Federal, State Regulators Renounce European Capital Standard Focus

At the NAIC Fall Meeting outside of Washington Thursday, capital requirements as a measurement in solvency and insurance financial fitness assessments took a beating.

“You can’t prevent an AIG by focusing on capital,” said NAIC President-Elect Kevin McCarty, chair of the NAIC’s International Insurance Relations Committee and chief of the Florida Office of Insurance Regulation, at the national meeting here. He affirmed the sentiments of many U.S. insurers concerned that international and European standards are forcing a thicket of new requirements on the domestic industry.

Earlier, at the NAIC opening session Thursday, Sheila Bair, former Chairman of the FDIC during the financial crisis (June 2006-July 2011) urged the NAIC to fight the pressure to use European-capital standards “very strongly.” She was referring to internal modeling that insurers would use under the European Solvency II regime. Avoiding Solvency II’s banking counterpart, BASEL II, “was the only thing that saved our bacon” during the financial crisis, Bair said. 

Solvency II is an overhaul of the capital adequacy regime for the European insurance industry. It will have implications for multinational insurers who are are not perceived to be adequately meeting the revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. Solvency II is scheduled to go into effect on January 1, 2013, but has run nito numerous delays already. 

The NAIC is currently working on its own version of solvency standards under the Solvency Modernization Initiative, where many regulators have chafed under the capital requirements and prescrtiive approaches of Solvency II and now, apparently, ComFrame.

Models should never be used to drive minimal capital levels, she said. Pointing to the sovereign debt problem now in Europe, Bair said she was glad the U.S. kept its leverage ratios and fought Basel II.

Connecticut Insurance Commissioner Thomas Leonardi, who is also very active on international supervisory issues, said Bair’s comments were “music to the ears” of many regulators assembled there. 

Leonardi has been a vocal opponent of the one-size-fits-all approach he believes Solvency II is taking. Leonardi and Washington, D.C., Commissioner William White, who are also both now part of the Federal Insurance Office’s (FIO) advisory circle, known as Treasury Department’s Federal Advisory Committee on Insurance, agreed with ex-FDIC’s Chairman Bair’s comments and explained to National Underwriter later that using internal models for determining capital requirements are an issue.

NAIC CEO Terri Vaughan said some had learned a hard lesson, that when you create systems with internal models, there are games to be played. “At the NAIC, we are looking at the basic leverage ratio,” she said, for strength, with minimums that are clear, before looking at more complicated systems.”