The election of Donald Trump and a Republican Congress creates the possibility for a number of significant policy changes that could affect the insurance industry. Although the plans are still being debated and devised, and although the state-based regulatory approach to insurance will remain in place, below are some key issues for insurance industry participants to consider.
Tax Reform: The new president and Congress will make overhauling the tax code a centerpiece of their legislative agenda, even though enacting comprehensive reform is notoriously challenging. In June, House Republicans released a reform blueprint, and during the campaign, Trump released a series of corporate tax reform proposals. Notably, Trump has promised to lower the business tax rate from 35 percent to 15 percent; eliminate the corporate alternative minimum tax; and provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent. Some members of Congress have considered taxing offshore reinsurance to counter what some call “income stripping” by U.S. affiliates of insurers and reinsurers domiciled in no-tax or low-tax jurisdictions. The following issues will likely be key for the industry to monitor: (1) the implications of moving to a cash-flow tax system on the insurance industry; (2) defining “border adjustments” for the insurance industry; and (3) the implications of moving to a “territorial” tax system while also retaining Subpart F rules on insurance income.
- Repealing and Replacing the Affordable Care Act: Devising a way to “repeal and replace” the Patient Protection and Affordable Care Act (ACA) will be the top healthcare priority for President Trump and the Republican-controlled Congress this year. Every health sector, including the health insurance industry, is scrambling to understand the implications and impact. Upon returning to Capitol Hill, the Senate began work on a budget bill that asked committees and lawmakers for ways to remove key funding components from the law, fulfilling Senate Majority Leader Mitch McConnell’s, R-Kentucky, promise to start repealing the ACA immediately — even though Republicans have not yet devised a replacement. Some Republicans have suggested taking as long as three years to craft the ACA replacement, but Sen. McConnell has not committed to such a strategy. So far, he has declined to explain what a new health insurance system might look like. In the meantime, House Speaker Paul Ryan, R-Wisconsin, pledged this week that Republicans will complete legislation to repeal and replace the ACA this year. Sidley resources on navigating ACA reform can be found here.
- Dodd-Frank Regulatory Relief Legislation: Versions of legislation to reform the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) were introduced by Senate and House Republican leaders during the last Congress. Sen. Richard Shelby, R-Alabama, the outgoing chairman of the Senate Committee on Banking, Housing and Urban Affairs, introduced S. 1484, the Financial Regulatory Improvement Act, legislation largely designed to ease the burden on small institutions. House Committee on Financial Services Chairman Jeb Hensarling, R-Texas, introduced a more comprehensive Dodd-Frank rollback, HR 5983, the Financial CHOICE Act. Both bills passed out of their committees on party-line votes; neither was considered by the entire Senate or House. Committee leaders are still evaluating legislative tactics to amend Dodd-Frank. To change the law, both the House and the Senate must approve legislation. There have been few and limited Dodd-Frank changes since the law was enacted in 2010 because Senate Democrats could block bills through filibuster, which requires 60 votes to overcome. Republicans are expected to have only 52 senators in 2017, so congressional leaders have signaled that they may opt to use the budget reconciliation process to undo portions of Dodd-Frank. Reconciliation is an expedited process that allows the Senate to consider certain tax, spending and debt legislation with limited amendments. Filibusters are not allowed, and passing a reconciliation bill requires only 51 votes.
- “Systemically Important” Insurance Companies: Pursuant to Dodd-Frank, the Federal Reserve continues to develop capital standards that could apply to insurance companies the Financial Stability Oversight Council (FSOC) deems systemically important and to insurance holding company systems that own a bank or a thrift. Last June, the Federal Reserve Board approved an advance notice of proposed rulemaking laying out a possible regulatory framework, but it is not clear when any rules will be finalized.
- Federal Role in Insurance: Dodd-Frank made two other notable changes in federal oversight of the insurance industry: creating a new Federal Insurance Office (FIO) within the Treasury Department; and adding a voting, independent member to the FSOC with insurance expertise. Neither FIO nor the independent member with insurance expertise performs a regulatory function. House Republicans have proposed consolidating this federal insurance structure by creating a new independent insurance advocate (IIA) position within the Treasury Department to coordinate federal efforts on the prudential aspects of international insurance matters. They argue that this will give a “unified voice and seat at the table for the U.S. insurance industry at the domestic and international levels, while preserving our traditional state-based system of insurance regulation.”
- State Regulation: At the state level, the presidential election is unlikely to affect state consumer protection laws or enforcement directly. Republicans gained three governorships but lost one, which resulted in their national total increasing to 33. Additionally, in New Hampshire and Missouri, Republicans won complete control of state government. New financial rules are less likely in Republican-led states. But in Democratic-leaning states such as New York and California, it is possible that Republican control of the federal government could embolden the attorneys general and insurance commissioners to more aggressively address issues like privacy and cybersecurity, thereby increasing operating complexity for insurance companies.
- Flood Insurance: The House Financial Services Committee has begun considering how to reauthorize the National Flood Insurance Program (NFIP), a must-pass item on 2017’s agenda because the program is set to expire on Sep. 30. Rep. Blaine Luetkemeyer R-Missouri, the previous chairman of the Subcommittee on Housing and Insurance, has circulated a set of principles among Republican members that he hopes will guide the debate. They include ensuring sound fiscal footing for the NFIP; providing increased transparency, stronger public/private partnerships and greater consumer choice in the flood insurance market; providing a more open insurance rate-setting process; and making needed changes to mitigation and mapping processes.
- Department of Labor Fiduciary Rule: It is unlikely that the Department of Labor’s fiduciary duty rule will take effect on April 10 as currently scheduled. There is now a path for Congress to block the rule. President Trump can also act to freeze it until the Labor Department and the Securities and Exchange Commission can devise a replacement that imposes a less onerous investor protection standard.
- Role of Mortgage Insurance in Housing Finance Reform: Restructuring Fannie Mae and Freddie Mac remains a Republican priority, and deeper mortgage insurance structures seem to be a central tenet of the effort. Chairman Hensarling has introduced legislation to privatize the housing-related government-sponsored enterprises (GSEs). Sen. Mike Crapo, R-Idaho, the incoming chairman of the Senate Committee on Banking, Housing and Urban Development, co-authored a bill in 2014 to eliminate Fannie and Freddie and replace them with a federal mortgage insurer that would guarantee mortgages through a combination of private and public capital. Neither approach gained significant traction, but we expect both chairmen to re-engage on mortgage finance next year. Meantime, Reps. Ed Royce, R-California, and Gwen Moore, D-Wisconsin, released GSE credit risk-transfer legislation in early December that would mandate the Federal Housing Finance Agency director to formulate guidelines that would require “significant and increasing” GSE credit risk transfers, including a requirement that all execution structures cover at least “400 basis points of risk in total, starting from the first dollar of credit loss among all the different credit risk-transfer structures.” In other words, the legislation would mandate that Fannie and Freddie access more private-sector capital to hedge potential losses in their guarantee books, a potentially significant development to try to ensure the strength of the GSEs’ balance sheets.
Michael E. Borden
Sean M. Keyvan
Michael J. Pinsel
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