State insurance regulators and certain members of Congress are implying that the Federal Insurance Office (FIO) is playing footsie with European regulators over international capital standards. That is disturbing and self-defeating.
The allegations center on a belief that federal trade negotiators are caving in to demands by European regulators to require U.S. insurers doing business overseas to comply with “bank-centric” capital standards.
However, if we think about it, for what reason would U.S. representatives want to undermine U.S. institutions? And, would any bureaucrat be allowed to get away with such a thing?
Insurers fear that among other things, they will be required to mark their long-term assets, such as bonds and mortgages, to market, as banks are required to do in most instances. Currently, U.S. insurers are allowed to carry their assets at cost.
This has helped insurers deal easily with market downturns or periods where interest rates are volatile. For example, in the early 1980s, interest rates soared as the Federal Reserve Board acted to bring commodity prices under control, substantively reducing the market value of municipal bonds owned by property and casualty insurers. And, in the early 1990s, the commercial real estate market soured because of an economic slowdown and overbuilding, hurting life insurers.
Insurers were able to deal with the problem better than banks because they didn’t have to mark down their long-term assets, as banks are required to do.
Pressure on FIO comes from such state officials as Ben Nelson, NAIC CEO. He recently warned of the implications for life insurers if the FIO doesn’t “stand up” for life insurers in these international talks. And, on cue from state regulators, 49 members of the House signed a letter demanding legislative and report language in the appropriation bill for Treasury that requires federal officials “to halt” negotiating European-centric, bank-like capital standards for internationally active U.S. insurers.
The letter argues that the FIO doesn’t have authority to oversee the “business of insurance” of U.S. firms. However, under the Constitution, only the federal government negotiates international trade agreements. And, in recent comments, FIO director Michael McRaith stated that everyone involved in the international talks “recognizes that U.S. standards will need to be tailored to our market and to the U.S. approach.” For example, he said, “issues of group supervision, confidentiality or professional secrecy and reinsurance are being addressed, as are important topics like reporting, on site examinations and actuarial standards.”
Other critical issues that U.S. insurers want dealt with that McRaith said will be addressed include reinsurance collateral requirements. Driving the need for international standards McRaith noted, is that in the 2008-2012 period, developed economies declined as a percentage of global premium volume. For example, he said, the U.S. declined by over 5 %, the UK by 35%, and Spain by more than 23%.
At the same time, China grew as a percentage of global premium volume by more than 61%, South Korea grew by 32%, and Brazil by more than 60%. And, a recent study by the Federal Stability Oversight Council indicates U.S. life insurance revenues declined 10 percent in 2013 compared to the prior year.
McRaith said the decline in the premium growth of developed countries “indicate what the global demographics have already told us in so many other ways: emerging markets present enormous opportunities for growth by U.S.-based firms and that growth will continue, we hope, at an increasing rate in the years to come.”
In other words, it is important that craven domestic politics not undermine U.S. negotiators trying to negotiate agreements with international authorities needed to provide regulatory certainty for U.S. insurers seeking overseas growth.
Moreover, every U.S. president since Ronald Reagan has promoted a greater federal role in U.S. insurance regulation. Unwillingness of legislators to face up to the fact insurance is an international business, as is every other aspect of financial services, has raised the cost of insurance products and limited competition.