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.” 

McCarty was referencing concerns about the direction of ComFrame, which has begun to get a lot more visibility of late. 

The IAIS, the Basel,-based group for insurance regulators from around the world, began developing a Common Framework for the Supervision of Internationally Active Insurance Groups in July 2010.

“We have made our position abundantly clear,” McCarty said in response to concerns voiced by David Snyder, general counsel, public policy, of the American Insurance Association about a possible new layer of regulatory oversight and requirements.

After noting that the U.S. and Europe had different approaches he said, “we think the focus should be on risk concentration. We don’t believe capital is the answer.” 

In banking there are issues of insufficient capital. “We don’t think that is the case in insurance,” McCarty said.

“If you spend all this time, resources on capital,… you have created a false sense of security,” McCarty said in a booming, lengthy oral statement against preventing the AIGs of the world through European-induced capital requirements. 

Yoshihiro Kawai, Secretary General of the IAIS, who spoke to the NAIC committee on the challenges of ComFrame’s charges, said the Basel-based body has not reached any consensus on the issue. He confirmed to National Underwriter that the IAIS has made no determination of too-big-to-fail or globally systemically important financial institutions (G-SIFIs) to the Financial Standards Board, which in turn reports up to the G20, or Group of 20 Developed Countries (G20).

That report is expected by summer 2012. In fact, the IAIS is debating if there is a G-SIFI in insurance, what should be done, how does one interpret capital or other needs if a GSIFI insurer does exist. G20 leaders meet this week and methodologies are expected to be disclosed there, Yoshihiro said. 

Bair, the recent federal banking regulator, also exhorted the NAIC to start getting involved in credit default swaps, and to take a look at any insurance interest in them, as she thinks that these derivatives could cause another credit event. These, flying out in high volume in unregulated pockets of the globe, and not normally oversen by state isnureance regulators, were at the heart of the crisis in 2008, not AIG’s capital models or lack thereof, industry and regulators seemed to agree.