EU-US Dialogue: Exploration of future action takes hold

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.