Federal Advisory Committee on Insurance (FACI) Hears Technical Subcommittees’ Reports on Regulatory Systems

Nov 21, 2012


With the Federal Insurance Office (“FIO”) placing a keen focus on international issues, three technical subcommittees of the Federal Advisory Committee on Insurance have been charged with comparing the design and efficiency of the U.S. and European Union (“EU”) insurance regulatory systems.  At last week’s November 14, 2012 FACI meeting, the subcommittees shared their findings. 

The meeting was led by FIO Director Michael McRaith, who also provided an update on the FIO’s engagement with the International Association of Insurance Supervisors (“IAIS”).

The FIO is gathering information to compare the respective supervisory regimes in order to promote effective regulation, consumer protection, and business opportunity.  The EU’s insurance regulatory regime is being modernized through the Solvency II Framework Directive.  Meanwhile, the European Commission (“EC”) is trying to determine whether non-EU regulatory systems provide equivalent regulatory systems.  

The following are summaries of the three subcommittees’ reports, which together are evaluating group supervision; professional secrecy and confidentiality; financial reporting, data collection, and analysis; supervisory peer reviews; independent audits, actuarial reports, and on-site regulatory examinations:

Subcommittee One

This subcommittee reviewed the affordability and accessibility of insurance, looking at international markets and the impact they might have on competition.  It was noted that this could open new opportunities for personal lines and individual consumers, but also pose challenges on a regulatory basis.

“We think the biggest changes will come because of a change in demographics,” a Subcommittee member stated.  Producers are another question, particularly in regard to who will be producing coverages and products, and providing the kind of advice and information consumers need on an ongoing basis.  There also will be regulatory concerns with regard to licensing producers and monitoring the markets, it was noted.

Subcommittee members said they had many questions in regard to affordability and accessibility in terms of a changing world, and what that could mean in terms of regulatory changes in the United States.  How the United States would present itself in international markets was also questioned.

Subcommittee Two

Subcommittee Two’s members noted that some of the areas being questioned probably need more detailed study that is not currently available, or perhaps public hearings with testimony by experts in order to gain better insight into the issues.

In answer to the question “How should the insurance sector be viewed in the context of overall financial services?” one overriding concern was noted:  If the insurance sector is to be aligned with broader financial services, the aligned regulatory regime should be sensitive and reflect those differences, rather than be redundant and burdensome in a way that adversely affects both regulators who monitor the industry and companies’ ability to perform.

Additional concern was voiced because recent initiatives related to financial sector regulation seem to be more “bank-centric” and may not incorporate what is unique in insurance industry.

It was also noted that supervision and regulation – in order to be efficient – must be collaborative with other financial services sectors.

In response to the question of regulatory compatibility, there was “zero support” for a single global regulatory regime, mostly because it would not accommodate the unique geographic and demographic considerations that drive insurance markets in different jurisdictions.

“We also thought we should resist strongly having to alter a system in the U.S. that has historically been strong simply because there is a bias among our European colleagues for a developing model in Solvency II which has never been tested or modeled out,” a subcommittee member noted. “We think our system is better than what we are seeing developed as part of Solvency II.”

The subcommittee also explored the connection between regulation of the insurance market and participation in that market by insurers. A direct correlation was noted between regulatory oversight and the willingness on the part of the players to compete and participate.

In addition, the subcommittee wondered what U.S.-based limitations exist for U.S.-based insurance firms when they are operating outside their jurisdictions.

“Some members believe the absence of a single national authoritative regulatory regime in the U.S. puts U.S. companies at a competitive disadvantage in dealing outside the U.S.,” a subcommittee member pointed out.  “This was definitely not a consensus point.”

In regard to the question of group supervision, there was general agreement that it is not possible or desirable for group supervision to impose a single prescriptive approach toward capital.

“There are things regulators can do and things they cannot do,” it was noted.

Subcommittee Three

Subcommittee Three focused on the notion of group supervision, its definition, role, and authority.

“Discussion centered on the notion that the group supervisor should be first among equals, that the role isn’t one exercising omnipotent power, but rather trying to coordinate, collaborate, and communicate amongst regulators and affected stakeholders,” a subcommittee member said.

The question of how to determine leadership of the situation focused on the following:  Location where the premium is written, where a company and its employees are located, and a review of company history.

Scope of authority—meaning that the leader’s authority has to be earned, not bestowed, also was discussed.  There was talk about group capital and the movement of it within the holding company system.  In the absence of a supra-legal global structure, it was unclear to what extent capital can be mandated and moved within a holding company system in the absence of something like federal consolidated supervision, a subcommittee member said, adding  that “There was a lot of discussion distinguishing between those international insurance groups that might be systemically risky and those that are simply internationally active.”

Talk touched on the experience at supervisory colleges and how group supervision fits together.

In regard to the IAIS’ effort to develop a common framework (“ComFrame”), the following was explored:

Would ComFrame require changes to the U.S. approach to group supervision and would such changes benefit U.S.-based insurance industry and consumers?

It was noted that parts of ComFrame are seen as beneficial, but do require legal changes to be implemented in the states.  Some aspects regarding legal authority brought up concerns that consumers would suffer, especially in instances involving concerns about solvency.

There was a sense that ComFrame’s impact on the U.S. market could be potentially disruptive and create arbitrage opportunities. Other discussion touched on how banking rules are being developed vis a vis insurance rules.

“There were concerns that the IAIS and the ComFrame initiative are perhaps a little bit Eurocentric in nature, particularly disproportionate to the size of the European market,” it was noted.  Other concerns focused on whether the ComFrame initiative was possibly a back door means to bring Solvency II to the floor.

Enterprise Risk Management (“ERM”) and the supervisory college process were lauded, with suggestions to focus on those aspects of ComFrame where there is agreement, then build consensus before discussing what a regulatory regime should additionally entail, a subcommittee member stated. 

After the subcommittees completed their presentations, Director McRaith agreed the issues before them are very complicated.

“It is helpful to hear substantively where the (sub)committee members are.  Some of the discussion was a bit more sloganeering than factual and it’s important for us to be able to talk about that,” Director McRaith said, adding that he wants to personally participate in moving the subcommittees forward.

“Between now and our next meeting in March (2013) there are more significant issues that will continue to evolve internationally,” Director McRaith stated. 

The above discussion followed a previously reported update on flood insurance in the aftermath of Hurricane Sandy.  To read a summary of that portion of the meeting, click here.

The next FACI meeting is scheduled for March 13, 2013.

With no further business before the FACI, the meeting was adjourned.



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