Sister Europe and U.S. insurance sector trade aspirations

June 30, 2014, Washington–The European Commission will host a sixth round of EU-US trade talks in Brussels from July 14th to July 18th and insurers are pushing for the inclusion of financial services in any final treaty or deal.

What happens there is anyone’s guess, but there is a lot of “happy talk” now about progress on pushing insurance into the mix.

Life and property casualty trade groups united to state that there should be a framework to enhance and support trans-Atlantic regulatory cooperation in financial services.

Insurance Europe, the American Insurance Association (AIA), and the American Council of Life Insurers (ACLI) stated they continue to support TTIP as a comprehensive agreement.

“We believe it is essential for financial services to be included fully in any final outcome, given the current size of our bilateral financial services trade and the opportunity that this would present to drive economic growth in both Europe and the United States,” they said jointly.

One of the most contentious issues in TTIP is inclusion or non-inclusion of financial services, including insurance,” notes the Property Casualty Association of America (PCI).

“Our greatest concern lies with the need for the U.S. to be found equivalent by the European Commission for group capital, group supervision and reinsurance supervision under Solvency II.  If that is not done (i.e. a finding of Solvency II equivalence for the U.S.), barriers to trade that do not exist will be created, inviting retaliation. Ironically, this would result in inhibiting the transatlantic insurance market, which is currently relatively open and well serves both individuals and businesses.  In the end, this would result in less competition and capacity on both sides of the Atlantic, thereby hurting consumers,” PCI has argued.

Indeed, the financial regulatory sector of the U.S. government and some consumer groups said to have  problems with opening up  the 2010 Dodd-Frank Act to possible weakening or dilution.

Presidents Obama  and European leaders European Council President Van Rompuy and European Commission President Barroso  a year ago June  announced that the United States and the European Union (EU) would launch negotiations on the Transatlantic Trade and Investment Partnership (TTIP) agreement. They have supported in general reducing regulatory barriers to trade by cutting regulatory red tape while still protecting consumers at the same level.

“TTIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth,” states the Office of the U.S. Trade Representative (USTR).

The United States is the largest services exporter in the world, and lowering barriers in the services sector will have a beneficial impact on the entire U.S. economy, states the USTR, mentioning as examples telecommunications and the shipping business

Ways forward on an agreement include equivalence –complying with one set of rules in order to sell in both markets, some international standards, and regulatory cooperation in the different sectors, which include auto, textiles and apparels, chemicals, architectural and structural codes and mechanical/transportation.

For insurance, for example, there could be a a framework for discussion that resolves reinsurance collateral equivalence issue through the U.S. states or covered agreements where the US is granted equivalence. Europeans might want a covered agreement from Treasury’s Federal Insurance Office (FIO.)

A covered agreement with Europe in part forged by Treasury (and under development now) and USTR and insurers is of higher importance to some now in the insurance sector, especially with resistance by state insurance regulators and Treasury to including insurance in TTIP.

“We do think that the trade agreement can stand for mutual recognition,” said PCI’s international executive, Dave Snyder.

Pre-emption, transparency and regulatory arbitrage vulnerability issues persist, however, on the U.S. side, for many parties.

Although officials weren’t readily available Monday–everyone is reading the Hobby Lobby Supreme Court decision anyway–states and consumer  advocates have noted, as Birny Birnbaum from the Center for Economic Justice (CEJ) has written, “compared to issues before the International Association of Insurance Supervisors (IAIS), the TPP (Trans Pacific Partnership ) and TTIP have potentially greater impact on pre-empting state regulation of insurance and are far less transparent with far less participation by state legislators and regulators.”

Let’s see them talk and see whether there is any progress made–depending on how one charts progress, of course.



Lew “comfortable” with Prudential’s SIFI designation, FSOC process & FSOC’s work

June 25, 2014 –Well, the Financial Stability Oversight Council’s (FSOC) hearing over its 2014 annual report is over and done with. Treasury Secretary Jack Lew testified that FSOC has an important, unprecedented job to do, it is doing that job with rigor and transparency, agencies are no longer “siloed,”and that Dodd Frank Act  and its FSOC really shouldn’t be meddled with — except perhaps for technical reasons.

During the June 24 hearing, lawmakers on the House Financial Services Committee pointed out “push back” from the primary regulators on the Council, such as from the independent insurance expert Roy Woodall and from the Securities and Exchange Commission (SEC), on some of the reviews of their sectors’ companies and products.

The lawmakers complained about lack of transparency, the possible avoidance of systemically risky financial institution (SIFI) designations, international capital standards, insurance accounting principles, and how a financial company might be trapped in the label with no way out once it got its SIFI designation, the suggestion that it was not the insurance portion or the state insurance regulators that were at fault with the AIG financial meltdown in a credit default swaps blaze and a variety of problems perceived by their constituents and others with regard to the FSOC process.

After all, the Committee passed two bills last week that put the FSOC on a shorter leash, one a moratorium on SIFI designations for six months and  the other opening up FSOC to the Sunshine Act and the meetings to select members of Congress and federal agency board members.

“I believe the review of the record was a robust one and it warranted the decision,” Lew stated in a reference to Prudential Financial’s SIFI designation last year, after a hearing.  The  decision stands and the company has not appealed it through the courts as it could have, Lew noted. The bar for winning such a court appeal is high, though, the industry has noted.

The FSOC process with Prudential was one that “reflected rigor and analytic quality and I am both comfortable with and concur with the judgment that was made,” Lew said.

Designation is “a big deal” and there is not an opportunity  at all for the potential designee to directly address the final information charges that are used to justify the decision before full FSOC or have the FSOC justify the charges that made their decision, charged  Rep. Gwendolynne  “Gwen” Moore, D-Wis.

Lew said this  was not correct. “There is extensive back and forth between a company and the FSOC ” in the stage three process, Lew said.

Other Committee members  wanted to know what a company could do to fend off stage 3 review, perhaps ditching some of its risky business beforehand, so to speak. Lew said full disclosure before stage 2 might not make sense for the company because it would have to report to financial markets and might affect the company before a decision had been made.

There is a company in Stage 2 now that is an insurer or has large insurance elements, based on a review of the FSOC meeting minutes, which is believed to be Berkshire Hathaway. Bloomberg first reported Berkshire Hathaway may be under FSOC scrutiny in January.

Berkshire Hathaway  sort of passes the criteria for stage 1 of a SIFI if one looks at size. But insurance, although core, is mixed with massive  investments and holdings, including now a major interest in RJ Heinz and  is not 85% of the holding company.  A SIFI must be “predominantly engaged” in financial activities, a US nonbank SIFI “must derive 85% or more of its consolidated annual gross revenues from financial activities or have 85% or more of its consolidated assets related to activities that are financial in nature.”

Of 2013 sated balance sheet revenues, about $36.7 billion were insurance premiums earned, about  $94.8 billion were  in sales ad service revenues, about  $34.8 billion were in  revenues from railroad, utilities and energy businesses, and almost  $16 billion in interest, dividend, investment income, revenue of financial and financial products and derivative gains, all totaled.

Whether it is systemically risky from a reinsurance perspective, even as it appears to be  in stage 2 FSOC analysis, is another question. Warren Buffett wrote in the 2012 annual report AND the 2013 annual report that “if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings.”

Indeed, “All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency,” Buffet wrote.

Lew  also said once the SIFI designation is made, companies get reviewed once a year. The FSOC chair, said sometimes it will be a product and not a firm that is an issue, and urged lawmakers to let “the process run its course,” and not put FSOC in a place where “you are afraid to ask the question” about whether some company or product is indeed systemically risky.

There are many instances [under review] where there is not a risk and where FSOC does not need to take action, Lew stated. One lawmaker made it seem as if there was a “gotcha” situation with the SIFI designation. He pushed for something called “self-correctness,” something a company can do before it reaches stage 3.

“What?” asked Lew, calling FSOC’s review process of companies very transparent.

As for international accounting and/or capital standards, Lew acknowledged it might be difficult to go about creating them but it was a good thing to “eliminate some of the noise between different systems.”

Lew also told lawmakers that  the goal of going in and amending Dodd -Frank Act was not a good idea on a broader basis,  unless it involved a technical fix (perhaps the reworking Collins Amendment legislation to free Fed-supervised  insurers fro the same minimum capital standers under Basel 3 than the banks).

Lew answered multiple inquiries into the IRS and White House handling of  issues, computer crashes at the White House, cybersecurity  and information-gathering initiatives and other elements of the financial and political system.

FSOC annual report testimony on Hill Tues., while FSOC eyeing Stage 2 nonbank, meets in closed session

The Financial Stability Oversight Council (FSOC) will have a busy day Tuesday, June 24, as it meets in a closed, executive session and as Treasury Secretary Jack Lew testified before the House Financial Services Committee (HFSC)  on a hearing  entitled “The Annual Report of the Financial Stability Oversight Council.” Lew will be the only witness.

Although insurance is a subset of FSOC’s realm and of its annual report, there may be questions  from lawmakers on  the prudential regulation by the Federal Reserve of large insurers and asset managers, discussion on the application of domestic and proposed international capital standards and on FSOC’s internal business. HFSC passed measures last week on party line voting, to try and put the brakes on FSOC’s designation process and open it up to more federal officials and Congress.

MetLife is still in stage 3 of its potential designation as a nonbank systemically important financial institution (SIFI.) However, according to a readout of the March 27 FSOC meeting, which was closed, there was a discussion in late March on not only a stage potential designee but also a stage 2 financial company.

MetLife has already acknowledged it is in stage 3 and discussions are likely to continue Tuesday.  Of interest, the company, now stage 2 analysis, is perhaps an insurer or reinsurer.

Although the minutes did not disclose the sector, presentations on the unidentified  company were given by John Nolan, deputy director for Financial Stability in the Federal Insurance Office (FIO), who provided an update on the status of the ongoing analysis of the company. Randall Dodd, senior policy advisor at FIO, Todd Cohen, policy advisor at Treasury; and Scott Alvarez, General Counsel of the Federal Reserve, were available to answer questions on the company. However, the minutes do not reflect any presentation made by the office of the FSOC voting  member with Insurance Expertise, so it could be FIO’s and the Fed’s take on an asset manager with insurance holdings, or perhaps a large reinsurer.

The Financial Stability Board, in concert with the International Association of Insurance Supervisors (IAIS)  is coming out with its reinsurance global systemically important insurers (G-SIIs) around November of this year.  As far as domestics, Berkshire Hathaway could  possibly be among them because of its size, although the percentage of insurance as part of Berkshire Hathaway may not meet specific FSOC threshold material for insurance companies.

The annual report for 2014 again discussed again interest rate risk for insurance companies:

“Despite a significant rise in longer-term interest rates this past year, the insurance industry continued to report investment margins that were below historic averages,” the annual report of FSOC stated.

“If historically low interest rates persist, insurance companies could face a challenge generating investment returns that are sufficient to meet the cash flow demands of liabilities,” the report continued. Interest rates remained well below historical averages and continued to weigh on life insurance investment yields.

Legacy products in particular (including annuities, long-term care, and universal life insurance with secondary guarantees) have been less profitable in the current interest rate environment, as they were originally priced and sold under differing market conditions, as insurers have found out, the report noted.

The current low interest rate environment also may affect the use of captive reinsurance: the low rates affect the present value of insurers’ contract obligations (increasing the present values

of future obligations), and therefore may encourage use of reinsurance for insurance products with liability valuations that are interest-rate-sensitive

FSOC recommends that the Federal Insurance Office (FIO) and state insurance regulators continue to monitor and assess interest rate risk resulting from severe interest rate shocks.

FSOC also reported that Life insurance revenue from insurance and annuity products decreased to $583 billion in 2013 from the record $645 billion set in 2012.

Although  Expanded product distribution channels and a more favorable interest rate environment led to higher fixed annuity sales,  a number of one- time transactions and increased reinsurance cession overcame the improved fixed annuity sales and led to the decrease in total revenues.

Life insurers’ average portfolio yields continued to decline in 2013, but at a slower rate than in 2012, the report stated. Nonetheless, the life insurance sector’s net income rose 6.8% to $41 billion, a record high, benefitting from rising equity markets.

FSOC also delved into concerns regarding captive reinsurance. It pointed out that regulators and rating agencies have noted that the broad use of captive reinsurance by life insurers may result in regulatory capital ratios that potentially understate risk.

During times of financial market volatility when reserve and capital levels for some products should increase, an insurance company that uses captive reinsurance may not be required to hold higher reserves and capital. This could become a financial stability concern if a large, complex insurance organization were to experience financial distress,” the annual report stated.

The concerns have some offsets: The implementation of principles-based reserving (PBR) by the states  may eliminate the need to use captive reinsurance for the purpose of reducing reserves that are significantly higher than expected losses, according to the report.

The Federal Reserve  issued a “Supervision and Regulation Letter” (SRL)  in December 2013 concerning the effects of risk transfer activities on capital adequacy, which would apply to captive reinsurance risk transfer transactions for insurance companies it supervises when they become subject to the Federal Reserve’s risk-based capital framework.

The FIO is still monitoring both the role and impact of captives in the sector and the potential for regulatory improvements at the state level, as well.

Property/Casualty sector revenue from insurance products increased 3.9% to $544 billion in 2013, a record high.

Rates charged by insurers to policyholders increased moderately in most commercial lines of P/C business led by strong sales of workers’ compensation and demand for personal auto insurance. Net income increased to a record level of $70 billion, or an increase of 91.5% from 2012, as expenses and losses paid on claims declined and there were no major storms during the hurricane season in 2013, the annual report stated.

UPDATE: TRIA Renewal voted out of House Financial Services Committee 32-27

The new U.S. House Terrorism Risk Insurance Act extension was voted out of the House Financial Services Committee (HFSC) Friday morning 32-27, with Democrats objecting to many of the provisions increasing the insurance industry exposure, arguing  it could lead to job loss issues and concentration of risk. 

TRIA Reform Act of 2014, H.R. 4871, legislation to reauthorize the Terrorism Risk Insurance Act (TRIA), will now go to the House floor, and get passes, insurers hope, before the August recess. It is here where insurers and others hope to  soften the terms of the HFSC’s version, including the $500 million trigger, the 20% co-pay and the recoupment amounts.

Also attached was the proposed NARAB 2 producer clearinghouse, the darling of the insurance broker community, and two separate bills on the Financial Stability Oversight Council (FSOC), on opening it up to more federal participants or observers  and to the Sunshine Act, and another putting a six-month moratorium on any designations. The FSOC bills are separate, and not attached to TRIA, as NARAB 2 is.

An amendment by Democrats to extend the five year TRIA program extension to 10 years was defeated.

 NARAB 2 was accepted on a unanimous bipartisan basis as an amendment by Insurance Subcommittee Chairman Randy Neugebauer, R-TX. The FSOC bills also split along party line votes, with Republicans the majority. 

“As the debates made clear yesterday, the proper role for the federal government in backstopping terrorism losses is an exceptionally sensitive philosophical debate.  While both House and Senate leaders currently feel strongly about their respective views, we view the House committee’s action today to be a positive step toward the ultimate resolution of TRIA extension this year.  It could, however, get uglier before it gets nicer,” wrote Joel Wood of the Council of Insurance Agents & Brokers after the vote today. 

Jimi Grande, senior vice president of federal and political affairs at the National Association of Mutual Insurance Companies (NAMIC), was more skeptical.

“We are appreciative of the committee’s willingness to work with stakeholders to reauthorize a program that is essential for protecting the U.S. economy from the potentially devastating effects of a catastrophic terrorist attack,” Grande said. “That said, NAMIC has serious concerns about some of the provisions in the House bill that, if not addressed, could severely curtail some companies’ access to the program and significantly disrupt the currently competitive marketplace for terrorism insurance coverage.”

Please see more  coverage in Carrier ManagementHere’s the link

Thursday’s Child: Vote on TRIA renewal now set for Friday, June 20

The new U.S. House Terrorism Risk Insurance Act extension bill will go to a vote Friday morning, now, in the House Financial Services Committee (HFSC)  after a long debate Thursday, with a variety of amendments added and withdrawn into the afternoon.

The bill , H.R. 4871, appears to poised to move to the floor along party-line votes, although both Democrats and some  Republicans have qualms about some of the provisions. If it does not pass, the HFSC leadership will allow “a clean,” half-year extension only to go to the  House Floor.

However, all was studied politeness and patriotism at the mark-up today as Committee Chairman Jeb Hensarling,R-Texas,  thanked members for voicing their opposing views while noting that the bill has been debated for over a year, and all sides heard. Carolyn B. Maloney (D-NY) was among  the first out with a statement from the Democrats opposing the  bill, even though she sad it was a “significant improvement over previous drafts.” Her concerns  are increasing the trigger for the government backstop from $100 million to $500 million; and treating “conventional” terrorist attacks differently from so-called “NBCR attacks” – nuclear, biological, chemical, and radiological attacks.

“These changes would drive small- and medium-sized insurers out of the market entirely – which would actually reduce the amount of terrorism insurance available to businesses,” Maloney stated.

There have been a number of changes in TRIA over the past dozen years, Hensarling said, to parry complaints about the proposed rise of the trigger to $500 million, along with increases in the recoupment and co-pay amounts.

However, the increase to $500 from $100 million is 500%, not the incremental percentage changes of earlier increases in industry cost amounts, several lawmakers  on both sides of the aisle argued. Hensarling said that the bill, sponsored by Rep. Randy Neugebauer, R Texas, chair of the Housing and Insurance Subcommittee,  is not an end to TRIA at all, as seems to be the theme among  some of his his colleagues,  as he said.  “To amend it is not to end it, he said.

But with the current legislation, “You have a program but no one can afford it,” said Rep. Michael Capuano, D-Mass. Rep. David Scott, D-Ga.,  even went as far as to suggest a $500 million trigger would be fodder for terrorists now watching Congress’ every move on TRIA, including one that would be “foolish” and “irresponsible” by placing the U.S. “on its knees” in its ability to regain its footing and rebuild after a terrorist event by effectively getting rid of the federal backstop, as he believes the  legislation’s higher trigger amount would do.

One significant addition is the inclusion of NARAB II, a non-profit clearinghouse, the National Association of Registered Agents and Brokers (NARAB) that would streamline non-resident market access for insurance agents and brokers by allowing full multi-state uniformity and reciprocity while keeping state  market conduct authority “to police bad actors,” as the National Association of Insurance Commissioners (NAIC) puts it. Rep. Ed Royce, R-Calif., did  question the need with an amendment for a review of NAIC governance pursuant to NAIC’s role in NARAB 2, and its authority to  recommending board members to the President, who would make the appointments. Another attempted amendment was the addition of the so-called Collins Amendment fix.

Like the FSOC, the Collins (Sen. Susan Collins, R-Maine) Amendment is a part of the Dodd Frank Act (DFA.) This amendment, DFA Section 171, does require minimum capital standards on all thrifts and bank holding companies as well as on nonbank systemically important financial institutions regulated by the Federal Reserve.

The fix offered by Rep. Gary Gene Miller, R-Calif, and Rep.  Carolyn McCarthy, D-N.Y.,  and supported by the Senate by and large, would free insurers as such from the minimum leverage capital requirements and minimum risk-based capital requirements on a consolidated basis.

For further coverage, see on Friday with information on the final House vote on TRIA and on legislation to put the brakes on, and allow more oversight of, the U.S. Financial Stability Oversight Council (FSOC.)

“We look forward to the Committee reconvening tomorrow to vote on the TRIA reauthorization provisions pending before the Committee. We are also very pleased that NARAB II was adopted by the Committee and will be included in the House TRIA Reform Act,” stated Nat Wienecke, senior vice president, federal government relations, of the Property Casualty Insurance Association of America.

Congress passed the Terrorism Risk Insurance Act of 2002 in the aftermath of 9/11 for fear that the lack of available terrorism insurance could harm economic development and since 2002 the market has stabilized, risk management has improved, modeling has advanced, and premiums have decreased by 70%, according to Neugebauer.

IAIS meeting glimpse: Powerpoints, cap standard concerns, timetables

At the well-attended meeting of the International Association of Insurance Supervisors (IAIS) in Quebec City this week, much talk centered on the development of capital requirements for insurers, from the giant systemically risky insurers to the merely large and globally active ones.

According to notes from observers there on the discussion and  power-point presentations, as the event is not open to the press, the next step for the basic capital requirement (BCR) is to go to the Financial Stability Board (FSB) with a fairly detailed BCR proposal and have that out for early July consultation. It will then go to the FSB again in mid-September with endorsement by the G-20 later.

IAIS Financial Stability Committee Chair Julian Adams who gave a Powerpoint presentation,  according to sources,there is a preliminary BCR formula with a limited number of factors, and beneath each factor is a small number of underlying risk drivers.  The idea is to capture risks on both the asset and liability sides of the balance sheet, Adams was quoted as saying.

According to sources,  most of the designated global systemically important insurers (G-SIIs) have already provided data after  field testing exercises, and it has been analyzed.  Stresses considered include interest rates up and down, equity failure, mortality increase, non-life underwriting stress.

This data is being analyzed now to develop BCR formula.

As for the Global Insurance Capital Standard (ICS), many comments have been received that run the gamut in their delivery and tone, at least.

The multi-national insurers, insurance trade groups and “global elites” almost universally told IAIS members in Quebec City that they are  very concerned about the  2016 deadline for development of the  new capital standards, especially for internationally active insurance groups (IAIGs.) Some observers said any standard should be principle-based, not prescriptive.  Local supervisors should be able to set own standards within a broad principle-based approach, one insurer was quoted as saying during the observer hearing.  Another asked, shouldn’t regulator be focused on policyholder protection?

Insurers at the IAIS also shared major concerns about process and a result of a single standard in Quebec City. These concerns are not new, but a growing number of voices are joining in.

The ICS implementation  itself will come after the IAIS adoption by 2018, in 2019.  It apparently has not been a major topic yet in terms of development work and the ratio involved is still said to be under discussion, as are the principles, according to a presentation by Federal Insurance Office (FIO) Director Michael McRaith, who spoke there.

The stated  goals of the ICS are to avoid inter-jurisdictional capital arbitrage and reduce, long-term the regulator burden on companies.

Many IAIS member-officials delivered Powerpoint presentation of their work to observers.

It was clear that firms are expected to comply with the ICS in 2019.

The IAIS did not immediately provide comments after a request and Treasury declined comment.

TRIA renewal teed up in House but legislation sharing the day may put brakes on FSOC

The House Financial Services Committee (HFSC) has a full agenda Thursday, June 19, with a mark up  and likely passage of the Terrorism  Risk Insurance Act Reform Act of 2014, which will extend the program for five years, albeit with an increased co-pay, and higher  program trigger amounts, through Dec. 31, 2019, along with consideration of  bills to slow down and open up to Congressional eyes  the Financial Stability Oversight Council (FSOC).

Housing and Insurance Subcommittee Chairman Randy Neugebauer is introducing the bill before the full committee.

The ease with which the House bill has been accepted, although it is more austere in what is provided for the insurance industry  than the Senate TRIA version, combined with the support for action, likely means the House legislation will sail through with broad Republican support,  until it meets the softer Senate version in conference committee. Then, real tussling could begin.

How the House Democrats will vote on Thursday is said to be a major factor in how the bill moves forward.

If the Democrats on the HFSC are led in a  vote against the TRIA renewal bill, there could be a floor fight. If they vote for it, the bill could go forward on the suspension calendar next week on two-thirds of a vote.

A key question is the Thursday vote of Rep. Carol Maloney, D-NY,  ranking member of the House Financial Services Subcommittee on Capital Markets and GSEs.

Maloney stated in May that raising the program trigger for conventional terrorist events from $100 million to $500 million  and increasing the recoupment of federal payments to 150 percent, which are both features in the Neugebauer bill, “are changes that go far beyond what the market will bear. The economic consequences of these proposed changes to TRIA for metropolitan areas like New York, which continue to be at risk of another attack, would be disastrous.”

However, her office pointed out that since key components have changed, this statement does NOT apply to the current draft.

Another major consideration the industry is concerned about is how  the Congressional Budget Office (CBO) scores the bill, and for how much, given the proposed recoupment level.

Beginning on January 1, 2016, the House bill increases the amount that the Treasury Secretary is required to collect through terrorism loss risk-spreading premiums from 133 to 150 percent of the federal payments made subject to mandatory recoupment. The bill clarifies that the amount of federal payments subject to mandatory recoupment shall be equal to the lesser of the total of federal payments made or the insurance marketplace aggregate retention amount.

But so far the insurance industry is on board to get this bill quickly  through Chairman Jeb Hensarling’s, R-Texas,  committee.

“Any sign of progress is a welcome one,” said Jimi Grande, political affairs senior vice president for the National Association of Mutual Insurance Companies (NAMIC) of the bill that would bifurcate nuclear, biological, chemical or radiological type (NBCR) of attacks from the conventional terrorism trigger amounts.

The American Insurance Association (AIA) praised the growing momentum for TRIA reauthorization in the House but cautioned that certain provisions of the bill could decrease market capacity, citing the bifurcation of conventional terrorism acts with the NBCR attacks. This differentiation “falsely assumes that the insurance market operates based on the same distinctions,” stated AIA president and CEO Leigh Ann Pusey.

Ken Crerar, president and CEO of the Council of Insurance Agents and Brokers (CIAB) stated the organization which represents the largest commercial insurance brokerage firms is “so gratified to see great legislative progress…”

“We hope the Committee and the full House act swiftly so that the Congress can send TRIA legislation to the President for his signature before the August recess,” stated Nat Wienecke, senior vice president, federal government relations at the Property Casualty Insurers Association of America (PCI).

PCI and its member companies applauded what they said were several improvements that have been made in the legislation, including the “reasonable reauthorization duration, maintenance of the “20% insurer deductible,” and incorporation of  “very important technical corrections to the terrorism certification process.”

The Senate bill, S. 2244, contains a seven-year reauthorization and is awaiting a full vote by the Senate.

“We echo the calls of all the key stakeholders for the Financial Services Committee to advance the legislation which has been authored by Chairman Neugebauer. We’re particularly grateful for the Chairman’s decision to seek a five-year extension of the program—just one of many substantive improvements that have been made after close and deliberate consultation with all of the major interests in recent weeks,” Crerar stated.

As Crerar noted, the appropriate federal role in the terrorism insurance marketplace has been debated for 13 years —  and this is the fourth Congressional debate.

There are industry exposure concerns with the House bill but not many were voiced today, in advance of the mark-up.

The House bill increase of trigger amounts to $500 million at the end of five years, can be absorbed by large companies if their coverage as one company does not saturate the marketplace or have too great an area of concentration, but smaller insurers, who may be able to opt out of offering coverage, cannot absorb the higher amounts readily. The tilt in  terrorism risk exposure to only a few, large companies could  skewer the marketplace and raise prices, insurers worry.  And some in the insurance industry remain skeptical of the large co-share or co-pay on top of an already sharply increased trigger amount for federal coverage.

Congress, by and large, wants the industry to fend for itself more in underwriting terrorism risk but almost all of the insurance industry, although conceding the point, says it is not ready to fully expose itself to known and unquantifiable future losses because they are almost impossible now to underwrite and the capacity for full exposure is not there.

With regard to other proposed  insurance reform measures, many in the industry hope that Neugebauer can attach the ‘NARAB II’ legislation to facilitate interstate agent/broker nonresident licensure to the TRIA legislation. NARAB has support from almost all quarters, including the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO.)

The full HFSC will also mark up legislation to place a six-month moratorium on the authority of the FSOC to make financial stability decisions under section 113 of Dodd Frank. Asset managers and mammoth insurer MetLife, which has been under intensive review by the FSOC for almost a year as a systemically important financial institution, have resisted the suggestions that they are systemically risky  the financial markets.

Both the FSOC and the global Financial Stability Board (FSB) have begun examining whether regulated funds or their managers could pose risk to the overall financial system and thus should be deemed SIFIs.

U.S. mutual funds designated as SIFIs would be subject to new, bank-style prudential regulation that could significantly harm funds and the investors who rely upon them. Singling out individual mutual funds for inappropriate regulation or supervision would raise costs for fund investors and distort competition, among other harmful effects, according to the Investment Company Institute Viewpoints blog.

The HSFC will also be marking up H.R. 4387, the FSOC transparency and Accountability Act.

This bill would open up to varying degrees of participation  the FSOC processes to members of Congress, and to the boards and commissions of the agencies that serve on the FSOC, from the Securities and Exchange Commission (SEC)  to the National Credit Union Administration (NCUA.)  It would also make the FSOC subject to both the Sunshine Act and  the Federal Advisory Committee Act. It was introduced by Capital Markets and GSEs Subcommittee Chairman Scott Garrett, R-N.J.

The U.S. Treasury, which houses FSOC, did not comment on the FSOC measures but rarely comments on the particulars of  legislation. Treasury and the Obama Administration have acknowledged their support of TRIA renewal.

“I should add that we, Treasury, applaud the strong bipartisan action by the Senate Banking Committee to preserve the long-term availability and affordability of property and casualty insurance for terrorism risk.  A report of the President’s Working Group on Financial Markets recently affirmed the importance of TRIA to the national economy.  We look forward to swift action by the full Senate and the House to extend the program,” FIO Director Michael McRaith stated in a recent speech in New York this month.

How this will play  out if  the somewhat-hobbling FSOC legislation is attached to the TRIA renewal bill is another story. The next closed FSOC meting is next week, on June 24.

Well, then, next week will begin soon enough– with a House TRIA bill, Quebec IAIS meeting

The latter part of this week has been dominated by muted industry  reaction to the new U.S. House of Representatives draft discussion bill on TRIA renewal [Terrorism Risk Insurance Act].

The Washington insurance policy sector is  happily divided  between those who might be in town to see the bill’s introduction in the House Financial Services Committee Monday or Tuesday, and a possible mark up later next week, as I wrote for Carrier Journal and Insurance Journal  today, here, and those going to Quebec City for the International Association of Insurance Supervisors (IAIS)  global seminar starting June 16. 

The IAIS seminar will be focusing on developments in capital standards, especially those proposed for ComFrame,enhancing cooperation through  supervisory  colleges and memorandums of understanding (one of Connecticut Insurance Commissioner and IAIS Executive Committee member Tom Leonardi’s top areas of activity and expertise,) market conduct and standards implementation. It should be the inaugural  IAIS meeting for new Federal Reserve executive insurance official Tom Sullivan, who started the job June 9th.

The full use of restraint by the insurance industry on the TRIA House draft legislation, despite the higher trigger amount ($500 million) for federal coverage and the large co-pay, has some people tense over on the U.S. Senate side, where a bill that sailed out of the Senate Banking Committee keeps the $100 million trigger. This “traditional” trigger amount means a lot to small companies–and even to large ones who want a many carriers to stay in the game as possible, but most want the  House legislation to roll ahead and get its footing before fiddling with its contents.

Washington Insurance Rider is parked in Washington for the time being, so will have to make do with  covering any TRIA action within the sweltering Capital City where temperatures are forecast for the low 90s (Fahrenheit! for the IAIS Secretary’s benefit–Yoshi Kawai used a Celsius -Fahrenheit analogy at a recent NAIC international forum in Washington to advocate for international capital standards for all large global insurers–or ones just thinking about it!)

A big loss this past week: Sean Carr

Today: remembering a friend and insurance journalist colleague,  a wonderful person,  a generous soul, a great reporter in the old-style of reporters and a most welcome presence in any room, at any event, the one-of-a kind lively wit, Sean Carr. I will miss him a great deal, as will anyone who knew him. Others have written and shared  touching stories of him in articles and social media and on long phone calls today in Washington, and more will in the coming days.   There are some incredible people on the insurance regulatory sector in any field, and Sean was one of them.  Sean, I feel I should leave the rest of the page blank for all the news you should have covered this week but could not.












Liz Festa 

Choice, budget ratios and ‘big data:’ FIO suggestion box on auto premium affordability gets a fill-up

The best way to judge personal auto insurance affordability is to look the premium costs as a percentage of disposable household income although this isn’t meaningful without examining whether it is even available in areas, according to a leading consumer advocate on insurance policy.

Or: A reasonable measurement of affordability is one that recognizes “relativity and consumer choice.” What is affordable to one consumer is not necessarily what another would consider affordable, and income may have no bearing on this consideration, countered a top personal lines trade association. One such consumer choice?: to even go out and purchase a vehicle, it said.

Birny Birnbaum’s consumer advocacy group, the Center for Economic Justice (CEJ) and the American Insurance Association (AIA) were among those submitting comments to the Federal Insurance Office (FIO)  Monday in response to a request from the Treasury office on how it should define auto insurance affordability and what metrics and data would best show the extent underserved communities and consumers, minorities, and low- and moderate- income (LMI) persons can actually procure affordable insurance.

Beth Sammis, FIO Deputy Director for Consumer Affairs, wrote in a Treasury blog in mid-April that the FIO exercise is necessary because it is hard to know if personal auto is becoming more or less affordable as insurers change how policies are priced with new risk classifications.

FIO remains very interested in the increased use and penetration of ever more precise and pervasive use of data mining to create risk categories and pricing and who and how  it might harm consumers.

After all, FIO stated in its  late 2013 Modernization Report that states should develop standards for the appropriate use of data for the pricing of personal lines insurance. “

That’s because, as FIO has noted,  there is a public policy issue at stake: Owning an automobile is likely associated with a higher probability of employment and other factors associated with economic well-being, Sammis wrote in her blog piece, which was echoed in the FIO call for comments.

With the exception of New Hampshire, all states require a consumer who owns and drives a car to maintain liability insurance.  From 2002 to 2009, the percentage of uninsured motorists nationwide hovered around 14 percent, according to FIO.

The AIA repeatedly pointed to the element of choice taken by the consumer and noted that the cost of insurance is but one cost associated with ownership of a vehicle — but that it is  the only cost subject to a “long-standing and comprehensive system” of state rate regulation and price controls.

CEJ took on insurers increased  use of so-called :big data and data mining for pricing in its comments,  but interestingly, prefaced its position  by calling for FIO to “take significant action to fulfill its Congressional mandate and monitor the availability and affordability of personal auto insurance.”

The Dodd-Frank Act of 2010  provides FIO with authority to monitor exactly this, and FIO reached out for comments April 10 some months  after the Availability and Affordability Subcommittee of the FIO’s Federal Advisory Committee on Insurance (FACI) took on the issue, proposing in part that affordability means that the cost of personal auto insurance is a “reasonable percentage” of a consumer’s income.

FIO noted that one approach may be to declare personal auto insurance as affordable if premium payments don’t prohibit people from purchasing other required household  necessities. Or, perhaps auto insurance may be interpreted as affordable if it is “actually purchased,” FIO wrote.

FIO is also looking at rounding up other  data sources to monitor affordability and availability.

Birnbaum, who serves on the FACI, favors the FIO suggestion of how the cost of auto insurance plays out among other household  costs. “We suggest that the notice’s example is a useful one – does not preclude a person or family from the purchase of other necessities,” CEJ’s Birnbaum stated in his June 9 comment letter.

With such a definition, the metric will vary by income levels – from a very small percentage at very low incomes to somewhat higher at low incomes, CEJ noted.

However, take a good look at availability, too, Birnbaum says.

While insurers licensed to write in a specific state may sell insurance anywhere in the state, the fact is that many insurers focus on non-LMI markets, while so-called “non-standard” insurers focus on LMI markets, according to the Texas economist, who  has  performed availability analyses of personal auto insurance for the Texas Office of Public Insurance Counsel and the Texas Department of Insurance who developed a data collection program for monitoring market performance of insurers in Texas auto insurance markets.

While some risk classification is essential to avoid adverse selection and to provide economic incentives for less risky behavior, states have allowed pricing practices that disfavor LMI consumers, Birnbaum charged.

For example, most states allow insurers to use small geographic rating territories for uninsured motorists with the result that consumers living in LMI communities are forced to pay more for  coverage simply because more of the neighbors cannot afford insurance than consumers in non-LMI communities, CEJ charged.

States have allowed ultra-refined, very small geographic rating territories which reflect and perpetuate historic housing discrimination, according to Birnbaum’s CEJ.

FIO stated that while data on average personal auto insurance premium by coverage is collected by the National Association of Insurance Commissioners (NAIC), other data sources will likely be needed.

Over the past year, the NAIC has worked to compile a report about the availability and affordability of auto insurance (“Compendium of Reports Related to the Pricing of Personal Automobile Insurance”) that will be considered by the full NAIC membership later this summer.

The AIA said that FIO need only look at existing data from a number of sources and noted that according to NAIC data, the average expenditure for auto insurance nationwide was well below the rate of inflation in the last decade while  family health insurance coverage rose on all counts.

The AIA also pointed to the Automobile Insurance Plan Service Office (AIPSO) as a source for data  on changes to the size of residual markets over time, as well as rates charged by residual market funds as compared with average rate levels in the voluntary market.

“AIA feels this data will demonstrate that residual markets have shrunk over time due, in part, to the increasing ability and willingness of the private market to competitively price a broader range of risk and offer affordable coverage to a wider segment of the population,” stated AIA Senior Counsel & Director of Compliance, Lisa Brown.

The NAIC couched its response in caution and  pushed the discussion outside the sphere of insurance regulatory policy.

“Our work has shown that concepts of affordability and availability are somewhat subjective and vary depending on a number of factors like financial resources, historical norms and experience, supply and demand, and expectations for the scope of coverage, among others,” the NAIC leadership stated.

There are important public policy considerations that impact whether insurance premiums are purely “actuarially justified” ( versus premiums that include adjustments for “social equity” and flatten out pricing such that higher risk drivers pay less and lower risk drivers pay more, the NAIC told FIO.

” Understanding and improving availability and affordability, particularly for property/casualty products like auto insurance, may require holistic solutions that extend beyond insurance and insurance regulation,” concluded the state regulatory leadership led by Adam Hamm of North Dakota.

More industry and some regulatory responses, which were due  to FIO June 9th, are expected to become public shortly and may be added here later as they become available.


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