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Commenters seek tweaks in U.S.-EU Dialogue Project

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Members of the U.S. and European insurance communities are hoping to bridge the supervisory divide between the two regions with the EU-U.S. Dialogue Project, but more work needs to be done to make it more forward-looking and inclusive of some overlooked elements, many said.

Still, the state regulatory community and U.S. industry warmly embraced the non-judgmental and respectful tone for each regime and the scope of the project, calling it historic, a “milestone in the history of insurance regulation,” and generally praising the work done so far, more so than on any other international work stream. The draft compares and catalogues aspects of the insurance supervisory and regulatory regimes in the European Union and the United States.

As an alternative to either or both jurisdictions entering into unilateral equivalence exercises, FIO initiated an EU-U.S. insurance dialogue. The insurance industry based on both sides of the Atlantic needs greater clarity and certainty as to regulatory expectations and capital requirements, as FIO Director Michael McRaith stated in Congressional testimony in May.

Many in the U.K. insurance/reinsurance industry, judging from comments made at a hearing Friday, would like the U.S. states to move a little faster on adoption of the Credit for Reinsurance Model Act, and generally making reinsurance nondiscriminatory in terms of collateral required from non-U.S. insurers. 

McRaith, director of FIO, who chaired the dialogue, at times asked if anything was missed and what others thought about the direction the project should take in its second phase. It is expected discussions will lead to policy decisions by their respective organizations regarding whether and how to achieve further harmonization in regulation and supervision. 

But, first, some elements, it was pointed out, were indeed left out or overlooked in the document, which some involved expected to be included as the draft is developed. It is in a consultation period now.

The most glaring oversights in the catalogue of the U.S. system included no real mention of the Federal Reserve’s power of consolidated supervision of insurers deemed systemically important or insurers that have thrift holding companies or banks, or of the Federal Insurance Office’s (FIO) actual powers. The Fed is not so much on the sidelines but is busy thinking about these issues

The report fails to discuss the Dodd-Frank enhanced prudential regulatory standards that would apply to non-bank SIFIs [systemically important financial institutions], and the Dodd-Frank provisions aimed at identifying and reining in industry-wide practices that may present systemic risk, pointed out Stef Zielezienski, general counsel of the American Insurance Association (AIA).

Contributions to the draft by the steering committee were made by many regulatory or supervisory officials. FIO had five people represented, the states and NAIC had about 26, and European representatives from individual countries or the European Insurance and Occupational Pensions Authority (EIOPA) had almost 30, so representatives from the Atlantic were about equally divided.

FIO’s pre-emption powers, which include the ability to recommend changes to the state system of insurance regulation and preempt certain state insurance laws, are either not enumerated in the report, or are mentioned as monitoring, identifying and interacting.

The Dodd-Frank Act gave FIO broad authority, including authority to coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters.

AIA’s Zielezienski noted other areas where he believes the section on group supervision seems to understate or, in some cases, omit elements of the U.S. framework, including not giving enough props to state regulation in looking at solvency regulation that applies across state boundaries to groups, including the use of market discipline, public ratings, financial reports, hazardous financial condition statutes and financial examinations, and doesn’t note the long history of state insurance regulatory cooperation in the U.S., among other things. 

The AIA executive did stress that more cooperation is needed in supporting efforts throughout the country to “swiftly adopt the amended NAIC credit for reinsurance model.”

Some in the global reinsurance and insurance industry agree it is critical that the collateral reform laws and regulations be enacted by each state, or that some uniform law apply, while supporting ceding company efforts to effectively manage reinsurer counterparty risk under the new regulation. Thus far, 11 states have enacted laws consistent with the NAIC model, which was passed last November at the NAIC fall/winter meeting. The model law was seen as a compromise, as part of the struggle for the U.S. to not have to be girdled with the equivalency strictures expected in the now-delayed European Solvency 2. Much is at stake, almost all people who participated in Friday’s hearing agree.

“We spent a lot of time talking about ComFrame — we can’t have anything as grand as ComFrame unless these two countries can get together,” said one commenter representing UK reinsurers, Bill Marcoux from DLA Piper US LLP. 

Nick Lowe of the International Underwriting Association of London Ltd. noted during the hearing what some in the U.S. have expressed on background — that while the U.S. and UK have enormous influence, this is due to decline in the coming decades, so the U.S. and the EU need to collaborate now. He expressed that this may be the last chance for anything meaningful, saying that there may be no chance for an effective international supervision, no chance for an effective ComFrame “if you go down the wrong path now.”

“I think U.S .and Europe can still beat the world, but they need to join up now or it will be too late,” Lowe said. 

Brad Smith, the international affairs executive at the American Council of Life Insurers, said the ACLI  thinks this process “is tremendously important. This is the most material insurance relationship in the world.”

ComFrame (the Common Framework for the Supervision of Internationally Active Insurance Groups) has caused either robust debate or stress, depending on who one talked to at the recent IAIS conference

There are deep fractures in it now due to the U.S. and the EU seriously diverging on the scope and application on standards for group supervision of internationally active insurance groups (IAIGs.) 

ComFrame is a work product under development by the International Association of Insurance Supervisors, which met here in Washington last week. The Financial Stability Board (FSB) under the G-20, approves the IAIS conclusions — it basically checks IAIS’ homework on identifying moral hazards in the insurance industry, and even influences some measures in ComFrame, such as reinsurance, according to those involved at the IAIS conference.

Many now reread the initial July 2010 charges for the supervision of IAIGs and see that the quantitative requirements in the terms of possible global capital standards loom more real than first anticipated; to the U.S., most of the thinking had been around supervisory cooperation and interaction. 

There has been some push back from the NAIC on any global standards and questions about what legal authority they would be given, and even what the U.S. policy is and who voices it in international policymaking groups, as was discussed between NAIC and FIO representatives during a late September IAIS solvency and actuarial subcommittee meeting in Singapore. As a result, many elements of ComFrame are back on the table, including unified accounting standards. FIO became a full member of the IAIS a little more than a year ago.

NAIC CEO Terri Vaughan said at a press conference Oct. 10th that the U.S. may be able to use GAAP (U.S. Generally Accepted Accounting Principles) accounting rather than IFRS (International Financial Reporting Standards) accounting, which had first been expected to be a global standard. 

In the Dialogue draft, the writers explained, without intentional judgment, the similarities and differences between the U.S. and European systems, including differences on accounting. GAAP looks to establish more of a winding-up value based on the statutory accounts and the use of amortized cost methodologies, whereas the EU regime assesses a company on a going-concern basis based on a market consistent balance sheet. This difference is consistent with the SCR potentially being an earlier intervention point than the RBC CAL, and explains why available capital is likely to be more subject to variation over time in response to changing market conditions under the European regime, the draft states.

In a brief interview after the hearing, NAIC President and Florida Commissioner Kevin McCarty, who is heavily involved in ComFrame and the EU-U.S. dialogue, suggested the possibility of the EU-U.S. dialogue being used as a track for ComFrame discussions rather than running along its own parallel track. The dialogue has no authority or standard-setting plans, but it has not decided on its next step other than that there will be one. He also expressed that the consultation period will be meaningful and invite all input, without a tussle over which system should be more like the other. The dialogue values both.


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