Month: July 2014

IAIS proposing removing ‘observer’ groups, adding public forum and phone time

UPDATE with NAIC consumer rep comment

July 31, Washington—In a move that had been anticipated by some for awhile, the International Association of Insurance Supervisors (IAIS) told members and observers that it is proposing the elimination of “observer” status. If this proposal becomes policy, it would go into effect January 2015.
Comments on the proposal, which is expected to become public Aug. 4, will be due on Sept. 2.
The IAIS, which did not confirm this action or timeline. It has been developing and weighing new processes for participation by interested parties for some time and will continue to do so.
Some groups have in the past been vocal about their  criticism of the move toward what they feel has been a trend at the IAIS toward less transparency and more closed meetings. Observers say the policy will definitely change the dynamics  of interaction with the IAIS at a critical time.

A global insurance capital standard is in the works by 2016 for globally active insurance groups, with implementation by 2019, alongside the continued development of capital standards for global systemically important insurers (G-SIIs) and possibly for global reinsurers.

The IAIS is also developing basic capital requirements (BCRs), which are planned to be finalized this year for implementation by global systemically important insurers (G-SIIs.) BCRs will serve as the foundation for higher loss absorbency (HLA) requirements for G-SIIs, and it is anticipated that their development and testing will also inform development of the ICS, the IAIS stated last year.

“You are talking about very complex issues here –the idea that  they are decided in closed sessions is absurd….Corporate governance now being thrown out the window–they spend 10 years opening up these meetings, and now with the flick of a switch they are going to close them,” one industry executive noted.  “Why is it that the public that is most effected by this have little time…less than a month… to comment?”

Also, recently, there are some key observers who just got their ‘wings.” The latest inductees into the observer ranks had strongly pushed for inclusion–namely, consumer groups and the independent insurance member of the U.S. Financial Stability Oversight Council (FSOC.)

Peter Kochenburger, one of six National Association of Insurance Commissioners  (NAIC) consumer representatives designated for IAIS observer participation was worried about the effect of any new policy after consumers had just gotten their foot in the door.

Unlike big insurance  companies, the consumer advocates are less well known and could have really benefitted from face-time with their counterparts from different countries as well as from having an audience with international regulators, he noted. He expressed concern that  eliminating observer status will reduce the effectiveness of consumers’ participation although that is not the intent of the new proposal.

Kochenburger, a University of Connecticut law professor and executive director of the law school’s insurance law center, says he thinks communicating only via e-mail, conferences calls and the like does not enhance understanding and developing trust (if not agreement) between the parties.  However, he noted, consumer groups will always be very strapped for paying for travel (despite funding up to a point by NAIC) and always vastly outnumbered by the industry in public live meetings so the proposed this emphasis on written communication/comments could help level the playing field a bit.  He also supported the IAIS intention of setting out specific processes and timelines for stakeholder participation, and welcomed written participation.

 

Roy Woodall, the appointed independent insurance expert and insurance voting member at FSOC, gained observer status this winter after trying for more than a year and half to become part of the proceedings. Woodall had publicly expressed strong concern in Congressional hearings about not having access to important regulatory discussions on financial stability of insurers in the FSOC’s wheelhouse when associates at NGOs and other service-oriented organizations could join the top-level discussions.

The Federal Reserve Board, also an FSOC member, was approved for membership –more than observer status-in the fall of 2013. The Federal Insurance Office is also a member.
Observers pay a flat fee of $19,000 Swiss Frances (CHF). A 2013 IAIS list denotes 144 observers for a possible total of 2.736 million CHF which is over $3 million US dollars.
Members pay quite a bit more. Total such fees for 2013 were 3,848,900 CHF or $4.237 million converted today. The NAIC pays a hefty 317,000 CHF, or almost $350,000, dwarfing the fees of any other member. They also bring more people to the table.
The Federal Insurance Office fee is $14,100 CHF and the UK, Canada, the Netherlands and Bermuda have a membership fee of 67,000 CHF, the top fee among most other global jurisdictions.
It is thought that the Financial Stability Board (FSB) could help fund the difference if and when Observers are dropped from membership, although no one is publicly discussing options.
IAIS observers include in the United States as of 2013:  ACE, INA Holdings Inc .,  ACORD
AFLAC, AM Best, American Council of Life Insurers (ACLI,) American Insurance Association(AIA), AIG, Assured Guaranty Municipal Corp., Barnert Global Ltd., Cigna International Corp. CNA Insurance, Deloitte LLP, DLA Piper, LLP, Duane Morris LLP, Examination Resources LLC, Genworth Financial, Liberty Mutual Group, MassMutual Financial Group, MetLife, New York Life International, Northwestern Mutual, Promontory Financial Group, LLC, Property Casualty Insurers Association of America (PCI), Prudential Financial Inc, Reinsurance Association of America USA, Starr International USA Inc., The Chubb Corp., Transatlantic Reinsurance Co., Travelers Companies, Inc., Treliant Risk Advisers, United Health Group and XL Group.

The NAIC consumer representatives, as noted,  and international organizations such as the International Actuarial Association, the World Federation of Insurance Intermediaries and Insurance Europe are also observers.

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Late summer, fall harvest of non-bank SIFIs, G-SIRs (global reinsurers)?

SIR? G-SIR?
It should come as no surprise when MetLife receives a proposed systemically risky financial institution(SIFI) designation when the Financial Stability Oversight Council (FSOC) meets July 31 in a closed session –if the decision is ready, whether or not people agree with it.
At least one other institution in consideration for a nonbank SIFI designation will also be discussed at the scheduled meeting, it appears from the FSOC notice.
There was a nonbank SIFI in Stage 2 (out of 3 stages before a designation is proposed) in late March, which could be a reinsurer like the behemoth Berkshire Hathaway, or an asset manager, like BlackRock, which also early on (2011) argued against its sector’s consideration by the FSOC. Yet, because the FSOC minutes show that the deputy director for financial stability in the Federal Insurance Office (FIO) provided an update on the status of the ongoing analysis of this nonbank financial company in Stage 2, a insurer or reinsurer could be under the microscope–although it could be an asset manager that owns an annuity company. Berkshire is expected by some to be named, along with other global reinsurers, a global systemically important reinsurer (G-SIR) in November by the Financial Stability Board. (FSB.)
For its part, MetLife has been meeting with Federal Reserve Board officials for at least two years as they have noted in presentations and filings, regulators and lawmakers have requested input on capital adequacy frameworks for insurers as an alternative to the Basel framework prescribed under the US Basel III final rule. met has been under consideration as a SIFI in stage 3 analysis for more than a year by the FSOC, where it came under review when it divested its bank holding company status. As such, it has been very familiar with Federal Reserve oversight and the onus of stress tests. Insurance-applicable capital standards have yet to be developed. All SIFIs will be subject to Basel III, and insurers are hoping for some insurance-centric adaptation.
What will be interesting, once the MetLife decision is released, will be the rationale used for determining MetLife’s proposed SIFI-hood, and the language of the dissent or dissents which could follow.

If a run on the bank scenario is not used as the starting culprit in the FSOC analysis, MetLife would still have to be shown to cause systemic risk in a failure if it were a SIFI. Its global position and leveraging, and enormous third party asset management arm, MetLife Investment Management, could conceivably be argued to cause  any systemic risk problem more than the insurance operations. According to a snapshot profile, it it manages 12 accounts totaling an estimated $12.3 billion of assets under management with approximately 11 to 25 clients. It purchases commercial real estate. Asset managers are already being explored for their systemic risk. 

There is a strong and lively camp that resolutely believes insurers are just not systemically risky. There are bills in the House, two approved by a panel, that would curtail FSOC’s SIFI designation process pending a review, allow certain members Congress and other agency officials to sit in on closed meetings,  and new efforts  this week to reform FSOC and the Office of Financial lResearch  introduced by U.S. Rep. Dennis Ross, R-Fla., Rep. John Delaney, D-Md, Spencer Bachus, R-AL., Kyrsten Sinema, D-Az.,  and Patrick Murphy, D-Fla.,

“Dodd-Frank turned four this week,” Ross stated.  Unfortunately, it has become increasingly evident that aspects of the law are not working as promised. FSOC and OFR are agencies that were established to identify potential risks to our nation’s financial stability but they have been broadly criticized for their lack of transparency, flawed research, and inadequate designation process. …. In many cases, the SIFI designation can lead to a large cost increase for consumers.” Ross and fellow concerned House members  wrote a letter to Secretary  of the Treasury Jacob Lew in April detailing concerns with judging asset managers as risky and suggesting the need for specific ways in how they pose risk.

All of this concern, FSOC hand-wringing and legislation will come too late for MetLife, at least.

The rationale used for the case to create Prudential Financial’s SIFI designation was pummeled by many, including the insurance contingent on the FSOC, excepting Treasury official and FIO Director Michael McRaith, a nonvoting member. The run-on-the-bank scenario was held as improbable, and FSOC insurance expertise member Roy Woodall also worried about how the insurer could possibly ever exit from SIFI-hood under the scenario offered. FSOC began its examination from an assumption that Prudential was in distress from a run on the bank.  Woodall dissented on Prudential’s SIFI designation, but not on AIG‘s.

“The Basis does not establish that any individual counterparty would be materially impaired because of losses resulting from exposure to Prudential. Instead, the Basis relies on broader market effects and aggregates the relatively small individual exposures to conclude that exposures across multiple markets and financial products are significant enough that material financial distress at Prudential could contribute to a material impairment in the functioning of key financial markets,” Woodall stated in his dissent.

Treasury officials were concerned about Prudential’s extensive derivatives portfolio and activities for hedging and otherwise.

The majority FSOC rationale offered for MetLife is likely to be a bit different, but invite still find criticism.
Prudential was officially designated by the FSOC on Sept. 19, 2013 after an appeal failed, and as such is subject to enhanced supervision by the FRB pursuant to Dodd-Frank.
Prudential states outright in its resolution plan filed with the Fed “the failure of the Company would not have serious adverse effects on the financial stability of the United States.”
Prudential is also subject to regulation as an insurance holding company in the states where Prudential’s U.S. insurance company material legal entities are domiciled, which currently include New Jersey, Arizona and Connecticut.
There are no capital or enhanced standards or Basel 3 adaptations worked out yet for Prudential, which is being overseen by the Boston Fed. The company says it will continue to work with the regulators to develop policies and standards that are appropriate for the insurance industry.
Its first order of business was filing a resolution plan, which it did just before the July 1 deadline. AIG also had to do one, and MetLife will have to do one as well.
The Resolution Plan describes potential sales and dispositions of material assets, business lines, and legal entities, and/or the run-off of certain businesses that could occur, as necessary, during the hypothetical resolution scenario.
Pru’s resolution plan describes potential asset or business sales that could occur during this hypothetical resolution of Prudential and its material legal entities as the result of the hypothetical stress event.
Prudential says that Under the hypothetical resolution scenario, each of Prudential Financial, Prudential Asset Management Holding Co., the holding company of Prudential’s asset management business, and (Prudential Global Funding (PGF, its central derivatives conduit) would voluntarily commence a bankruptcy proceeding under Chapter 11 of the Bankruptcy Code in the applicable federal court.
Once the Chapter 11 proceeding began, PFI and PAMHC would likely sell certain businesses and reorganize around the businesses each elects to retain.
PGF, Prudential’s central derivatives conduit, would quickly liquidate what limited assets would remain and settle any other liabilities following the termination and closing out of its derivatives positions, Pru’s resolution plan states.
Under the hypothetical resolution scenario, each of the primary insurance regulators for the insurance subsidiaries would file uncontested orders to start rehabilitation proceedings against the relevant insurer material legal entities in their respective states of domicile.
MetLife, which has more extensive global businesses than Prudential, which concentrates its overseas business in Japan, would have to include these in a resolution plan.
MetLife would have 30 days to request a hearing, which then must happen in another 30 days, once it is notified of FSOC’s initial decision. Without a request, a final determination is made by FSOC within 10 days.

House TRIA drama upstages Senate’s passage of bill

July 17–The Senate passage of a seven-year extension Terrorism Risk Insurance Program Reauthorization Act of 2014 (S. 2244) 93-4, complete with the package of National Association of Registered Agents and Brokers legislation (NARAB II) as an amendment, doesn’t mean the package will move to a complete legislative bill ready to sign anytime soon.
Division among various interests in the House to delay the legislation in the House, despite the smooth passage in the Senate. The current law, which expires at the end of this year.

House Financial Services Chairman Jeb Hensarling of Texas
House Financial Services Chairman Jeb Hensarling of Texas

In the past two days, the GOP whip operation has polled Republican members and those the whip counts have been mixed, which signal delay as loud as anything, as sources noted.
House Financial Services Committee Jeb Hensarling, R-Tx., led his committee to pass a five-year extension bill in mid-June that would treat conventional and nuclear chemical biological and radiological (NCBR) terrorist attacks differently, increase in the trigger for government payouts associated with conventional attacks and increased mandatory recoupment amounts.
As of this week, despite being tentatively on the House calendar for a floor vote, H.R. 4871 did not poll well, even before a whip count was attempted, with 218 votes still unlikely with the House bill as-is, sources close to the process said. Now that Hensarling has stated that, “Unfortunately, the Senate’s bill is essentially a status quo bill that uses a phony Washington budget gimmick as a pay-for, meaning it can’t even come to the House floor as written.”
Supporters of the TRIA extension are now looking at months before enactment, possibly, when just last week major insurers who supported both the Senate and the House versions were thinking in terms of days or a couple of weeks.
Certainty is of high value for insurers and commercial realtors as policies come up for renewal and no one knows exactly how to underwrite them.
The author of the bill and chair of the Housing and Insurance Subcommittee, Randy Neugebauer, R-Tx., and the House Leadership are fully behind the bill as passed by the Committee, and a Neugebauer aide underscored the point that a watered-down House bill was not welcome on the House floor. If it comes to the House floor, the bill will not be changed in any major, substantive way, he said.
Indeed, there are some members who feel it does not go far enough, not just those that think it goes too far in its widening of industry funds and capacity over time.
The House bill is supported by major insurers, producers, realty groups and associations and others. Small insurers openly oppose the $500 million trigger and not many don’t embrace the bill despite an opt-out provision on some measures.
The next few months -despite many fewer legislative days on the calendar– will be ones where the House Financial Services Committee leadership helps educate members who are not familiar with the TRIA program, and those that need help understanding the parameters of the bill, according to the Neugebauer aide, who indicated there is no rush and that they will be patient.
The six-month temporary extension will only come into play if the House cannot agree by ore before Christmastime.
“I’m still committed to getting a bill passed, but it has become very clear this week that the process is going to take several more months before there is a resolution….Washington is paying a lot of attention to one group’s concerns, but not enough attention to the other’s. That’s got to change if any TRIA bill is going to pass,” Hensarling stated.
“As this process goes forward over the next several months, I will be using that time to discuss with all members how to continue the program and also make reforms that improve our stewardship of Americans’ hard-earned tax dollars.”

On the action of the day, or as Hensarling put it, “…I’m pleased to hear that the Senate is at least working today,” in reference to the passage and the fact they have ignored job bills sent over to their chamber, insurers and other groups praised the Senate bill.
The Property Casualty Insurers Association of America (PCI) “commends the Senate for passing the Terrorism Risk Insurance Program Reauthorization Act of 2014. This long-term legislation will minimize the disruptions, maintain the availability and affordability of terrorism insurance for consumers, and protect taxpayers,” stated Nat Wienecke, senior vice president, federal government relations “It is great to see members of both parties come together in a broad bipartisan fashion to support America’s economic resiliency plan to recover from terrorist attacks.
“The strong bipartisan vote reflected a relatively smooth process through which the legislation was produced by the Senate Banking Committee, under the leadership of Chairman Tim Johnson of South Dakota and ranking Republican Sen. Mike Crapo of Idaho. The legislation tweaks the industry’s deductibles,” noted Joel Wood, The Council’s senior vice president for government affairs.
The tweaks include increases the “industry recoupment” by $2 billion a year to an overall level of $37.5 billion, and increases the insurer coinsurance level from 15% to 20% over five years.
The Senate legislation, S.2244, is strongly supported by the Administration, many sectors of insurance and commercial policyholder community, the real estate industry and the U.S. Chamber of Commerce. S. 2244 is opposed by the Heritage Foundation, the Consumer Federation of America and the free-market oriented insurance policy thinktank,  R Street Institute.
“Reauthorizing the program will ensure that the American economy remains resilient against the threat of terrorism. The Administration supports swift passage of this legislation and looks forward to working with Congress on this reauthorization and reform process,” came the statement from the WHite House before the vote.

But,according to R Street Senior Fellow R.J. Lehmann, “unlike H.R. 4871, the TRIA Reform Act … the Senate’s proposed seven-year extension fails to make appropriate changes to the program to shift more risk to the private sector.”
As Lehmann noted, the Senate bill does make modest adjustments to the federal share of terrorism losses, which gradually would be scaled back to 80 percent from the current 85 percent, the House bill goes further by raising the trigger level for coverage for conventional terrorist attacks to $500 million.
“Reinsurance broker Guy Carpenter recently issued a report finding that multiline terrorism reinsurance capacity is about $2.5 billion per program for conventional terrorism and about $1 billion per program for coverages that include NBCR,” stated Lehmann said. “The changes proposed in the House bill are well within the bounds of the private market’s existing capacity, and failing to make those changes would put taxpayers on the line for risks that should be borne by big corporations, property owners and insurance companies,” he continued.

NARAB is not a worry for most, although it slightly short of the “love fest” that one confident NAIC official once testified in the Senate it would be in March 2013.
Sen. Tom Coburn,R-Ok., who was one of the 4 Senate “Nay” votes, threatened to hold up Senate vote of the TRIA bill unless concessions were made on NARAB so a “sunset” of NARAB of two years after the first agent or broker receives a license from the clearinghouse was added to the Senate version. No such sunset exists in the House TRIA legislation to which NARAB is attached, sources noted.

The insurance industry will push for the elimination of the NARAB  sunset provision.

The NAIC noted, “while we have long supported the NARAB legislation, we do however have concerns with the inclusion of a sunset provision that could have adverse effects on insurance markets if NARAB were to come into existence and then ultimately be terminated.”

But,  as expected, most do want NARAB now to see the light of day and must pin their hopes on a  succsessful House and  Senate TRIA package.
U.S. Sens. Jon Tester, D-Mont., and Mike Johanns, R-Neb., stated today that the NARAB legislation is expected to lower prices through increased competition because insurance brokers can more easily register across state lines. It was added to a bill reauthorizing the federal backstop for insurance coverage for terrorist attacks.
Tester said, “This is a big step forward to create new opportunities for small agents and brokers and to provide consumers with a better product at a lower price. Streamlining the licensing of registered agents and brokers while maintaining state regulation of the insurance industry will increase competition and better protect consumers”
CIAB, which has been championing a clearinghouse for agents and brokers for many years, may finally see its work come to fruition if the TRIA bill gets past the remaining stumbling blocks.
“We are pleased that the legislation also includes our long-sought NARAB proposal to create a uniform agent/broker nonresident licensure clearinghouse,” said CIAB’s Wood.
“NARAB II is common sense legislation that creates a streamlined agent and broker licensing system that strengthens the competitive insurance market and protects consumers,” PCI’s Wienecke stated.
The Administration/Treasury also backs NARAB.

TRIA renewal bill not yet whipped and sawed by House

The Terrorism Risk Insurance Act (TRIA) could get a vote Thursday in the Senate as well as the House, although most say that division and discontent, as has been reported, could move the vote until next week.
No one yet is “feeling lucky.”
The Speaker’s office, when contacted early this afternoon said a vote was scheduled Thursday for H.R. 4871, but that is likely premature–observers and staffers say the 218 votes aren’t there yet for the bill that passed out of the House Financial Services Committee under Chairman Jeb Hensarling, R-Tx,  a month ago.

At best, they’ll get the GOP whip count Thursday, and that will determine whether–and then, when–the majority might schedule the vote, said one person familiar with the Leadership’s routine.

“No way,” said another regarding any vote in the Hosue on TRIA this week.

Majority Whip Kevin McCarthy, R-Calif.’s office said there was nothing on the schedule for TRIA as of yet.

In the meantime, where the two versions will meet in terms of their provisions for the program’s extension and trigger threshold is still an open question.

It would bifurcate nuclear, biological, chemical or radiological (NBCR) attack coverage from losses incurred from an attack using conventional (or non-NBCR) materials. In the House bill, which many insurers cannot stomach as-is, the trigger would increase incrementally from $100 million in calendar year 2015 to $500 million in calendar year 2019.
The Senate bill is a seven-year extension maintains the trigger at $100 million and increases the recoupment amount over five years by $10 billion. For more details, see <a href=”http://www.carriermanagement.com/news/2014/06/13/hr4871 CBO score” target=”_blank”>article:
H.R. 4871 would extend TRIA for five years, through Dec. 31, 2019.
The Congressional Budget Office (CBO)  has scored H.R. 4871, estimating that enacting H.R. 4871 would increase budget deficits by about $500 million over the 2015-2024 period. Changes in federal revenues and spending, however, would continue beyond 2024.
Enacting the renewal legislation would lead to additional spending of $250 million and additional revenues of $1 billion after 2024,the CBO estimates. Thus the estimated net budgetary savings after 2024 would be slightly larger than the estimated net budgetary cost between 2015 and 2024, the CBO stated July 15th. The CBO factored in the proposed National Association of Registered Agents and Brokers (NARAB II) reform, as well.
The CBO estimates that after taking into account all revenues and direct spending, enacting H.R. 4871 would lead to a small reduction in deficits over time.
At the same time, the establishment of NARAB, which is to be attached to the House and Senate TRIA bills during a vote now, is facing a sunset provision two years after the first license is issued in a floor amendment added by Sen. Tom Coburn, Md., R-Ok.
Some say it could have been worse and that NARAB otherwise has very strong, bipartisan, bicameral support.
According to one source, Senate supporters of NARAB and TRIA reached an agreement with Coburn where he would agree to a two-year sunset of NARAB – two years after the first NARAB license is issued to an individual after some back and forth on the clearinghouse provision.

Consultant to examine NAIC governance procedures, external and internal relationships

UPDATED 7/16 10:30 am with NAIC education initiative news:

Seven months after Connecticut Insurance Commissioner Tom Leonardi recommended hiring outside consultants to conduct a thorough evaluation of the governance structure of the National Association of Insurance Commissioners (NAIC), its Executive Committee has finally decided to go forward with the move.

The NAIC Executive Committee recently voted unanimously to accept the recommendation from its Governance Review Task Force to hire a consultant to assist in a comprehensive review of NAIC governance, the organization announced July 15.

The Governance Review task Force stated in its draft that the consultant should “compare NAIC’s organizational and governance model with best practices of associations, business or nonprofits that are comparable to NAIC, where practicable.”
The draft scope of work, dated June 13, contemplates a broad review of the NAIC’s organizational structure, committee processes and external engagements with with international bodies, including the International Association of Insurance Supervisors (IAIS), and interactions with federal bodies, including Congress, the Federal Reserve, the Department of Treasury, its Financial Stability Oversight Council (FSOC) and the Federal Insurance Office (FIO), including how NAIC strategy and message are developed.
The hiring committee is made up of some of the NAIC officers such as Pennsylvania COmmissioner Micahel Consedine even as one of the organizational reviews includes analysis of the role and authority of the Executive Committee, NAIC officers, the NAIC CEO and the organization’s management.
Back on Dec. 11, 2013, in a startling passionate letter that went as “viral” as anything the NAIC as an organization had ever been involved in to date, Leonardi blasted the organization for cronyism, acceptance of weaknesses and “so-called leadership.”
Anyone keen to revisit that letter and its colorfully-rendered revelations of NAIC discord and fissures within the ranks from the former CEO and business executive, who is as familiar in Washington and international insurance regulatory circles as he is in Connecticut can read about here and here.  It doesn’t lose its flavor months later.
“We cannot choose our fellow commissioners or always compensate for each other’s weaknesses, but we can make sure that our organization is structured and governed in a way to minimize the negative consequences of those realities,” Leonardi stated in the letter to his fellow state regulators, after detailing a variety of shortcomings and allegedly unprofessional behavior in the NAIC ranks.
The NAIC and Leonardi both have acknowledged in various ways that state insurance regulation is on the line, challenged by contemplated and real federal oversight moves and international pressures.

The 2010 Dodd Frank Act measures are slowly being enacted despite attempts to abridge or curtail them, and international efforts for global  insurance capital  standards have been embraced in a bear hug of the world’s top banking regulators,  threatening to squeeze the state out of state regulation of insurance, according to some insurance sector participants.

The NAIC said it anticipates issuing a request for proposals this week to help selection of a consultant and is targeting early September for the work to begin.
Leonardi, who was shut down in the December NAIC national meeting with his corporate governance proposal by the leadership and others, who decided to table a decision until after the current storm of outrage from Leonardi had subsided, is not part of the selection team.
In 2014 an Executive Task Force was formed and charged with making a recommendation to Executive Committee on whether to retain a consultant.

“I look forward to working with fellow regulators on a fair and open process that will ultimately strengthen the effectiveness of the NAIC and enhance our common mission of consumer protection and state-based industry oversight. Good governance is extremely important to the constituents we serve. It is my hope that the consultant vetted and eventually recommended by President (Adam) Hamm’s subcommittee is one who will deliver world-class expertise to this task and who will be afforded unfettered access to our organization in order to conduct an independent and unbiased review.”

Hamm’s statement acknowledged Missouri Insurance Director John Huff for his leadership on the Governance Review Task Force.
“As in past reviews of NAIC governance, we hope the consultant can assist us in facilitating a thorough evaluation and identifying best practices for us to consider,” stated Hamm, also North Dakota insurance commissioner.
The RFP will be posted on the NAIC website upon issuance, with actual contract with the consultant expected in late August.
Word on the cost or budget for the consultant was not disclosed.
The NAIC makes use of consultants in many areas from technology systems to legal and actuarial support human resources to accounting policies that accepted in 2011 a target operating reserve of 80% to 91%.
To help educate domestic and international policymakers about the actual workings and effectiveness of the U.S. regulatory system, the NAIC proposed, for example, in the 2014 budget, to retain the services of one or more consultants to help generate an educational outreach program intended to raise the awareness of the state-based system of insurance regulation in the U.S.

Interestingly, the nAIC announced a day later, July 16, that it had just launched this educational initiative, called  ‘Protecting the Future…’

Calling it unprecedented, the nAIC is deploying it in  Washington,  Brussels, the capital of the European Union; and in Basel, Switzerland, the seat of the Financial Stability Board (FSB) for the G-20.

“It is a critical time for state regulators as some federal officials and global regulators are seeking unprecedented authority over American insurance markets, including the imposition of bank-centric regulation on insurance companies,” the NAIC stated, claiming state regulation  has  a nearly 150 year history, even during the 2008 financial crisis, of protecting policyholders and helping to prevent an even deeper economic downturn.

With this  education initiative in mind, the 2014 budget projected about $12.220 million for outside consultants, down from $15.69 million in 2012 and about even with 2013 budget number amount. The budget did not appear to include the corporate governance consultant in its projections.

Global BCR consultation open-as U.S. House Aprops tries to keep Feds in line with state insurance views

The International Association of Insurance Supervisors (IAIS) has issued its second consultation document on the global Basic Capital Requirement (BCR), the first capital underpinning for global insurers, beginning with the Global Systemically Important Insurers (G-SIIs), which include in the U.S.,  AIG, Prudential Financial and MetLife.

Many insurance company representatives and executives who initially railed against the intrusion of global capital standards have accepted it as a foregone conclusion once the G-20 came resolutely to the table, although many  insurance interests still push Congress to examine the need for them, how it will be devised and wonder who or what will implement them in the United States.

Some in the House –and insurance trade organizations — are casting a cold eye on these and other developments.

Just recently, the leadership of the House Committee on Appropriations,attached a report (113–508) to appropriations legislation (H.R. 5016) requiring the Inspector General to submit a report to the House and Senate Committee on Appropriations, the House Financial Services Committee, and the Senate Banking Committee on federal agency progress in developing a consensus with the state insurance commissioners on such  international insurance standards. The IG’s office would also, under this report, keep track of  Federal agency representation at international insurance supervisory organizations such as the IAIS to make sure it conforms with state consensus views. This would likely mean the views of the National Association of Insurance Commissioners (NAIC) leadership or a “consensus” of state insurance commissioners.

Under the IAIS proposal, BCR required capital will be calculated on a consolidated group-wide basis.

The BCR will determined using a ‘factor-based’ approach with 15 factors applying to defined segments within the main categories of insurance activity.
The BCR Ratio will be the qualifying capital resources divided by the required capital components.

Required capital will be calculated with three components: insurance, banking, and non-insurance financial and material non-financial activities not currently subject to regulatory capital requirements. The insurance component will include non-traditional insurance activities (variable annuities, GICs & synthetic GICs, mortgage insurance, political risk insurance, surety and trade credit) and the banking component will apply the Basel III requirements.

IAIS field testing indicated that the volunteer insurers had material exposures to regulated banking activities.
The IAIS states that significant progress has been made in developing the BCR since the last consultation document and the BCR proposal which will be delivered to the G20 summit in November 2014.The first public Consultation Document on the BCR was issued Dec.16, 2013 with the close of the comment period on Feb. 3.
The development of the BCR, which acts kind of like a temporary capital assessment backbone, is the first step in developing group-wide global capital standards, an initiative pushed by the G-20’s Financial Stability Board. The second step is the development of Higher Loss Absorbency (HLA) requirements to apply to G-SIIs, due to be completed by the end of 2015. The HLA will build on the BCR and address additional capital requirements for G- SIIs reflecting their systemic importance in the international financial system.
The third step, news of which almost knocked some insurers off their feet when first proposed, is the development of a risk based group-wide global insurance capital standard (ICS), due to be completed by the end of 2016, and to be applied to Internationally Active Insurance Groups (IAIGs) from 2019 after refinement and final calibration in 2017 and 2018.
The ICS will then replace the BCR in its role as the foundation for HLA.

The IAIS states that the exact timing of the transition of the foundation from BCR to ICS will depend upon the adoption date of the ICS by the body and upon the time required for jurisdictions to develop and implement the necessary legislative frameworks for implementation of the ICS. That’s a wide-open timetable and question in the U.S., of course.
The scheduled ICS adoption date is October 2018 so calibration of HLA may need to be revised once the ICS has been adopted.
The field testing exercise to collect data to inform BCR development began March 21 with 33 volunteer insurance groups, covering a wide range of products and geographical markets. Eight of the nine G-SIIs submitted sufficient data in early May.
The data collected by early June were assessed as sufficient to inform the proposed BCR design, specific factors and calibration level, despite the need to analyze data more thoroughly in certain areas, including non- traditional insurance exposures and non-insurance exposures, according to the IAIS. The Organization said that data coverage and quality will be improved during the consultation process and will be used to inform the final BCR design, specific factors and calibration level.
The IAIS consultation document contains analysis and tables to better understand key drivers of the proposed BCR formula.
Insurance groups who just received the documents today and will likely wait until the deadline to submit comments.
Earlier comments submitted by the previous February 2014 deadline on the first iteration of the BCR expressed gratitude that the association distinguished between the characteristics of the BCR from the role and characteristics of the banking leverage ratio in the banking world and for inclusion in the process. Insurers however had comments on timing, period of field testing, confidentiality of data between companies and regulators, risk-sensitivity gauges and risk-weighting.
For example, Northwestern Mutual stated that asset/liability management is an important risk mitigation activity of any major insurance company and then proposed that a factor determined by the degree of sensitivity to interest rate risk could be developed.
The Global Federation of Insurance Association suggested that the BCR framework should acknowledge the risk mitigating features of certain products, like adjustable products and participating policies, as well as reinsurance.
MetLife, in its early February comments on the BCR, stated it agreed there is a natural trade-off between risk sensitivity and simplicity for the formula but added that while “fewer factors may appear simpler,” more factors may make the BCR more risk sensitive, easier to calibrate and better able to promote appropriate management of risk.

New clearinghouse open to try to ease way for commercial brokers

July 2, 2014 —
It’s July, and financial institutions, and U.S. insurance agents and brokers are now required, since yesterday, to comply with the 2010 Foreign Account Tax Compliance Act regulations, which means some groups have swung into gear to work with the law meant to report foreign financial assets.

According to the IRS, under FATCA, to avoid being withheld upon, foreign financial institutions (FFIs) may register with the IRS and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners.

Enforcement is supposed to start now but there may be delays in enforcement but only with good-faith efforts to comply.

The Council of Insurance Agents & Brokers (CIAB) has been hard at work on a new portal to simplify the IRS form exchange between U.S. insurance brokers and foreign insurers.

FATCA’s inclusion of non-cash value insurance premiums despite the lack of revenue and any connection to tax evasion could apparently not be avoided, even after attempts to draw attention to the issue in Congress and with the U.S. Treasury and try and get some change in place before July 1. That did not happen, as the issue was flagged for Treasury quite late.
About two months, during budget hearings, ago Treasury Secretary Jacob Lew was grilled before the House Appropriations Committee by Rep. Ander Crenshaw, R-Fla., on why non-cash value insurance premiums were included in the then-looming regulation.
The law generally requires that foreign insurers receiving U.S.-source premiums provide W-8BEN-E forms to their U.S. insurance brokers to demonstrate that they are either FATCA-compliant or FATCA-exempt in order to avoid otherwise mandatory 30% withholding.
CIAB’s W-8BEN-E portal allows global carriers to upload their W-8 forms to a database which U.S. brokers can then search and download.
Demonstrating compliance requires a certificate to be collected and stored from every foreign entity involved with a policy with even the slightest exposure to U.S. risk, and the portal allows this through the exchange of W-8BEN-E forms.
There is a $10 processing fee, but usage for the duration of 2014 is free of charge.  After that, the cost will be between $200 and $500 annually, depending on the brokers’ affiliation with the Council.
Before the law went into effect, the Council worked to try and identify all the foreign carriers with which its member brokers do business, so that this online portal was the most comprehensive resource for W-8BEN-Es in the market. CIAB’s member firms have helped it identify hundreds of offshore insurers and it claims good communications with them and our colleagues abroad.
That doesn’t mean every company that does business with U.S. brokers has signed on yet, of course, to this new solution to an IRS conundrum for the industry.
But, according to Joel Wood of the Council, “We can’t imagine why any FATCA-compliant international carrier wouldn’t want to participate. FATCA is a burden, this can only relieve some of that burden.”
 But Wood did acknowledge that “we are in a bit of a transitional period; we have hundreds of carriers that we have contacted (and there is universal interest).  It will be an evolving product, but we have high confidence that it will be the go-to clearinghouse.”
The IRS website provides a web application that provides paperless FATCA registration.
The IRS has published a Foreign Financial Institution (FFI) list on IRS.gov. The list contains the names of financial institutions and other entities that have completed FACTA ) registration with the IRS and obtained a global intermediary identification number (GIIN).
CIAB says it is still working with the Treasury Department on the issues involved. It’s “not a total solution” – there are annual premium reporting requirements for brokers, but CIAB is keeping up the conversation on those, Wood says.
While many entities are required to register with the IRS and obtain a GIIN in order for payments to them to be free of FATCA withholding, many other entities are not required to and must meet different requirements, for payments to them to be free of FATCA withholding. The IRS advises one to get a tax advisor if uncertain.

“It has been a very frustrating process because we have never understood a good rationale for why non-cash value property casualty insurance transactions should considered financial or could be utilized as a mechanism for international tax avoidance,” Wood said in his address to members.

The  IRS concern CIAB evinced in is talk with Treasury officials were the possibility that hedge funds utilizing offshore captives for tax evasion and parking excessive premiums there.

We  surely don’t want to be part of any of that Wood said, but FATCA’s application on a $2.5 trillion industry  of non-cash value premiums  is “a matter of the tail wagging the dog,” he told CIAB members.

A response from Treasury’s IRS  was pending.

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