On August 27, 2013, the Financial Stability Board (FSB) released itsPeer Review of the United States (Report). The Report is an interim update on the progress the U.S. has made in implementing recommendations made during its Financial Sector Assessment Program (FSAP) evaluation. FSAP assessments are conducted every five years to evaluate a country’s financial sector compared to accepted regulatory international standards. In insurance, the evaluation is based upon the Insurance Core Principles (ICPs) established by the International Association of Insurance Supervisors (IAIS). FSAP recommendations are advisory in nature - it is up to each country to decide whether and how to implement the recommendations. A peer review focuses on the implementation and effectiveness of regulatory, supervisory or other financial sector standards. It also highlights the steps taken or planned by national authorities with respect to recommendations made during FSAP assessments. The most recent FSAP for the U.S. was in 2010.
The peer review of the U.S. included three topics: (1) regulation of systemic risk oversight arrangements; (2) supervision and oversight of financial market infrastructures (FMIs); and (3) insurance supervision. The Report indicated that a “unifying theme” behind all three topics is the “complex and fragmented U.S. regulatory and supervisory structure, characterized by multiple agencies at the state and federal levels with closely related (and sometimes overlapping) responsibilities.” It also noted that the FSAP assessment acknowledged that insurance regulation in the U.S. “is generally thorough and effective.”
The Report indicated that the U.S. has made “good progress” in following up on the 2010 FSAP recommendations, particularly with respect to systemic risk oversight arrangements and the supervision and oversight of FMIs. With regard to insurance supervision, the Report stated that U.S. federal and state authorities have “begun to address the insurance-related FSAP recommendations,” but that “significant additional work” is required to fully address the recommendations. The Report highlighted the progress in insurance supervision:
- Establishment of the Federal Insurance Office (FIO) (while noting its lack of authority to promote regulatory uniformity);
- The designation by the Financial Stability and Oversight Council (FSOC) of one insurance company as significantly important, and therefore subject to consolidated supervision and enhanced prudential standards by the Federal Reserve Board;
- Increased information sharing and coordination between state regulators and federal authorities;
- Steps to improve group supervision, including the revisions to the National Association of Insurance Commissioner’s (NAIC) model holding company act and model regulation, the adoption of an Own Risk and Solvency Assessment model act and the assignment of lead supervisors for each U.S. insurance group(whilenoting that only 15 states have adopted the holding company act revisions, the absence of consolidated financial reporting and the lack of group capital requirements); and
- Modernization of solvency requirements through principle-based reserving (PBR) and the introduction of stresstesting (while noting the absence of target safety levels of reserving).
The Report contained 11 recommendations for consideration by U.S. federal and state authorities. Four of the 11 recommendations concern insurance supervision and are as follows:
- The U.S. authorities should promote greater regulatory uniformity in the insurance sector, including by conferring additional powers and resources at the federal level. The FIO should enhance its monitoring of the insurance sector through increased use of non-public information, and be further strengthened so it can take action to address issues and gaps identified.
- The U.S. authorities should further enhance insurance group supervision by introducing requirements for consolidated financial reporting for all insurance groups. Lead supervisors should be given additional powers to fully assess the financial condition of the entire insurance group, such as having direct powers over holding companies.
- State authorities should continue to modernise solvency requirements through enacting PBR into state lawand the NAIC should take measures to clarify the safety level targets for individual risks and the overall effectof reserving and capital requirements in its model laws.
- State authorities should implement the FSAP recommendation concerning the terms of state Commissioners’ appointments, the rulemaking powers of state insurance departments, and their funding and staffing to bolster specialist skills.
The Report was prepared by representatives from Deutche Bundesbank, Swiss National Bank, Japan Financial Services Agency, European Commission, European Systemic Risk Board Secretariat, Bank of Canada, and the Insurance Regulatory and Development Authority of India. The FSB Secretariat also provided support and contributed to the preparation of the Report.