Financial Services Reform

The Dodd–Frank Act is a historic and broad reaction to the perceived regulatory shortcomings believed by some to have been the cause of the most severe financial crisis since the Great Depression. This Act introduces the most significant changes to the regulation of financial services since the 1930s.

Despite passage of the legislation, financial services reform in Washington is far from complete. The Act is now in the administrative rulemaking process, which will further define the broad language included in the law.

The timetable for actual implementation of the Dodd–Frank Act provisions vary depending on the agencies involved, the deadline in the act for issuing a regulation, and the resources Congress provides to the agencies.

State Farm® will continue to be involved in the rule making and regulatory process as issues unfold.

Systemic Importance

The Dodd–Frank Act creates the Financial Stability Oversight Council (FSOC) which will consist of 15 members (ten voting members and five non–voting members). The main responsibilities of the FSOC will be to:

  • Identify and respond to emerging risks throughout the financial system.
  • Identify companies to be designated as systemically important, warranting additional regulatory scrutiny.
  • Make recommendations for companies deemed systemically important concerning: their capital requirements, how much money they borrow, how quickly assets can be converted into cash, and risk management.

Recently, the Financial Stability Oversight Council proposed a rule indicating what it will consider when determining which financial companies will be designated systemically important. State Farm submitted comments to the proposed rule through participation with a group of property and casualty insurers. Comments were also submitted by the Financial Services Roundtable, American Council of Life Insurers, and the National Association of Mutual Insurance Companies, among many others.

State Farm's position, as covered in many of the comments, is as follows:

  • The process for designating companies as systemically important should be aimed at highly leveraged and interconnected Wall Street financial companies like AIG and Lehman, and not at traditional Main Street insurance companies such as State Farm. Also, a company's size alone is not a reason for designation.
  • Insurance companies in general, and mutual insurers in particular, do not engage in the types of unregulated, highly leveraged, and interconnected activities that threaten the financial stability of the United States (e.g., speculative participation in credit default swaps).
  • Congress dedicated three positions on FSOC to individuals with knowledge of the insurance industry (two non-voting and one voting). To date, however, the only insurance position with a vote in the Council's deliberations has not been filled. Not having this member on the Council limits the ability of FSOC to give informed consideration to issues affecting insurance.

State Farm will continue to work with coalition partners and trade associations to shape the final rules on systemic designation. We will also explain directly to government officials that we are a conservatively managed company that avoids excessive risk taking. Moreover, we are already subject to comprehensive and consolidated regulation at both the state and federal levels, meaning none of our activities can fall through any regulatory cracks.

Federal Insurance Office

Michael McRaith, the director of the Illinois Department of Insurance, was recently picked by the Obama Administration to run the newly created Federal Insurance Office.

State Farm congratulates Illinois Insurance Director Michael McRaith on his appointment as the first Director of the Federal Insurance Office. We have worked with Director McRaith in our home state of Illinois since 2005. We look forward to continuing to work with him in his new capacity.

The Director will face a number of major challenges in his new role. McRaith will lead the FIO in its main duties to:

  • Make recommendations to Financial Stability Oversight Council regarding whether an insurer should be designated as systemically important.
  • Provide advice to the Secretary of the Treasury on major domestic and international insurance issues, except for health insurance.
  • Collect and request insurance industry data.
  • Identify gaps in insurance regulation.
  • Conduct a major study on how best to reform our insurance regulatory system. This report is required to be completed by January 2012 under the Dodd–Frank Act.

The FIO will not regulate insurance rates, underwriting practices, or coverage requirements, which will continue to be governed by state law.