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EU-US Dialogue Project proposes a 'Way Forward' for transatlantic insurance supervision

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The EU (European Union)-U.S. Insurance Dialogue Project has forged an agreement plan it announced December 21, a little less than a year after its members got together to cut through conflicting insurance supervisory issues to create a more cooperative framework for all market participants. 

The Way Forward plan, as it is called, seeks coordination and even consistency  between and among insurance supervisors on both sides of the Atlantic on such issues as group supervision, solvency and capital requirements, reinsurance and collateral requirements and exchanges of information under confidentiality strictures.

The projects’ goal is to craft a detailed project plan in early 2013 to be pursued over the next five years — U.S. industry players would like to see a rapid path toward cooperation as they say markets do not like the uncertainty of ambivalent regulatory guidance.

The project envisions a template for Own Risk and Solvency Assessment (ORSA)reports that can be used by both U.S. and EU groups, with a joint section for commonalities and  a tailored section on separate approaches to governance.

One objective which could prove thorny are a consistent approach to held capital requirements, valuation and technical provisions. The U.S. industry and state regulators have tried to stave off, at least since global repair work began on stability in the wake of the financial crisis in 2008, blanket capital requirements imposed by regulators and/or rules they view as too bank-centric or just not U.S. insurance solvency- system-sensitive in their approach.

However, the solvency approach would be viewed on an “overall basis,” and capital requirements would be examined with other supervisory tools used by state regulators, such as financial analysis, according to an outline of the Way Forward.

 On reinsurance, the possible removal of collateral requirements in both the United States and the EU for a risk-based determination in relation to credit for reinsurance could mean revising the current NAIC model laws on credit for reinsurance and examining uniformity and collateral levels among the differing states. Eleven states have passed the model laws in question.

The Federal Insurance Office (FIO)may have more of a role, as well, adding meat to some of its sketched-in statutory powers. 

The FIO is tasked with responding to suggestions regarding its authority under the Dodd-Frank Act to enter into covered agreements. 

The Dodd-Frank Act authorizes the Secretary of the Treasury and the U.S. Trade Representative jointly to negotiate and enter into bilateral or multilateral agreements regarding prudential matters involving the business of insurance or reinsurance. FIO is supposed to assist the Secretary with those responsibilities.

The EU-US Insurance Dialogue Project got underway in early 2012, when the European Commission (EC), the European Insurance and Occupational Pensions Authority (EIOPA), the National Association of Insurance Commissioners (NAIC) and the Department of the Treasury’s FIO agreed to participate in a deeper dialogue project after much fretting over Solvency II and its equivalence expectations for the U.S. state system and how they would be achieved when the states take a risk-based approach to capital. Work by the NAIC to help appease concerns for foreign reinsurers and to foster better trade are also part of the long supervisory regime coordination saga. 

Before FIO looped together the various stakeholders, tension was building  domestically from efforts to pressure the United States into a stricter equivalent of Solvency II in order to receive equal treatment in trade negotiations and agreements. There were attempts to ameliorate trade issues with reinsurance model laws.

On Friday, FIO Director Michael McRaith said in a statement, that the undertaking shows “a mutual commitment not only to the best practices for insurance sector supervision, but also a respectful awareness of commonalities and differences which will lead to improved insurance supervision on both sides of the Atlantic. While important issues remain to be addressed in technical detail, the EU and U.S. insurance supervisory regimes are moving toward improved compatibility that will benefit insurance consumers, industry participants, and the U.S. economy.” 

The Project’s steering committee, of which McRaith is a member, of the EU-U.S. Dialogue Project agreed on the common objectives at a meeting this past week hosted by EIOPA in Frankfurt. The agreement was based on a report released for consultation earlier this year which summarized the key commonalities and differences between the two regimes, with a big focus on the state regulatory system here in the U.S.

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Following joint hearings in Washington and Brussels, the draft report was revised to increase accuracy and provide clarification of certain content, according to the steering committee. 

After the report draft’s release in September, U.S. industry participants 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. Others noticed the federal role could be spelled out more in the draft. 

For its part, the NAIC International Insurance Relations Leadership Group embraced the work and approved a motion on December 21 to  give the proposals to the NAIC Executive Committee with a recommendation to engage the appropriate committees in the work necessary to evaluate and carry out the recommendations.

“I believe we have achieved a greater mutual understanding of our respective solvency systems through the U.S.-EU Dialogue Project,” said NAIC President and Florida Insurance Commissioner Kevin McCarty. “The Way Forward plan reflects our best efforts to identify key areas for enhancement and possible alignments between our solvency approaches. These efforts should lead to more efficient and effective regulatory oversight and increased policyholder protection.”

There’s “sufficient granularity to the Way Forward task-lists that give us and, more importantly, the supervisors themselves a way to measure progress,” noted one observer. 

Another, Dave Snyder, international affairs regulatory executive with the Property Casualty Insurers Association of America (PCI), said that the efforts should not lead to attempts for one group of say, reinsurers, to gain advantage over the other, but to work together and seek efficiencies. 

Snyder also noted that he hopes the capital requirements discussion does not develop into set of capital requirements that could be imposed.  

The stated goal in the project’s new outline involves development of some sort of mechanism or approach “which more accurately reflects the risk profile of companies, is sufficiently sensitive to changes in that risk profile and which has capital requirements that are fully risk-based, based on a clear and transparent calibration and that cover similar categories and subcategories of risks to which companies are exposed.”

The Project will at the least examine the interaction of solvency and capital requirements with other supervisory tools such as financial analysis when looking  into transparency of risk measurement and consistency of solvency measurement.

Snyder had previously said before the group during open hearings this fall that the most important objective is to avoid disruption of the transatlantic insurance marketplace by erecting new barriers that would harm commercial and personal insurance consumers.  

“We continue to believe that the work demonstrates that the two systems actually have much in common in terms of objectives and outcomes. We support on-going dialogue and are reviewing the specific proposals for the Way Forward.  But we also believe that there is ample evidence already established to deem the two systems sufficiently congruent so as to be equivalent,” PCI said in a statement. 

Gabriel Bernardino, chairman of EIOPA, said in a statement, “We look forward to continue to work with the US colleagues on this process and we are committed to achieve concrete outcomes that will facilitate the business environment, increase consumer protection and contribute to more efficient supervision.”