On June 14, 2013, the Subcommittee on Insurance and Housing of the House Financial Services Committee held a hearing on the impact of international regulatory standards on the competitiveness of U.S. insurers. Testimony was presented by:
- Michael McRaith, Director, Federal Insurance Office (FIO)
- Ben Nelson, CEO, National Association of Insurance Commissioners (NAIC)
- S. Roy Woodall, Jr., Member, Financial Stability Oversight Council (FSOC)
Rep. Randy Neugebauer (R-TX), Chair of the Insurance and Housing Subcommittee, stated the objective of the hearing was to:
- Provide an understanding of the strategic objectives being pursued by insurance supervisors;
- Assure that the objectives are a net positive for policyholders and insurers; and
- Raise awareness of International Association of Insurance Supervisors (IAIS) "regulatory proposals" that some fear may "undermine" the state based regulatory system.
Specific concerns included whether:
- The IAIS Insurance Core Principles (ICPs) would impose requirements on the U.S. regulatory system;
- The Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) would be a "one size fits all regime" that would impose "group-wide capital assessments" and "prescriptive regulatory requirements"; and
- The IAIS's designation process for Global Systemically Important Insurers (G-SII) was being harmonized with FSOCs work in designating systemically important financial institutions.
McRaith explained that IAIS standards are "outcomes based" and U.S. regulators will have the option of determining how or whether to implement those standards. Nelson testified that "impractical and counterproductive" standards will not be implemented. With respect to ComFrame, McRaith explained that ComFrame's next version will focus on "principles based" outcomes and will include guidance for companies. McRaith also explained that ComFame will be subject to testing with insurers for a four-year period to determine its costs and benefits.
As for the G-SII process, McRaith indicated that the IAIS has collected non-public data from 14 U.S. insurers as part of developing a methodology to evaluate insurers. Those insurers determined to be G-SII will have the opportunity to engage directly with the IAIS's Financial Stability Committee to explain their "unique circumstances," and why they should not be designated. Woodall stated that if an insurance company is designated as a G-SII, FSOC would "take note" of the designation.
The hearing included discussions about the FIO's role in international negotiations. Nelson stated that FIO should act as another federal voice to the assist the NAIC and should not speak for insurance regulators or participate in supervisory colleges. Nelson continued that some regulators believe that the FIO is not fully coordinating with state regulators, communicating its policy positions or sharing information.
Solvency II and the EU-U.S. Insurance Dialogue were also addressed during the hearing. McRaith explained that, when he became the FIO's Director, one of the primary international insurance issues that the industry faced was the threat of a unilateral equivalency assessment of the U.S. insurance regulatory system. McRaith explained that EU and U.S. regulators have been involved in high-level discussions, and the threat of a unilateral equivalency assessment no longer exists.
Several questions were asked by members of Congress about the status of the Modernization Report. McRaith stated that the report would be released "soon."
The Federal Insurance Office Releases Two Reports
On June 12, 2013, the FIO released its First Annual Report on the Insurance Industry as well as a report on its use of its preemption power. Under the Dodd-Frank Act, the FIO is charged with releasing an annual report to Congress on the "insurance industry and [on] any other information as deemed relevant by the Director or requested by [Congress]." The FIO is also required to provide a report related to any use of its preemption authority.
This first annual report contains high-level, aggregate data about the industry, an overview of regulatory developments in the U.S. and globally, and a description of some current issues and trends. It provides an overview of some NAIC and IAIS initiatives as well as the FIO's participation in the IAIS and the EU-U.S. Insurance Dialogue Project. Some of the current issues and trends identified by the FIO include a low interest rate environment, natural catastrophes and emerging global markets.
Meeting of the Federal Advisory Committee on Insurance
The Federal Advisory Committee on Insurance (FACI) met in Washington, DC, on June 12, 2013. The FACI received reports from:
- Robert Kerzner, CEO, LIMRA, on the impact of global demographics on the insurance market;
- David Miller, Associate Administrator, Federal Insurance and Mitigation Administrator, on the Superstorm Sandy Rebuilding Task Force;
- Birney Birnbaum, Executive Director, Center for Economic Justice, on the activities of the Subcommittee on Affordability and Accessibility of Insurance,
- John Degnan, Senior Advisor to the CEO, The Chubb Corporation, on the activities of the Subcommittee on Regulatory Balance; and
- Michael Consedine, Commissioner, Pennsylvania Insurance Department, on Reinsurance Captives.
The next meeting of the FACI will be on September 18, 2013. The meeting will include discussions on the Terrorism Risk Insurance Act and the Modernization Report.
Report on the Impact of Demographic Changes on the Insurance Market
Kerzner reported on the implications of U.S. demographic changes on "life insurance and retirement savings." He noted that life insurance policy ownership has declined over the past 30 years, despite surveys showing that the majority of individuals say they need more life insurance or that they would face financial hardship if their spouse died. Demographic changes that may impact the life insurance industry include: increases in the ethnic diversity in the U.S., longevity, the number of non-married individuals, the earning power of women, single-parent households and a decline in the number of households with children under the age of 18. While the number of Americans over the age of 65 will significantly increase over the next decade, a majority of these individuals do not have sufficient income for retirement.
Superstorm Sandy Rebuilding Task Force Report
Miller provided a report on Superstorm Sandy claims handling and the implementation of the Biggert-Waters Flood Insurance Reform Act (Biggert-Waters). After Sandy, the NFIP was criticized for not having enough NFIP adjusters; slow claims handling and payments; and various issues related to the "increased costs of compliance" provisions in flood policies. He explained that claimants often did not understand that their NFIP policies provided for "actual cash value" of losses, not replacement costs, and were surprised when they did not receive sufficient funds to fully repair their homes. The NFIP is working with Write You Own (WYO) insurers to determine how many adjusters are available and tracking claims adjusting times.
Miller noted the creation of a 5/25/5 program, which would provide immediate payments ahead of the closing of a flood claim. Under the plan, the NFIP will provide an advance payment of $5,000 against the loss of personal property; $25,000 will provided to lenders, these funds will be withhold until repairs are made; and $5,000 is provided for immediate temporary repairs. Regarding the implementation of Biggert-Waters, efforts are underway to provide states and communities with the "best available data" about flood risk and new flood maps to assist with rebuilding decisions.
Regulatory Balance Subcommittee Report
Degnan stated that the subcommittee is focusing on the methods used by rating agencies to determine the financial strength of insurers. The subcommittee found that most rating agency models are transparent, but there is some concern that the models may not be applied uniformly. The subcommittee received information suggesting that rating agency models are more stringent than the Risk Based Capital (RBC) formula. Scott Harrington, a member of FACI, pointed out regulators use RBC for solvency purposes while rating agency models are used to determine overall capital.
Affordability and Accessibility of Insurance Subcommittee Report
Birnbaum stated that the subcommittee discussed the meaning of "affordability" and "accessibility." He explained that "accessibility" refers to the availability of "essential insurance products" and that the FIO should determine which products are essential. The subcommittee defines "affordability" as the cost of essential insurance products limited to a reasonable percentage of a person's income. They recognize that affordability will not be the same in all markets. Determining accessibility would require determining whether "essential" insurance products are widely available. Birnbaum suggested that the FIO should engage in "data driven analysis" and study how insurance products are presented to consumers. He suggested that property insurance and retirement income products should be the first priorities.
Report on Reinsurance Captives
Consedine explained that in 2012, the NAIC formed a Captives and Special Purpose Vehicles (SPV) Subgroup. The NAIC has released a white paper on Captives and SPV. Consedine states that insurers often use captives and SPVs to finance XXX reserves. The white paper recommends the creation of a subgroup to study XXX redundancies. The white paper also recommends requiring enhanced disclosures of the use of SPV and captives.