Ten Years Post-Crisis
The former Federal Insurance Office director says the regulatory changes stemming from the financial crisis may not have been popular, but they left the nation better prepared to handle future downturns in the economy.
- Kate Smith
- December 2018
It's been 10 years since Lehman Brothers collapsed, the U.S. government bailed out AIG with $180 billion, and the Federal Reserve slashed rates to nearly zero.
The 2008 financial crisis devastated Wall Street and created global panic. The world's largest economy was unraveling, and government officials, as well as the broader public, wanted to know how it had happened.
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 just under 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 Review 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 (SIFI), and how regulation has changed as a result of the financial crisis.
Former Director of the Federal Insurance Office
As a country, we are much better positioned today if a crisis that resembles the last one were ever to occur again.
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?
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.
To your point, some in the industry didn't want that position to exist at all. Why did you want that job?
As an officer of the NAIC and as someone who had been in leadership roles in the NAIC for a number of years throughout my tenure as the Illinois insurance director, I was engaged with Congress on behalf of all the states in trying to negotiate the language and the limitations on the Federal Insurance Office. As we moved through the crisis, I understood the reasons why the office should be created.
Why did we need this office?
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.
Did your history as a state regulator help you gain acceptance from those who may not have wanted this layer of federal oversight? Or was it still an uphill battle?
Anything new in government is always an uphill battle. However, the NAIC endorsed the establishment of the Federal Insurance Office as a matter of statute. As we moved forward and executed on the statutory authority, there were always some who were supportive, there were always some who were concerned.
Frankly, what I focused on, and what we focused on largely, was how to move forward in the best interest of the country. The states, I thought, rallied to that cause.
I thought together we did a great job representing the interest of the country in the global conversation.
Did this office do what it was supposed to do?
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.
So in my view, the Federal Insurance Office did exactly what the drafters of the statute expected us to do.
In retrospect, would you do anything differently?
I don't think in those terms. Our team did our best at every juncture. I have said for the last several years that I think the industry and the regulators undersell the importance of the industry to the country and the American promise of economic fairness and opportunity.
In terms of where we could have done more, we were so immersed in the details of our work and the important global and national issues, and looking back, there were opportunities I could have helped the Congress understand better the importance of the industry to families and communities. Having said that, I think we did a great job of highlighting for Congress, and multiple committees within the Congress, the importance of the work we were doing and the importance of our engagement with the industry and consumers throughout that work.
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.
You've made the not-so-obvious jump from insurance regulation to asset management. What exactly is your role at Blackstone?
Blackstone is committed to building a global leader in the insurance industry to provide investment and capital solutions to insurance companies. My role as part of the team is to support the growth and the development of Blackstone Insurance Solutions.
The experience I have of building within Treasury, the world's leading finance ministry, a global leader, the Federal Insurance Office, has parallels to being part of the team building Blackstone Insurance Solutions.
How does your background play into it? Is industry knowledge your value-add?
Yes. I understand the insurance industry from a 360-degree perspective. I've spent 12 1/2 years in oversight of and in direct engagement with all aspects of the industry. I understand the conversations that regulators and industry leaders and rating agencies have, and understand that fundamentally the value of an insurance company is its capacity to deliver on a promise to a policyholder. That perspective and how we at Blackstone enhance the ability of the insurers to deliver on that promise, that's one value I add, among other things, to the firm.
Are insurers' investing needs different than other sectors'?
The insurance industry is, as you know, heavily regulated. In the United States, state by state there is extensive regulation. But then for companies that operate in multiple states or nationally, much less multinationally, the regulation is even more extensive. Part of that regulation is focused on the oversight of investments by insurers.
Insurers are limited—restricted, in some ways—by what types of investments they can make and how much investment can be made in any one type of asset. There are penalties related to lack of diversification or liquidity within invested assets. So there are restrictions on insurance companies in terms of what they can invest in and how much. We are working with the industry and looking to provide it with alternative investment options.
So do you come up with portfolio mixes then that fit various combinations of regulatory requirements?
That's right. We're looking to do a couple of things in terms of asset management. We can help insurers optimize their unique investment portfolio, meaning we can help preserve the limited risk that regulators, rating agencies and consumers are so interested in, but also look for ways to improve yield on that investment portfolio. So on the one hand there is the broader service of portfolio management that we can provide, and then on the other hand there are individual investment products that we can offer to insurers.