A subcommittee at the International Association of Insurance Supervisors (IAIS) adopted a draft paper on insurance company branches in foreign countries that continues to encourage countries to favor a subsidiary structure and limits freedom of organization, say disappointed U.S. insurers.
Observers say the draft, in its fourth iteration, is biased towards subsidiaries instead of branches, potentially hamstringing U.S. and other global insurance companies at the behest of a few and against international standards.
The Issues Paper on Supervision of Cross Border Operations Through Branches, adopted Tuesday in Frankfurt, is not available for public review, but it will now go to the IAIS Technical Committee before being exposed for consultation.
However, insurers, trade associations and the NAIC have all weighed in and some say the Technical Committee is the last place to get changes made because any changes are minimal when a paper goes out for consultation.
“Although slightly changed, (the latest paper) continues to suggest that supervisors consider forcing companies into a subsidiary structure. We think this would harm markets and is in contrast to the global insurance industry’s position – both the insurers and the reinsurers,” said Dave Snyder, international regulatory affairs expert for the Property Casualty Insurers Association of America (PCI).
Snyder and others argue that insurers and reinsurers need the flexibility to establish a branch, subsidiary, joint venture for efficiency reasons as well as for reflecting the different and unique marketplaces they are in. He added that branch flexibility helped developing nations.
Branch structures can encourage more companies to enter into a developing market, Snyder said.
“Structure formation of choice is a right which has been strongly defended in all recent free trade agreements the U.S. has entered,” Snyder said in an interview last week.
“We hope that the Technical Committee will take a hard look at this and remove those parts of the paper that suggest that,” Snyder said after the paper’s adoption Tuesday. He added that the industry very much appreciates the NAIC’s advocacy on the issue in opposition to the direction that a supervisor ought to choose the structure of an insurer’s entities in other countries.
Stef Zielezienski, the American Insurance Association’s (AIA) senior vice president and general counsel said that “the bottom line in the discussion of branching and other corporate organization alternatives is that multiple options should be preserved and available to companies as they consider expansion into new markets.”
“So long as capital is available to support the financial capability of a company to meet its obligations to policyholders, how the company organizes itself should be a matter of preference, not regulatory fiat,” Zielezienski said.
Issues that other supervisors might have with branches might stem from the 2008 Lehman Brothers situation where funds reportedly flew out of London to New York on the last weekend before it failed, noted one industry participant. Branches can pack up more quickly and leave quickly without renewing masses of policies, some foreign supervisors worry.
The Insurance Groups and Cross-Sectoral Issues Subcommittee (IGSC) is chaired by a regulator from Germany and this particular paper is under a subcommittee chaired by a Japanese regulator.
The NAIC is not going to publicly comment as an organization on the IAIS workstream until there is a paper out for consultation.
However, NAIC staff and staff regulators have expressed concern both in Frankfurt and when the third draft was released for discussion, and heard concern while convened at the spring national meeting in Houston last week. According to NAIC minutes, involved staff are worried that supervisors might consider requiring the foreign insurer to operate in the form of a subsidiary, and suggested a more appropriate step was for supervisors to regulate and supervise foreign branches the same way in which they regulate and supervise foreign subsidiaries.