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EU-US Dialogue: Exploration of future action takes hold

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The U.S.-EU Dialogue Project, which includes top insurance supervisory officials in the U.S. and Europe, released a draft report comparing aspects of the insurance regulatory regimes in the United States and the European Union.

U.S. industry participants and involved state regulators were cheered by the apparent acceptance that there are commonalities as well as differences between the core principles identified in the U.S. state-based regime’s Insurance Financial Solvency Framework and the three-pillar approach of Solvency II in Europe. 

The reports of the group’s technical committees spelled out some of the key commonalities and differences. The draft comforted many in the industry by noting that the overarching objectives of both of the supervisory regimes of the two largest insurance markets in the world are essentially the same i.e., to protect policyholders and to enhance financial stability. 

Before the Federal Insurance Office (FIO) looped together the various stakeholders, there was tension in the U.S. with perceived efforts to pressure the U.S. into a strict equivalent of Solvency II in order to receive equal treatment in trade negotiations and agreements.

The draft report reveals that it is understood that both regulatory systems are very comprehensive, effective and have very much in common, said Dave Snyder, Property Casualty Insurers Association of American (PCIAA)’s vice president of international policy.

“An initial read indicates that the insurance regulatory systems on both sides of the Atlantic have much in common with their objectives but some differences in how those objectives are pursued. 

Nevertheless both systems performed extremely well during the financial crisis—so we hope that this report will further the dialogue and improve understanding and result in an outcome which avoids erecting any new and unnecessary barriers—to transatlantic insurance commerce. And we commend all of the regulators and other public officials involved in producing this report as it reflects an incredible effort on everyone’s part,” Snyder told NU.

The U.S. and Europe are now more formally aligned in interests, as both are the largest players in the world in insurance, but competition is coming from all areas of the globe, especially China.

One of those key areas of difference identified, of course, is that under the EU regime, the European Insurance and Occupational Pensions Authority (EIOPA), which was established as a result of the reforms to the structure of supervision of the financial sector in the European Union, participates as a competent authority in its own right and in the U.S., the NAIC is not considered a supervisory authority although it coordinates certain activities among state supervisors and provides a series of analytical and support services. 

“In both regimes, EIOPA and the NAIC may have access to firm-specific information through the respective supervisory authorities or other grants of legal authority; however, the EU regime is different in that it allows EIOPA to request information directly from (re)insurance undertakings in certain instances,” the report noted, without making any value judgment on either system.

On the U.S., key contributors to the process include the FIO, the NAIC, and specific Steering Committee members such as FIO Director Michael McRaith, NAIC CEO Terri Vaughan, NAIC President and Florida Insurance Commissioner Kevin McCarty. In Europe, the European Commission and EIOPA are the key parties involved.

The project began at the beginning of the year and is scheduled to conclude at the end.

No action has been taken yet. But it could be—this has not been decided, yet.

The second phase of the project will involve discussions of the Steering Committee about the key commonalities and differences between the two regimes that will lead to policy decisions by their respective organizations regarding—and this is the key part—”whether and how to achieve further harmonization in regulation and supervision.”

One key difference U.S. regulators have focused on in recent discussions is the Risk Based Capital (RBC) formula used in the state-based regime in the United States comparing its efficacy to the European standards for ensuring insurers have enough on hand to cover liabilities. That amount of regulatory capital, as measured by U.S.’ RBC, is likely to be lower than the EU Solvency Capital Requirement (SCR). RBC is factor-based, generated from historical industry-wide data experience, with some use of internal models regarding interest rate and market risk.

The NAIC’s RBC formula derives an RBC ratio where the parent company is an insurance company. However, unlike the Solvency II directive, the state-based regime in the U.S. does not provide for an explicit group capital requirement, the draft stated.

The RBC action level (and the three other levels) for regulatory intervention used by the company is not calibrated to an overarching confidence level or time horizon in the U.S.

In the EU regime, there is an explicit Group Solvency Capital Requirement (Group SCR), the draft underscored.

Under the state-based regime’s RBC system in the U.S., the Company Action Level (CAL) sets a minimum amount of capital before corrective action is prompted.

The key aspects of the EU’s group solvency assessment include a “total balance sheet approach”—group SCR covers all quantifiable risks relating to existing business and also to new business expected to be written in the 12 following months (e.g., for liability and other long-tail business, including a projection of future cash flows); and a risk diversification benefit.

Under Solvency II, intervention is based on the SCR and the Minimum Capital Requirement using a measure derived from a total balance sheet approach. 

Another difference is that the scope of group supervision in the EU, according to Solvency II, is the entire group—all entities within the group, regulated or otherwise, on a global basis. But, in the U.S., traditional application of group supervision has focused on the holding company and its insurance subsidiaries, the draft noted.

The Steering Committee agreed upon seven topics during meetings that took place in Frankfurt, Basel, and Washington, D.C., over the past months. The topics were agreed upon as fundamentally important to a sound regulatory regime and to the protection of policyholders and financial stability. The seven topics are:

  • Professional secrecy/confidentiality;
  • Group supervision;
  • Solvency and capital requirements;
  • Reinsurance and collateral requirements;
  • Supervisory reporting, data collection and analysis;
  • Supervisory peer reviews; and
  • Independent, third-party review, and supervisory on-site inspections.

Although the Steering Committee oversaw the process, a separate technical committee (TC) was assembled to address each topic. Each TC was comprised of experienced professionals from both the European Union as well as the United States, specifically, from FIO, the EC, the NAIC and EIOPA, as well as representatives from state insurance regulatory agencies in the U.S. and authorities of EU member states. The draft states that the work is a collaboration and reflects consensus views of technical committee members for each topic area. 

The draft is not considered to express official views or positions of any organization.

Florida’s McCarty, who has been very involved in international supervisory matters, stated, “this report represents our continued commitment to building on and strengthening our mutual understanding of our respective systems.”

William P. White, commissioner and agency head for the District of Columbia Department of Insurance, Securities and Banking (DISB), who serves on the technical committee said in a far-ranging interview earlier this week that there is no preconceived future framework in mind for the final outcome of the dialogue and emphasized the ongoing discussions evaluating the different solvency regimes.

It is not a contest, he said, between Solvency II and RBC. It is not a tug of war between the two sides of the Atlantic, he further explained.

“We want to make sure we have a consistent framework for supervising internationally active insurance groups,” White said. 

Vaughan stated in a prepared release, “although we have different regulatory structures, this project has highlighted for us that we share regulatory objectives and approach supervision with policyholders’ interests in mind.” 

Although no conclusions were reached, the area of reinsurance is ripe for some sort of change.

One key difference noted by the technical committee, observers –and over the many months by interested parties—is that a foreign (non U.S.)  reinsurer could be subject to different collateral requirements in different states, even under the recent changes to NAIC  model acts, while Solvency II or its equivalency would lift the need for posting of collateral.  

It was interesting that the report on reinsurance contained a reference to the power granted by the Dodd-Frank Act to the Treasury and the United States Trade Representative to enter into agreements with other countries on insurance matters,” stated Michael Nelson, chairman of insurance-based law firm Nelson Levine de Luca & Hamilton.

“If reinsurance would become the subject of such an agreement, it is possible that state collateral requirements for foreign reinsurers could be preempted,” Nelson pointed out.

The Steering Committee of the U.S.-EU Dialogue Project will hold a public hearing Oct. 12 in Washington to solicit comments on a draft report comparing aspects of the insurance regulatory regimes in the United States and the European Union. Interested parties may provide written submissions by close of business Oct. 28, 2012, via email to [email protected].


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