Prudential Financial Inc., Newark, N.J., told the Federal Insurance Office’s (FIO) that we all must get along, or at least work together, for the common goal of promoting and defining U.S. interests in the insurance arena.

Prudential now derives roughly half of its earnings from international insurance, with the vast majority of this business being Japanese yen-based.

Responding to the FIO’s request for public input on its January 2012 report to Congress regarding the modernization and improvement of insurance regulation, Prudential said that it looks forward to the new insurance office taking the point on U.S. national interests on insurance on the international stage, filling a void at the G-20 and the Financial Stability Board.

But, “in order to present a unified U.S. “voice” on international insurance issues, the states and the NAIC must work collaboratively and constructively with the FIO,”  to get the FIO’s status elevated and heard on the world stage, Prudential warned in its letter, as penned by Prudential Vice President Rex B. Wackerle. Later in the letter, Wackerle told the FIO that the NAIC and state regulatory bodies must get up to snuff on market conduct.

“It is critical for the FIO to actively engage at the International Association of Insurance Supervisors (IAIS), especially on key issues like IAIS financial stability systemic risk deliberations (G-SIFI talks) and efforts to enhance insurance group supervision (e.g. ComFrame). To that end, we would encourage U.S. state regulators and the NAIC to support the need for the FIO to be granted a seat on the IAIS Executive Committee,” Wackerle wrote.

A unified voice “would benefit U.S. insurers and regulators in many international settings ….such coordination would also assist in ensuring that their U.S. companies are not disadvantaged when operating in foreign markets, either as a result of foreign law or because of inconsistent U.S. based regulation,” Wackerle told the FIO Director Michael McRaith.

“Dodd Frank’s creation of the FIO finally offers the U.S. insurance sector the opportunity for ongoing, direct engagement with the G-20, FSB, International Monetary Fund (IMF), World Bank and all of their relevant working groups,” The Prudential stated through its executive.

Armed with the expertise of various state insurance regulators, the G-20 and FASB could then defend the U.S. solvency regime, which has “proven itself to be resilient and successful in meeting its central mandates of protecting policyholders and promoting market stability

Like others, Prudential called upon the FIO to beef up its staff. See: http://www.lifehealthpro.com/2011/12/16/commenters-find-fault-with-state-regulation-look-t

FIO “must have sufficient levels of staff and funding appropriate to facilitate the strongest possible partnership between U.S. state insurance regulators, U.S. federal financial services supervisors and the Treasury Department’s Office of International Affairs in order to fully represent the U.S. national interest,” Wackerle said.

Wackerle also noted Prudential had helped draft comments by the American Council of Life Insurers (ACLI) and the Insured Retirement Institute (IRI) sent last week, as well. See: The IRI said the FIO should tell consumers they are at the risk of outliving their assets and provide them some education on the financial strategies that can provide guaranteed lifetime income, in its letter.

The ACLI’s response to the FIO included a study with a survey of CEOs, and identified areas for improving state regulation by increasing uniformity and comity among state regulators and regulatory requirements. See: http://www.lifehealthpro.com/2011/12/14/acli-finds-same-state-regulatory-problems-more-tha

One area of particular interest to Prudential, Wackerle said, is market conduct reform, coincidentally a huge area of concern and subject of a concerted effort now from the NAIC, according to the NAIC’s comments to the FIO, and the announcement of a new initiative yesterday, which begins with an NAIC survey to states and may end in a more comprehensive collection of market conduct data. See: http://www.lifehealthpro.com/2011/12/20/naic-pursues-comprehensive-market-conduct-assessme

Prudential noted that Government Accountability Office (GAO) Reports in 2002 and again in 2009 showed that, “differences among states have limited progress toward reciprocity and uniformity” and “lack of uniformity and reciprocity may lead to inefficiencies, higher insurance costs, and uneven consumer protection across states.”

Several years ago, the NAIC considered an accreditation program for market conduct, but that effort appears to be dormant, Prudential said. The National Conference of Insurance Legislators (NCOIL) adopted a Model Act with support from industry, but only 13 jurisdictions have adopted provisions from the Model.

“Prudential shares the industry’s concern that the NAIC has not adequately addressed issues related to the confidentiality and security of market conduct information,” the company said.

In its commentary to the FIO, the Affordable Life Insurance Alliance (ALIA) championed the NAIC’s work on solvency through modernizing reserving methods. ALIA focused on the need to move to a principles-based reserves (PBR) approach for valuation of life insurance reserves, a move underway by the NAIC now.

ALIA said it strongly supported the NAIC’s decision in 2005 to fundamentally reform the existing formulaic or “rules-based” system for calculating reserves and replace it with a modern, principle-based approach (PBA).

A full manual report for the model law passage is expected in March, and regulators are hoping to have enough (42) state legislatures pass the new PBR so that it can become the defacto model by 2015.

The ALIA, which was born amid the movement to better value life reserves, is one of the first organizations to tie PBR to FIO concerns.

It pointed out that momentum for the PBR project began in 2004 as the industry and regulators worked to find common ground regarding the interpretation of Actuarial Guideline 38 as it applied to Universal Life with secondary guarantees.

AG 38 is still a hot issue now, for other reasons relating to the interpretation of the guidelines and suspected loopholes used by some insurers that mask the need for higher reserves. The NAIC’s key parent committees are reviewing AG 38 guidance now for USLG and term life products.

See: http://www.lifehealthpro.com/2011/12/08/naic-top-working-group-tackles-ag-38

The initial AG38 experience “demonstrated to NAIC leadership that the current rules-based valuation system and heavy reliance upon Actuarial Guidelines to provide interpretative guidance was not working for some modern life insurance products. There was general agreement that the “one size fits all” approach inherent in the current formulaic, rules-based approach to valuation was inappropriate for certain products and that better tools were available to value reserves for those products,” ALIA stated.

The “NAIC’s project to modernize the system for valuing life insurance reserves is just another step in the ongoing process of modernizing valuation methodology in the U.S., to keep pace with the ability of insurers and regulators alike to identify and understand risk. While laser-like precision is not possible, modern technology and risk management techniques now make it possible to identify a level of economic reserves with a high degree of credibility,” the ALIA said in comments written by executive director Scott Harrison last week.

If U.S. insurance companies are to remain competitive in an increasingly global marketplace, solvency regulation in the U.S. must continue to evolve and further, companies must not be required to operate in a manner that disadvantages them relative to their European and other international competitors, ALIA concluded.