United States: President-Elect Trump's Potential Priorities For Insurance Regulation

Apart from a fundamental disagreement between the parties as to whether the Affordable Care Act ("ACA") should be repealed and replaced, insurance regulatory issues did not play a large role in the Presidential campaign. That does not mean, however, that President Trump will not make significant changes in how the federal government interacts with state insurance regulators. Here are some examples of where changes may come.

Healthcare

Sorting out whether, and if so how, to replace the ACA while still retaining its two most popular features, namely restricting underwriting based on pre-existing conditions and allowing young adults under 26 to be on parental policies, will likely occupy the Trump Administration and Congress for several months early in 2017. As they seek to devise a "replacement" solution, President Trump and his allies on the Hill will soon encounter the immutable insurance principle, known as the "law of large numbers," which indicates that, if the individual mandate and subsidies to buy health insurance are eliminated, insurers will struggle to be profitable unless large numbers of healthy people are in the risk pool. Read more about the possible repeal and replacement of the ACA from Dentons' Health Care practice.

However this issue plays out, what is likely to emerge in any replacement legislation are provisions allowing health insurers licensed in one state to issue policies anywhere in the country, similar to how risk retention groups are currently regulated (15 U.S.C. §§3901-3908). A more restrictive option would permit insurers to underwrite health coverage, free from cumbersome rate and form rules, in each state in which they are licensed, although presumably still subject to each state's fair claims settlement laws in the same way risk retention groups must comply. It will be interesting to gauge the enthusiasm of insurance commissioners, elected or appointed, in states carried by President-elect Trump (or, for that matter, even those won by Secretary Clinton) for ceding much of their existing authority over health insurance to another state's regulator. The NAIC and individual commissioners will no doubt continue to press Congress to go slow in divesting individual state regulators of their power.

Non-bank "systemically important financial institutions"

Candidate Trump vowed to dismantle the Dodd-Frank Act and he met last Thursday with Representative Jeb Hensarling, the Chairman of the House Financial Services Committee, who has introduced legislation to do just that. (Chairman Hensarling, a very close friend of Vice President-elect Pence, is rumored to be one of the leading candidates to become the Treasury Secretary.) Among the Dodd-Frank provisions likely to be substantially changed, if not outright repealed, is Section 113, giving the Federal Financial Stability Oversight Council ("FSOC") broad latitude to designate particular non-bank financial institutions as "systemically important" and thereby subject to Federal Reserve supervision. Three US insurers have so far been designated: AIG, Prudential and MetLife. MetLife sued in federal district court to overturn its Systemically Important Financial Institution (SIFI) designation and, earlier this year, succeeded in obtaining summary judgment, largely on the grounds that the FSOC arbitrarily applied the wrong criteria and failed to conduct the requisite cost-benefit analysis before designating MetLife as systemically important. (MetLife, Inc. v. Financial Stability Oversight Council, ___ F.Supp. ___, No. 15-0045 (RMC) 3/30/16).

Given the President-elect's position on Dodd-Frank, the future of the other SIFI designations is also in doubt. It is possible that the US Department of Justice in a Trump administration will simply withdraw the government's appeal to the DC Circuit Court of Appeals in the MetLife case. How the Federal Reserve will handle its oversight of Prudential and AIG is unclear. In any event, it seems highly unlikely that there will be any additional SIFI designations of insurers going forward—a prospect that most state insurance commissioners, of both parties, will applaud, as it will reinforce the primacy of state-based solvency regulation.

Reinsurance credit covered agreement with EU

There is a good chance that whoever will be running the Treasury Department in a Trump administration has not given much thought to the negotiations currently underway between the Federal Insurance Office ("FIO"), established by Dodd-Frank, and the European Union ("EU") to relax US credit for reinsurance rules imposed on unlicensed foreign reinsurers. The current FIO director, former Illinois Director of Insurance Michael McRaith, who was appointed by President Obama's first Treasury Secretary, is unlikely to stay on to work under the incoming Secretary. It's unclear whether the FIO/EU talks on relaxing US credit for reinsurance rules imposed on unlicensed foreign reinsurers will even continue in the next administration, let alone whether the Trump administration will override existing state rules requiring those reinsurers to secure all of their liabilities to US ceding companies. Dodd-Frank authorizes the FIO to execute multinational agreements on insurance regulations and, after a lengthy process of consultation with states and Congress, to declare state laws that conflict with the agreement to be preempted. (31 U.S.C. §313-314).

Although some US states, New York and California among them, have already relaxed their respective rules to permit highly rated reinsurers to collateralize only a portion of the liabilities, and although the NAIC has adopted a Model Law along the same lines, numerous states still require full collateral to be posted by unlicensed reinsurers. One would not expect a President Trump, who campaigned on a promise of less federal regulation and who is plainly wary of international agreements of almost any sort, to support reinsurance rules created and enforced in Washington as part of a multinational agreement. Thus, it would not be surprising if the current negotiations with the EU on reinsurance stall and, ultimately, wither and die.

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