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FACI: Its Flavor Is International, Its Focus Is on Domestic Regs

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At its second public meeting on Aug. 6, the Federal Advisory Committee on Insurance (FACI), a sort of private-public armchair consultancy branch of the Federal Insurance Office (FIO) at the U.S.Treasury, signaled it was viewing U.S. insurance regulation through the wide-angle lens of internationalization, and also seeking input on shortcomings or the need for updating state insurance regulation. 

FIO Director Michael McRaith also said the long-awaited modernization report could be expected “in the near future,” according to those present. 

A new FACI committee, formed under FACI Chairperson and Marsh McLennan CEO Brian Duperrealt, was specifically charged with possible changes to U.S. state insurance laws created by the implementation of an international body’s work known as ComFrame

The Comframe (or, more long-term, hot button international regulatory standards under development) Subcommittee, to be headed by New York State Insurance Superintendent Benjamin Lawsky would look at the potential impact of that work in relation to U.S. insurance laws, according to a FACI meeting review by Sue Stead, head of Nelson Levine de Luca & Hamilton ’s regulatory practice. 

ComFrame is the International Association of Insurance Supervisors (IAIS) “Common Framework for the Supervision of Internationally Active Insurance Groups.” ComFrame will codifiy methods of operating group-wide supervision of Internationally Active Insurance Groups (IAIGs) in order to make group-wide supervision more effective and more reflective of actual business practice and establish a comprehensive framework for supervisors to address group-wide activities and risks and also set grounds for better supervisory cooperation.

ComFrame is a centerpiece of U.S./European Union insurance supervision dialogue, which, with Solvency II, has seen its share of U.S. state regulatory mistrust. 

McRaith is a member of the IAIS executive committee. The subcommittee will also consider how “group supervision” is defined in ComFrame, and the effects of such changes on the U.S. industry.

In that vein, FIO had begun a U.S./EU dialogue. 

At the recent FACI meeting, McRaith said the dialogue is progressing well. A draft document covering seven different topics will be released shortly and will address privacy, group supervision, reinsurance (including collateral requirements), financial reporting, peer review and the oversight of third parties, according to Nelson Levine. Hearings are expected to be held in both the U.S. and in Europe. McRaith reiterated that he hopeful that there would be a resolution on these topics by the end of the year. As Stead wrote, when asked by a FACI member whether the FIO would adopt the views of state insurance regulators with respect to ComFrame, McRaith said it would be “inappropriate” for him to say that. 

Of course, not all regulators have the same opinion on ComFrame, but one FACI member, Pennsylvania State Insurance Department Commissioner Michael Consedine, has a department that has been outspoken on state versus international regulatory matters.

At this meeting, Tom Leonardi (the Connecticut Insurance commissioner, who participated in the meeting by phone) challenged McRaith with respect to ComFrame, asking whether the FIO would adopt the views of state insurance regulators with respect to ComFrame, according to a regulatory lawyer present. Consedine followed up, expressing his concern that the FIO and the states could end up diametrically opposed to one another on prudential supervision approaches, but McRaith did not back down, responding that he is “entirely confident” that will not happen and that the FIO and state insurance regulators have the same interest in a system that will be fair and protect the interests of consumers, this person stated.

“The one thing I like that the international people are doing is ORSA [Own Risk and Solvency Assessment],” Pennsylvania Deputy Insurance Commissioner Steve Johnson said last fall at the national NAIC meeting, after delivering a diatribe against international regulatory initiatives like ComFrame, a “400-page document” and other aspects of Solvency II. ORSA is a group supervision requirement of Solvency II. 

When a committee member expressed his concern that the FIO and states could end up diametrically opposed to one another on prudential supervision approaches, McRaith responded that he is “entirely confident” that will not happen and that the FIO and state insurance regulators have the same interest in a system that will be fair and protect the interests of consumers, the Nelson Levine law firm summarized.

This new subcommittee is the third formed under FACI. 

The first two subcommittees, Affordability and Accessibility and International Regulatory Balance, have already begun work on guiding principles, and were also given an international focus. 

The latter subcommittee’s purview is more obvious internationally, by name–it is charged with determining whether it was important for Europe and the U.S. to have compatible regulatory systems and determining what “compatible” would mean in this context and whether the U.S .regulatory system is equipped to regulate insurers doing business internationally and whether there are gaps in the U.S. system that put U.S. insurers at a disadvantage when doing business internationally, Stead wrote.

On the Affordability and Accessibility Subcommittee, the charge is also international– determining the impact of international regulatory developments on U.S. consumers. It also examines the role of state regulators by asking whether the role of U.S. regulators has kept pace with the U.S. market, whether producers have been affected by U.S. demographic changes and whether the regulation of producers domestically by the states has kept pace with any such changes, according to the law firm’s write-up.  It will also ask whether personal lines insurers have been affected by the changing demographics in the U.S.

McRaith said again, according to the Nelson Levine summary, that the coordination of the timing of the designation of insurers and groups as globally systemic important institutions by the IAIS and as systemically important financial institutions by the Financial Stability Oversight Council (FSOC) is a priority. This is seen as happening in the first quarter 2013.

Also, as expected, at the FACI meeting, McKinsey and Co. provided an analysis of the global property and casualty market and the global life insurance market. As McRaith has pointed out using similar data in the past, large U.S. carriers are deriving more of their income from overseas than they used to, as Nelson Levine summarized. McKinsey representatives stated that in the 1950s U.S. carriers derived about 5% of revenues from international markets. The analysis showed that the number increased to 39% in 2009. 

McRaith cited in his May 17th testimony before the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity a recent McKinsey study that showed that insurers, including U.S.-based insurers but not limited to them, are now generating almost 33% of premium volume from outside the insurers’ home countries. 


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