NEW YORK, May 8, 2013 – Lawrence H. Mirel is a partner in the Insurance Regulation Practice at insurance law firm Nelson Levine. A former Commissioner of Insurance, Securities and Banking for the District of Columbia, Larry advises insurers on the impact that the evolving regulatory landscape has on their business practices as well as the international convergence of international standards for insurers.
Later this week regulators and insurance executives from around the world are meeting at the NAIC international insurance forum. Can you provide insight into what will be discussed?
A significant portion of the forum is going to focus on discussions related to the supervision of internationally active insurance groups. The International Association of Insurance Supervisors (IAIS) and EU and U.S. regulators are working to develop systems and processes for group supervision. The IAIS is working on a Common Framework for the Supervision of Internationally Active Insurance Groups or ComFrame. EU and U.S. regulators are working through the EU-US Insurance Dialogue Project to clearly encourage regulatory cooperation, coordination and consistency in their respective approaches. These supervisory colleges are meant to be a forum where regulators can share information and work together to understand a company’s financial strength. There are a lot of issues that need to be worked through and insurers have several concerns.
What are the major areas of disagreement?
The primary issue is not “disagreements” – although there are those – instead it is the incompatibility of many of the world’s insurance regulatory systems. There are fundamental differences in the way insurers are regulated in different countries. Take, for example, the way EU and U.S. insurance regulators deal with large, cross-border insurance groups. Under Solvency II, EU insurers will be regulated at the group level with assets and liabilities of all the entities within the insurance group considered together. In the U.S., state regulators look at insurance entities individually. This is just one of many differences in ways that EU and U.S. regulators approach their responsibilities.
What do you expect will happen at the meeting and what conclusions will come from it?
The NAIC Insurance Forum is not a policy-making body, so there are not going to be any decisions or conclusions. There are going to be discussions – and perhaps some clarification – regarding the goals and objectives of the ongoing international regulator activities. While everyone agrees that the global nature of insurance justifies an ongoing effort at international regulatory cooperation, there are significant differences of opinion on what that actually means.
For example, there is disagreement regarding whether the goal of international discussions at the EU-US Insurance Dialogue and the IAIS should be developing a process for “regulatory convergence” or simply ensuring “regulatory compatibility.” This is a fundamental difference.
To explain, “regulatory convergence” means moving towards a common system of regulation, while “regulatory compatibility” means ensuring that regulators understand each others’ systems and can accept another regulator’s regulatory outcomes. Several EU regulators have stated that they believe the goal of the EU-US Insurance Dialogue Project should be the gradual development and implementation of a single, international regulatory system with uniform standards. That is likely a non-starter in the U.S. where state regulators and legislators would react very unfavorably to any attempts to impose international standards and requirements. U.S. state regulators are often leery of attempts to impose uniform regulatory standards even within the United States.
A major concern for the insurance industry is that any attempt to develop international standards will mean that a new system will be imposed on top of existing regulatory requirements. While insurers understand the need for regulatory cooperation, they do not want to be subject to overlapping or duplicative standards that are always costly and sometimes contradictory.
What role does the new Federal Insurance Office (FIO) have in these international dialogues?
Under the Dodd-Frank Act, the FIO is tasked with coordinating federal efforts and developing federal policy on prudential aspects of international insurance matters. FIO Director Michael McRaith has described the Office’s role as being a point of contact on international insurance matters. However, since the FIO does not have any regulatory authority, it is not clear what its actual role can be. The EU regulators would like to have a single U.S. representative to deal with, but U.S. state regulators are reluctant to allow the FIO to commit them to anything, and state laws would not permit him to do so. The FIO does have authority to preempt any state insurance laws that contravene covered agreements, but whether this power will ever be used, and if so to what end, will not be known for some time.