(Chinese Taipei, site of this year’s annual meeting of the International Association of Insurance Supervisors.)
American resistance to bank crisis-inspired capital requirements within ComFrame – the Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs) – dominated discussions at the annual meeting of the International Association of Insurance Supervisors (IAIS), held in late October in Chinese Taipei, as revealed in Deloitte’s IAIS Update report. But even as U.S. regulators pushed back, American representation on the IAIS’s executive committee showed decreasing influence of state regulators vis à vis the federal government. Together, the conflicts shed light on the potential for international regulatory developments to affect even domestic-only insurers in the U.S.
One of the main agenda items on the meeting was the field testing of ComFrame due to begin in 2014. The IAIS began developing ComFrame in 2010 and is currently on its second draft for public consultation. However, capital requirements dominated the discussion at what was the first meeting of the IAIS since designating nine globally systemically important insurers (G-SIIs – list below) in July.
The IAIS is currently developing global insurance capital requirements (ICS), beginning with a backstop capital requirement (BCR) to be developed in the coming year, followed by higher loss absorbency requirements (HLA) by 2019. The IAIS expects to have developed risk-based ICS during 2016, which are planned for implementation for IAIGs by 2019.
Capital Requirements Skepticism
A representative of the Property Casualty Insurers Association of America (PCI) attending the IAIS meeting responded skeptically to the ComFrame draft’s capital requirements, as quoted by Deloitte: “The ComFrame daft has been significantly improved…[However] we are still concerned that there are pieces of ComFrame… that will impose additional regulatory requirements on IAIGs,” he commented. “We’re not sure that the development of a global capital standard has been justified.”
Domestic-only insurers understandably may regard the activities of the IAIS as irrelevant. The typical regional P&C or life insurer bears little resemblance to an IAIG, which the IAIS defines as writing at least 10 percent of its gross premium outside its home jurisdiction and having at least $50 billion in assets or $10 billion in premium on a three-year rolling average. However, the commencement of capital requirements activities may represent a turning point for U.S. regulators and other who have long opposed capital standards, according to Deloitte’s IAIS Update:
Only time will tell if the United States, previously represented at the IAIS by state regulators from the National Association of Insurance Commissioners (NAIC), will be able to continue its strong opposition or if state regulators will be forced to work with fellow regulators at the IAIS with the aim of securing no worse than the least objectionable outcome.
The NAIC had occupied three seats on the IAIS Executive Committee, but Federal Insurance Office (FIO) Director Michael McRaith now holds one. Under the Dodd-Frank financial reform legislation, the FIO Director is responsible for representing the U.S. on international insurance matters. The Federal Reserve Bank is rumored to be seeking one of the three seats as well, according to the Deloitte report. If the Fed were to gain that seat at the expense of the NAIC, the report says, “that would reduce the NAIC’s representation on the Executive Committee over the past few years from three seats to one.”
The G-20’s Financial Stability Board (FSB) has argued a need for more centralized U.S. insurance regulation under the FIO, after formerly calling for quantitative insurance capital standards, the Deloitte report notes.
The Deloitte report implies that this erosion of state regulators’ influence at the IAIS could have consequences for American insurance in general, but also for those without significant international operations. “The fortress that has been U.S. state regulation has steadily been chipped away in the Dodd-Frank era,” the report declares.
Domestic insurers wondering how the IAIS matters to them need only consider the NAIC’s ORSA (Own Risk and Solvency Assessement) within the body’s Solvency Modernization Initiative. “The U.S. wasn’t part of Solvency II, but ORSA is coming on line here in 2015,” noted Howard Mills, chief advisor of Deloitte’s Insurance Industry Group, in a conversation with IIR. “Something will start overseas and while U.S. regulators may push back, these things still have a way of changing the way our regulators operate.”
While some critics may see ComFrame as a Utopian fantasy, the U.S. is already implicated in the process, and the IAIS has published aggressive timeframes, according to Mills. Regulators from the U.S. and other countries questioned the feasibility of ComFrame deadlines, but the work has accelerated despite objections. “We’re seeing a manifestation of that in the form of supervisory colleges,” Mills said. “That’s a fancy way of saying global regulators are getting together more often, but it’s also influencing the way U.S. regulators operate.”
High among American insurers’ concerns about ComFrame is the contention that its standards represent a bank-centric approach to the insurance industry. Such an approach is inappropriate because insurers don’t represent the same liquidity risks as banks, as demonstrated during the 2008 financial crisis, as voiced by some U.S. attendees to the IAIS meeting. However, insurers are by increasingly investing in financial applications and infrastructure to be able to handle new regulatory requirements, according to Mills. “They’ll need that technology infrastructure to deal with capital management and model valuation,” he commented.
Globally Systemically Important Insurers (G-SII) Designated by the IAIS:
- Assicurazioni Generali
- Ping An Insurance Company of China
- Prudential Financial
- Prudential plc