the price has fallen. However, challenges remain from both a social and an insurance point of view. Roughly 40 percent of policyholders still do not purchase terrorism coverage, and uncertainty remains regarding how much coverage would be available without TRIA. What is more, the program is set to expire on December 31, 2014, and it is unclear whether the improvements in the market since TRIA was first passed in 2002 can be sustained without it.
On June 10, 2014, a conference was convened in Washington, D.C., to present findings of recent RAND research and to address additional facets of this complex issue, including the pros and cons of proposed modifications to TRIA. This conference brought together stakeholders to not only discuss the varying implications of TRIA’s expiration, modification, and extension, but also to frame how it is debated in the halls of Congress and across the country.
Deloitte Survey: Where There is Reward for Travel, There is Risk
Three-quarters (75 percent) of frequent travelers expect their loyalty program data to be secured to at least the same standard as a financial institution — but only 33 percent feel their accounts are secure enough, according to a new Deloitte study, “Loyalty data security: Are hospitality and travel companies managing the risks of their rewards programs?”
Few frequent travelers appear fully aware of the wider risks involved when loyalty data — including travel schedules and other personal data — is lost or stolen. Roughly one in seven (15 percent) are simply concerned that a breach would result in a loss of loyalty points, while the majority of travelers (76 percent) worry about the loss of credit card numbers.
New GAO Reports
Source: Government Accountability Office
1. Defense Infrastructure: DOD Needs to Improve Its Efforts to Identify Unutilized and Underutilized Facilities. GAO-14-538, September 8.
Highlights – http://www.gao.gov/assets/670/665576.pdf
2. Information Security: Agencies Need to Improve Oversight of Contractor Controls. GAO-14-612, August 8.
Highlights – http://www.gao.gov/assets/670/665245.pdf
Podcast – http://www.gao.gov/multimedia/podcasts/664981
3. Personnel Security Clearances: Additional Guidance and Oversight Needed at DHS and DOD to Ensure Consistent Application of Revocation Process. GAO-14-640, September 8.
Highlights – http://www.gao.gov/assets/670/665594.pdf
4. Medicaid Demonstrations: HHS’s Approval Process for Arkansas’s Medicaid Expansion Waiver Raises Cost Concerns. GAO-14-689R, August 8.
6. Special Operations Forces: DOD’s Report to Congress Generally Addressed the Statutory Requirements but Lacks Detail. GAO-14-820R, September 8.
7. DOD Education Benefits: Action Is Needed To Ensure Evaluations Of Postsecondary Schools Are Useful. GAO-14-855, September 8.
Highlights – http://www.gao.gov/assets/670/665581.pdf
A Real Fix for Credit Ratings
Source: Brookings Institution
The failure of credit ratings agencies to do their job – warn investors of the true risks entailed by the subprime mortgage securities they rated – was at the heart of the financial crisis. Policy makers since have wrestled with how to “fix” the ratings process going forward. Although the Securities and Exchange Commission has required the agencies to disclose more of their methodology, the ratings process is still less than transparent. The issuer-pay rating agency business model has been criticized as a central cause and new agencies designated by the SEC after 2008 moved away from this model, though they have since moved back. Various additional ideas to fix the system have been put forward but none has been adopted: randomizing the choice of ratings agency, or replacing private ratings with those of a public agency, such as the Securities and Exchange Commission.
Faulting the issuer-pay model for the Crisis, which has been in continuous use for more than 40 years cannot explain the sudden explosion and subsequent collapse of the securitization market, which occurred over a much shorter period. We offer a different approach here: by showing how the absence of a single, numerical, public structured credit scale to serve as a yardstick of structured credit quality in the U.S. debt capital markets provides a more plausible explanation for the problems in structured finance in particular. Transparent, numerical benchmarks of credit risk relating to structured credits should not only fix structured finance going forward, and ideally help resuscitate the market but in a more sensible fashion. In addition, we will argue that such benchmarks also are a necessary component to a prudent system of capital regulation and for accurately informing investors of true credit risk, just as speed limits are a necessary component of vehicular traffic regulation.