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IAIS strengthens supervision of large, multi-national insurance and reinsurance companies

July 2009

Background

On June 17, 2009, President Obama announced a Financial Regulatory Reform U.S. Plan ("U.S. Plan") which is designed to overhaul the financial regulatory system by, among others, creating a systemic risk regulator, enhancing the roles of existing federal regulators, and creating a consumer protection agency.  The U.S. Plan was well received by the National Association of Insurance Commissioners, as well as by several insurance and banking trade groups.  The U.S. Plan preserves the states' role as insurance regulators but, at the same time, recognizes that gaps and weaknesses in the supervision and regulation of large financial firms challenge the government's ability to monitor, prevent, or address risks as they build up in the system.  These weaknesses in regulation of financial services, including insurance, seriously harmed investor and consumer confidence in the integrity of our financial system and highlighted the urgent need to reform our nation's financial regulatory system.

The U.S. Plan

The U.S. Plan proposes, among others (1) to create a new financial services oversight council of financial regulators to identify emerging systemic risks and improve inter-agency cooperation, (2) to confer new authority upon the United States Federal Reserve to supervise all firms that could pose a threat to financial stability, including firms that do not own banks, and (3) stronger capital standards for all financial firms, and solvency standards for large, interconnected firms.  The U.S. Plan is now being echoed by insurance industry regulators overseas who are beginning to talk about creating common rules on solvency requirements for large, international insurers.

IAIS actions

By no small coincidence, at the conclusion of its triennial meeting in Taipei on June 25, 2009, the International Association of Insurance Supervisors ("IAIS"), an organization that represents insurance regulators and supervisors of 190 jurisdictions in nearly 140 countries, issued a press release in which it reaffirmed a number of actions being taken to reinforce insurance regulation and improve the resilience of the global insurance sector against new challenges.  These actions include:

 

  • developing guidance on the use of supervisory colleges for all cross-border financial organizations in order to reinforce the supervision of cross border companies.  This guidance will take into account responses from a recent IAIS survey among insurance supervisors on their experience with supervisory colleges;
  • expediting the application approval process and encouraging additional members to join the IAIS Multilateral Memorandum of Understanding which establishes a formal basis for cross-border cooperation and information exchange among supervisors; and
  • proceeding with research into the design and practicality of a common assessment framework for insurance group supervision.

 

IAIS is also working to publish requirements for major insurers' solvency margins and, just this past March, published a White Paper on Group Wide Solvency Assessment and Supervision.  Solvency margins are a key measurement of how much capital an insurer has to deal with unexpected surges in claims and investment losses.  Minimum solvency ratios, and the way in which they are determined, vary from country to country.

 

Issues

 

While IAIS' efforts are aimed primarily at large international insurers, the U.S. Plan explicitly recognizes that financial stress can spread quickly across national boundaries.  Yet, regulation of insurers and reinsurers is still largely the responsibility of a central financial regulator in most countries.  In the United States, regulation of insurers and reinsurers remains set in a state-based regulatory system, and is likely to do so in the foreseeable future.  However, without consistent supervision and regulation, financial institutions tend to move their activities to jurisdictions with looser standards, creating a "race to the bottom" and intensifying systemic risk for the entire global financial system.

The recent proposal by IAIS is consistent with a mandate handed down by leaders of the G-20 countries (including the United States) in November 2008, which, in turn, was triggered by the United States government's bailout of several large, interconnected financial services providers.  IAIS' proposal is also consistent with the European Commission's ("EC") proposal for a new system known as "Solvency II" under which insurers would be required to take account of all types of risk to which they are exposed and to manage those risks more effectively.  The EC's proposal with respect to insurers is, in part, a reaction to the same bailouts by the United States government.  Solvency II would require European insurers to account for all types of risks to which they are exposed and to manage them more effectively.  In short, large insurance groups would have a dedicated "group supervisor" that would enable better monitoring of the group as a whole.

The U.S. Plan, while preserving the states' role as insurance regulators and stopping short of a call for an Optional Federal Charter, reaches further than Solvency II by calling for a financial services oversight council to 1) facilitate information sharing and coordination, 2) identify emerging risks, 3) advise the United States Federal Reserve on the identification of firms whose failure could pose a threat to global financial stability due to their combination of size, leverage, and interconnectedness ("Tier One FHCs"), and 4) provide a forum for resolving jurisdictional disputes between regulators.

The goal of the EC, and of the IAIS, is to set suggested solvency margins for large interconnected financial groups.  According to one of the regulators in attendance at the November 2008 meeting of the G-20, "the goal is to build a framework to enable regulators to examine things without being hindered by regulatory differences (among countries) and grasp risks in the global insurance system."

While introducing new solvency norms, the IAIS has made it known that it does not intend to over-regulate the insurance industry.  Insurer solvency requirements already exist in advanced industrialized countries, and many of them, like the United States, also have risk based capital rules and/or solvency margin ratios.  For example, Canada and Japan both require a 200% solvency margin ratio and many European nations now require a minimum 100% ratio, but the formulas used in different countries are based on different calculation methods.

Comment

IAIS' efforts may have an impact since its member regulators and supervisors regulate the insurance industry in countries whose insurance industries constitute 97% of the world’s insurance premiums.  On an international level, IAIS' influence closely parallels that of the National Association of Insurance Commissioners ("NAIC") in state insurance regulation in the United States.  The NAIC has a working group of state insurance regulators that communicate and coordinate efforts with IAIS, and whose representatives attend meetings of IAIS.  However, since IAIS has no global regulatory powers over insurers, the new rules it plans to promulgate on solvency margins will be nonbinding and will take years to finalize, yet will carry significant weight.  IAIS' goal is to contribute to improved supervision of the insurance industry, both on a domestic as well as on an international level, and to promote the development of well-regulated insurance markets.

This firm will continue to follow the activities of the IAIS, of its member global insurance industry regulators in creating the first common rules on solvency requirements for large, interconnected, international insurers, the European Commission and President Obama's Financial Regulatory Reform Plan.  For more information and assistance, please contact via e-mail Frederick J. Pomerantz at fred.pomerantz@wilsonelser.com at arnold.kideckel@wilsonelser.com. He can also be reached by phone in our New York City office at 212.490.3000.

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