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U.S. regulators taking a cue from int’l orgs

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Overseas regulatory bodies are increasingly guiding the work of their U.S. counterparts. And on a number of fronts, the International Association of Insurance Supervisors (IAIS) is leading the charge.

These were among the chief takeaways of a panel discussion held in New York City on Tuesday at the 2013 Annual Executive Conference. Hosted by National Underwriter Professional Network and sponsored by EY (formerly Ernst & Young), the session brought together executives of the IAIS, the Association of Bermuda Insurer and A.M. Best Company to explore trends in the global regulatory landscape.

IAIS Deputy Secretary General George Brady said the growing influence of the IAIS with national regulators in both developed and emerging markets stems from the varied initiatives the organization is spearing to “bring global solutions to global issues.”

A voluntary membership-driven organization of insurance supervisors and regulators from more than 190 jurisdictions in more than 140 countries, the IAIS is a standard-setting body that promotes globally consistent supervision of the insurance industry and global financial stability. Among other initiatives, the organization has developed methodology for identifying systemically important financial institutions (SIFIs) that operate worldwide.

“If you’re active internationally or active as a group, IAIS has established a common framework for supervision of internationally active insurers,” he said. “The aim is to establish a common framework that can be applicable globally for supervising insurance groups.”

Brady added the IAIS also is behind a multinational memorandum of understanding that enables insurers’ supervisors to exchange information confidentially via a Web portal. The organization also conducts peer reviews of jurisdictions to assess their degree of compliance with IAIS standards, as well as training and education to promote compliance.

IAIS also backs Solvency II, a European Union directive that codifies and harmonizes EU insurance regulation. A pillar of the initiative is a capital reserve requirement that aims to reduce the risk of insolvency. Brady said that Solvency II is having an impact internationally, as jurisdictions outside the EU are adopting it in modified form.

He pointed to Mexico, where the Insurance and Surety National Commission (CNSF) has introduced a regulatory and supervisory scheme based on Solvency II. In respect to the U.S., he noted the National Association of Insurance Commissioners (NAIC) has also embarked on a Solvency II-like modernization initiative to keep pace with global regulatory standards.

“Every country is assessed by the World Bank and IMF on their observance of international regulatory standards,” he said. “Their report, like FIO’s, will identify weaknesses.

“There is pressure on U.S. supervisors to have a system that responds to the global practices. Specific to Solvency II, there are equivalency tests. So the world is having an influence on the U.S. market.”

Non-EU countries that meet Solvency II’s equivalency tests, he added, will secure advantages now afforded their counterparts in EU member countries. Among them: EU recongition of the non-EU nation’s regulator, the jurisdiction’s capital requirements and a waiver of reinsurance collateral requirements.

“Once IAIS-backed regulatory requirements gained teeth internationally, even the NAIC started adhering to them; and I was under the impression that the NAIC had no intention of bending to international standards,” said Andrea Keenan, vice president of research and ratings, criteria & training at A.M. Best.

“The U.S. is becoming more cooperative internationally at a time when there has been a great deal of activity to guard against a repeat of the [2008-2009] financial crisis.” Bradley Kadin, president and executive director of the Association of Bermuda Insurers and Reinsurers, says that progress on international regulatory initiatives help not only minimize risk to the financial system. In the reinsurance space, he noted, global regulatory standards also promote greater transparency, cross-border trade and asset diversification. To illustrate, he pointed to Singapore, which aspires to become a reinsurance hub for Asia.

“If Singapore becomes the Asian hub, then the city-state will be regulated to international standards, providing ceding insurers some comfort that European, Bermudian and the U.S. approach to regulation is now being solidified and that international standards will be applied to emerging carriers,” he said. “That’s the linkage I see. So reinsurers can serve markets as long as they can pool risk and take on the volatility that you [ceding insurers] all want to give up.”

Keenan added that regulatory developments also are influencing (albeit indirectly) the work of ratings agencies, as for example when an insurer assess the adequacy of its risk management and current/future solvency positions under normal and severe stress scenarios. Promoted by the IAIS, an Own Risk and Solvency Assessment (ORSA), once issued by an insurer, will be factored into A.M. Best’s enterprise risk management (ERM) analysis of the company. She emphasized, however, that an ORSA will not necessarily change the company’s credit rating.

Turning to reinsurers, Kadin emphatically rejected the suggestion that companies in this space might qualify as systemically risky businesses.

“Systemic risk is all about linkages that cause a cascading series of problems,” he said. “The research that has been done on our space shows that reinsurance is a distributive risk; it does not lead to accumulations of risk, nor concentrations of risk. If the two largest reinsurers in the world fail, only a very small percentage of assets actually would lead in a meaningful way from their counterparties’ balance sheets.”


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