Dave Matcham

Can insurance be regulated at State and Federal levels?

Firstly, we saw EU proposals for a systemic risk council, then a review of UK regulation by FSA, finally the Obama proposals for a systemic regulator.

In the US, the financial crisis seems to have been born out of a range of products which were clearly unsustainable. These products did not fall under state regulation of Insurance – they were banking orientated, regulated at the federal level. A clear systemic risk shone through but there was no functional regulator, hence these new proposals.

US insurance regulators are rigorously defending their track record of solvency regulation and do not want federal intervention, especially as part of a banking initiative. However, certain insurance groups called “Tier 1 financial holdings companies”, who offer a wide range of financial products (insurance, mortgages, securities etc), are perceived to be potential causes of systemic risk in the financial system. The systemic regulator would predict the shocks which could occur and act accordingly. Both states and federal governments seem to have an interest, therefore, they will need to work effectively together and cut through the politics for the sake of the overall economy.

Most recently the US Treasury mapped out its proposals for an Office of National Insurance as part of the Obama Administration’s proposal for financial reform. If adopted the ONI would monitor all aspects of the insurance industry, except for health, and represent the US in international insurance matters. This latter point is important to the ability for the US to engage authoritatively with EU regulators and fits neatly into the current work on reinsurance regulatory modernisation.

There seems to be a momentum for some form of federal involvement along with continual state regulation. Both sides need to work together, recognise their reciprocal merits and make it happen. If they manage this quickly it could be very influential in the changes expected within the EU and UK specifically.

Systemic Risk

After initial signs last month, there is a growing sense of urgency both within Europe and the US to structure regulatory reforms for the financial services industry, including insurance regulation. The term “systemic regulator” has been mentioned on both sides of the Atlantic.

Within Europe, a report was published last week which made a number of proposals for a new financial services regulatory framework. It proposes a European Systemic Risk Council but the detail still needs to be clarified as it could be too banking orientated. In addition, the report noted the current fragmented nature of EU regulation which did not effectively address the growing complexity of financial market organisations. For insurance, it recommends that Solvency II be adopted quickly and that it adequately addresses the cross-border regulation of insurance groups.

This endorsement of Solvency II is welcomed by the insurance industry and hopefully it will give a necessary boost to the current tri-lateral discussions taking place within the European Central Government.

Within the US, as extended bail-outs are announced, there is a growing call for regulatory modernisation at a national level. Proponents state that enormous companies such as AIG can’t be effectively regulated at a State level but need some form of higher level systemic oversight.

There have been studies before about the possibility of systemic failure within the insurance and reinsurance industry for example, by the Financial Stability Forum. They showed that the industry did not represent a systemic risk to the world economy. It seems that regulators and the industry are now experiencing a practical analysis of the issues on a real time basis.

IUA would still argue that a knee-jerk reaction should be avoided as the vast majority of non-life insurers and reinsurers have avoided the worst effects of the recent financial turmoil. Insurance is different to banking therefore regulatory change should take account of the differing risk transfer mechanisms in place.

The New Legal & Regulatory Committee

Insurance supervisors have been preoccupied for many years by the question of how to regulate the activities of international re/insurers. Globalisation has been compelling them to share information and work together. Perhaps the most striking recent evidence of this is that the organisation representing US Regulators is planning to open an office in Brussels or Frankfurt in early 2009. Financial turmoil is now adding to the pressure, from policyholders and politicians, for supervisors to demonstrate that they have a sufficiently tight grip on, and understanding of, international re/insurance.

With a view to reducing the future burden of regulation on the industry, IUA has formed a new Legal and Regulatory Committee. This Committee which is made up of over a dozen general Counsel or Compliance Officers of member companies will seek to influence policy developments in this area.

Most IUA members are part of Group Operations. Those that write reinsurance tend to operate internationally but are not regulated on an international basis. Outside the EU they are usually subject to different regulations in each jurisdiction where they trade cross border creating in effect an inefficient patchwork of regulation that needs to be replaced by structures of global co-operation.

We see many benefits for both supervisors and policyholders. Supervisors would be able to access better information and more certainty and control over group operations. They could pool resources and eliminate duplications giving them more scope to focus on domestic supervision. Cedents and policyholders should see lower costs, greater market stability and more security. And of course, for the groups themselves, there would be benefits of easier market access, better use of capital and more certainty about supervisory actions.

Our new Committee will oversee new regulatory initiatives as they emanate from individual jurisdictions or global associations such as the International Association of Insurance Supervisors. Ideally, global mutual recognition of regulatory regimes is a goal worth pursuing for our industry.

The Year of the Regulator?

A recent insurance publication observed that 2009 could be the year of the regulator. I would tend to agree given all that has gone on but I sincerely hope that the “regulator” acts more like a good cricket umpire, ie seen but not heard and doesn’t seek to become the main attraction through his actions.

I sense that the industry is in a state of nervous anticipation. Government affairs departments are looking for clues of new regulatory initiatives, Solvency II has its challenges at the moment and will be under further scrutiny in the European Parliament and the new US Congress is being formed to implement “Obamaresque” policies as the new President seeks to make an impact in his 100 days.

For IUA, we need to monitor the key jurisdictions, alert members accordingly and tactically respond to regulators in our members’ interests. Our members are global companies and will also be interested in the activities of IAIS where global standards are being developed.

Some key questions remain unanswered:

 Will group supervision be part of the final Solvency II framework?

 Will there be a federal option to regulate US reinsurance?

 Will there be a vehicle for implementation of the NAIC’s new reinsurance framework including reduced collateral for IUA members.

We await developments with great interest.

Regulation Still the Top Priority

This week’s European Insurance Forum hosted by the Dublin Insurers Management Association (DIMA) covered many of the important business issues for global insurers.  This annual event is well supported and held in Dublin which is now an important centre for reinsurance in the EU, both competing with and complementing the FSA regime.

Not surprisingly, regulation emerged as the biggest concern of global insurers.  A number of sessions covered aspects such as Solvency II, Global Regulatory Convergence and US developments.  It was good to participate in the Forum on a panel with my counterparts at the Reinsurance Association of America and the Association of Bermudan Insurers and Reinsurers looking at reinsurance within the US.  This was a first for the three of us both in terms of our joint participation and the fact that we followed the key note speech from the Irish Prime Minister. 

Regulation within the US is changing but is also potentially encroaching into the commercial reinsurance market.  RAA commented that proposals by state guarantee funds to absorb catastrophe exposure protection had the potential to significantly reduce commercial reinsurance premium income. 

At the same time the FSA held its Annual Insurance Sector Conference, which inevitably focused on regulatory developments.  One of our Board members, Tim Carroll of Swiss Re, painted a picture of regulatory nirvana which could be reached if there were greater harmonisation across jurisdictions in the fast moving global market.  Building better relationships and trust between regulators is necessary and more advanced than ever.  This is especially important in our continued lobbying for US collateral changes where current proposals anticipate that a new entity will evaluate non-US jurisdictions for equivalency prior to collateral reductions. 

Focussing on Desired Outcomes

If you search for principles-based regulation on the FSA’s website, you will find comprehensive information from a regulator with forward thinking regulatory ideas.  Other regulators are taking note and beginning to include principles-based regulation in their own websites as they consider and design their versions of principles-based regulation.

Principles-based regulation focuses on the desired outcomes and enables firms to have flexibility in how these are achieved.  It requires commitment from senior executives and sound practices in risk identification and management.

FSA state they will be moving more to principles-based regulation, building on their risk based approaches.  IUA’s members welcome this development. New York has proclaimed a similar proposal of their own as part of their overall review into the financial services industry of New York.  And just this week, Bermuda in its first ever business plan, outlined the phased introduction of risk-based capital requirements to replace the solvency margin regime.  Add to this the jurisdictions such as Dubai and Bahrain, who like Bermuda, have FSA alumni in their employ, it all leads to global regulatory modernisation which should assist the industry and ensure the relationship between regulator and regulated is effective.

Those already subject to the FSA regulatory template should at least be well placed to comply with Solvency II and wider group supervision.

Making Inquiries

From time to time the European Competition Directorate conducts an 'inquiry' into a sector of business in the EU. On 25 September last year the EC published its final report on its two year sector inquiry into business insurance. This report is important for the London market as its observations could result in practical changes to the way business is written, but, if nothing else, it is another clear indication that our industry is under the regulatory microscope.

Our first market briefing of the year, held this week, concentrated on this topic. Over 60 people attended. Most members were represented which clearly demonstrates its importance. Of the greatest relevance is the focus of the report on the operation of the subscription market and in particular, alignment of premium whereby co-insurers agree to charge the same rate as the leader.

London's subscription market is highly competitive and syndication of risk is essential for many of the large complex risks in the market. The report shows that we need to demonstrate that this competitive environment is optimal in the eyes of the European Commission and Office of Fair Trading. This will be a key objective as we meet with and lobby the Commission in the next few weeks.

Regulatory Developments Gather Momentum

Happy New Year to everyone.

Many of the entries on this blog will focus on regulation, indeed it is a key area of work for IUA.  We need to be constantly vigilant to monitor regulatory developments and respond effectively on our members’ behalf.

There are a number of insurance/reinsurance-related regulatory initiatives currently under discussion and attracting the attention of underwriters in London. They can be local, regional or global but there needs to be an appropriate balance in place because over-regulation remains a key concern of the industry.

After a quieter period in 2006/7 the pace and frequency of regulatory activity seems to have heightened.  Perhaps this is party due to Solvency II planning or the focus on global regulatory harmonisation.  Certainly the first six months of 2008 will see considerable development of Solvency II – if the European Commission’s timetable is to be met.

US regulators at the State and NAIC level also have an intense period of deliberation ahead of them on issues such as credit for reinsurance, catastrophe pools, regulatory modernisation and the overall State versus Federal regulatory debate.  At least the most pressing matter seems to have been concluded, ie. statutory changes to the Terrorism Risk Insurance Act 2002 known as TRIA.  The Terrorism Risk Insurance Program Reauthorisation Act 2007 (TRIPRA) includes a 7 year extension and has been welcomed in many quarters as it offers stability and greater certainty to insureds and insurers of US risks.

At the global level, the International Association of Insurance Supervisors has published a further draft of its draft principles of group-wide supervision advanced by its Financial Conglomerates sub-Committee.  This is another example of supervisors reflecting the need to regulate globally not just locally.  Many insuring/reinsuring entities are now enormous, multi-national corporations, presenting regulators with the need to recognise each other much more than ever before.

The year ahead contains a busy regulatory agenda. IUA must stay alert to new developments and be well resourced to understand and represent our members’ interests at all times.