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  • Former FIO Chief: Regulatory Changes Post Crisis Not Always Popular, but Vital for Economy

    November 28, 2018 by Kate Smith

    NEW YORK – It’s been 10 years since the U.S. government bailed out American International Group Inc. with $180 billion. The 2008 financial crisis devastated Wall Street and left the world’s largest economy unraveling.

    Many questioned what role regulation — or lack thereof — played in the collapse. As a result, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which included the establishment of a Federal Insurance Office within the U.S. Department of the Treasury.

    In March 2011, Michael McRaith, former director of the Illinois Department of Insurance, was appointed as the first director of the FIO under the Obama administration. He spent nearly six years in the role, resigning his post as of Jan. 20, 2017, when the Trump administration was sworn in. McRaith was succeeded by Steven J. Dreyer, a former S&P Global executive.

    Best’s News Service sat down with McRaith, who is now managing director at Blackstone Insurance Solutions, to discuss the formation of the FIO, disagreements over systemically important financial institutions, and how regulation has changed as a result of the financial crisis.

    Q: The director of the FIO is an appointment position. How did you land the role? Did Barack Obama pick up the phone and give you a ring?

    A: It’s unfortunately far less glamorous. The director of the Federal Insurance Office is both an appointee of the Secretary of the Treasury and a career Senior Executive Service member of the federal government, which means the person appointed has to apply through the SES process. I was fortunate enough to apply in writing, go through the interview process and then be offered the position.

    The statute, like many things in insurance, is a function of compromise of polar opposite sides. There were some in the industry who wanted the position to be purely a political appointment and some who didn’t want the position to exist at all. So Congress ended up with a compromise that made it both an SES career position but also subject to the appointment of the Treasury secretary.

    Q: Why did we need this office?

    A: One was that the federal government needed, within its four walls, an office that had expertise about the industry and its regulation.

    Second, the country needed someone who could collect and assess data following natural catastrophes or following disasters. After Katrina or after 9/11, the federal government did not have within its walls the expertise or the resources or the authority to understand the economic implications and the participation of the private insurance sector in recovering from those events.

    The third reason was financial stability. We saw with the financial crisis that the insurance industry was directly involved with the financial crisis. We can discuss whether it was the industry itself that had a critical role. But really what we saw, if nothing else, is that the industry is an essential part of our national economic fabric and the global financial system.

    For me this was an opportunity to serve the country, to represent the insurance industry and consumers within the federal government, to help the federal government, and ultimately the country, understand the industry and its regulation better than it did before the office was created.

    Finally, by Constitution, there is no state that represents the United States. The industry and sector, including the regulators and consumers, needed some federal office to represent the country globally on insurance matters. I felt my understanding of the regulatory system and my understanding of the essential consumer-focused priorities of the U.S. insurance industry and regulators, would serve our country well in the global conversation.

    Q: Did this office do what it was supposed to do?

    A: One of my personal priorities was to execute on every single statutory authority provided by Dodd-Frank, knowing that as the first person to build and lead the office, the failure to execute on that statutory authority would make it more difficult for whoever succeeded me. We undertook all of our activities in a very substantive, professional, serious and balanced way.

    We, in my view, supported the state regulatory system. We supported consumer interests, the interests of policyholders. And we represented the interests of the country in the global conversation and, ultimately, allowed the U.S. to have the place and the prominence it should have in global financial and economic conversations.

    While looking back, there are always things I would improve upon, we did in fact help the Financial Stability Oversight Council, as called upon by statute. We worked with the Federal Reserve and the states on the global conversation regarding prudential oversight of the insurance industry. We studied and reported on consumer protection issues in the insurance industry. Working with our EU counterparts, we conceived the EU-U.S. covered agreement, and I then had the privilege of leading the U.S. delegation.

    We completed 17 separate reports in five years and seven months, which is a substantial amount of public reporting. We worked with stakeholders around the country and world. We did what was in the best interest of the country.

    Q: How has insurance regulation changed as a result of the financial crisis?

    There were many aspects of the AIG experience that were helpful for the states to learn from. At the state level, what I saw was the development of an agenda based on group supervision. Since that time, we’ve seen the states dramatically enhance the oversight of insurance groups at the group level.

    They’re looking more broadly at group capital for large insurers operating with multiple subsidiaries around the world. They’re looking at governance more broadly. That has strongly enhanced the stability of the insurance industry in the United States.

    Also, the work of the FSOC in looking at and evaluating AIG, MetLife and Prudential. Even though not everyone agreed with those FSOC decisions, those decisions ultimately enhanced the regulatory system at the state level and enhanced the understanding of the insurance industry at the federal level.

    So as a country, we are much better positioned today if a crisis that resembles the last one were ever to occur again. We have insurance industry and regulatory expertise in the national financial stability conversation, and that strongly enhances the financial stability of the country overall.

    (By Kate Smith, senior associate editor, Best’s Review: Kate.Smith@ambest.com)

    BN-NJ-11-27-2018 1045 ET #

    Originally Posted at A.M. Best on November 27, 2018 by Kate Smith.

    Categories: Industry Articles