House hearing should bring U.S. approach to ICS into sharper focus

The NAIC meeting is kicking up a lot of talk on international capital standards, and position or positions of TEAM USA may come more into focus during a hearing of the House Financial Services Committee Nov. 18 as Federal Reserve Board insurance policy czar Tom Sullivan, Federal Insurance Office Director Michael McRaith and NAIC Vice President and International Committee Chair Michael Consedine are called upon to testify.
So far, all we have on paper regarding the U.S. ICS approach is the NAIC working group discussion draft of two potential group capital methodologies: RBC Plus and Cash Flow. A hybrid of the two is also under discussion and generating buzz, although no one has endorsed it yet.
“RBC Plus” utilizes selected design features from the existing legal entity RBC framework. The accounting basis for this methodology is the insurance group’s U.S. GAAP accounts, says the NAIC’s ComFrame Development and Analysis Working Group, which people lovingly call C-Dog, aka CDAWG.
The “Cash Flow” concept follows the general methodology of asset adequacy testing for insurers. This methodology is being proposed partly in response to the sentiment that an ideal global insurance group capital standard should be accounting independent and thus would be able to perform its function in any accounting environment, according to the CDAWG group.
Property casualty insurers have expressed concern about the Cash Flow method, which would require significant use of internal models and scenarios would have to be updated periodically, and, as CDAWG has written, may not be easily understood or compared to a factor-based or RBC approach.
NAIC staff states CDAWG has not completed sufficient research to develop a potential hybrid approach, but it is possible that a combination of both the above methodologies could be developed that would reflect a factor-based approach (RBC Plus) as the minimum group capital requirement,coupled with a cash flow/stress testing approach as a complement to the minimum group capital requirement.
So far, any agreement among U.S. agencies is focused on avoiding market valuation for the assets underpinning the capital used for any standard. The International Association o Insurance Supervisors will put out its draft on the ICS by the end of December. No one seems certain if the U.S. or its various supervisory component will be submitting their work on an alternate U.S. approach by early December.
SNL Financial will be covering the capital standard proposals as they move forward and the hearing, so stay tuned. I will try and provide a link here later from our coverage.
Here’s our SNL Financial Coverage: https://www.snl.com/interactivex/article.aspx?id=29916991&KPLT=6

Washington Insurance Rider Coverage UPDATE

I love writing this blog here in Washington and hope you enjoy or at least get some insights from reading it.
I only regret I didn’t cover even half the stories I wanted to, from more machinations on legislation over renewal of

Lovely morning photo of US Capitol before scaffolding, by Jessica Gardner

Lovely late summer morning photo of Capitol before scaffolding, by Jessica Gardner

the Terrorism Risk Insurance Act to exploring the inter-industry dispute now brewing — or should one say boiling over — on the alleged use of misleading illustrations of indexed universal life (IUL) products.
At a time when insurance group capital and other standards will be fashioned to be adopted by nations and states alike, when disasters rattle, boom, blow,and crush, as the globe undergoes climate change, when viruses cyber and pathological alike spook communities,and the middle class population ages and is forced to face its retirement needs head-on, as the Federal Insurance Office (FIO) keeps pointing out the explosive growth of insurance premiums in emerging markets and what it means (what does it mean?), well, the need for wide-ranging insurance regulatory coverage is important.
This wide lens perspective is needed along with an eye for the minutiae that matters. Legal or legislative language when overlooked could later mean so much to so many industry participants — just see the Dodd Frank Act’s Collins Amendment. There will be stories to be told of the people that drive the insurance regulatory and legislative space, as well. We will look at their agendas, their consumers and clients, their goals and projects, their targets, their ascensions and their falls, their meetings and their votes in closed rooms, their invitations not extended and their recollections.

Thank you,

Twitter @LizFesta

IAIS develops BCR; U.S. weighs whether they are evolutionary or revolutionary

The International Association of Insurance Supervisors (IAIS) completed its first step in process to develop group-wide global insurance capital standards during its conference in Amsterdam. This week it announced that it had concluded development of the first-ever global insurance capital standard – Basic Capital Requirements (BCR) for global systemically important insurers (G-SIIs).
The BCR has also been endorsed by the G-20’s own Financial Stability Board (FSB).
“With design of the BCR now complete the IAIS has concluded the first of several steps in its process to develop group-wide global insurance capital standards,” said Peter Braumüller, chair of the IAIS Executive Committee, which also includes Federal Insurance Office (FIO) Director Michael McRaith, a Treasury official, and two U.S. state regulators.
Treasury and the Federal reserve Board as well as the Securities and Exchange Commission sit on the international FSB.
This comes as expected–now it is up to the countries to absorb it or otherwise fit it into their regulatory methodologies.
In the U.S., that means the primary regulator, whether the states or the Fed, depending on whether the insurer owns a thrift/savings & loan has been deemed a systemically important financial institution subject to enhanced prudential regulation.
The adoption in whole or part should be interesting as not all U.S. attendees appear to be on the same page, although some would wish it so.
McRaith, according to those live-tweeting the event at #iais2014 (let’s be clear; this blogger could not attend and turned to social media and attendee feedback) apparently said on a panel on capital standards that there was “a great desire” to move forward with them as long as “no one has to change.”
McRaith also called the BCR development a significant milestone as it is the first ever group capital standard, according to Tweets from attendees. He also focused on the importance of the globalized insurance markets and also noted, according to Tweets, that he was not worried about a monoculture developing with this capital standard.
The IAIS is developing no less than three separate capital standards for SIFIs: the BCR and the higher loss absorption (HLA) for G-SIIs, and the Insurance Capital Standard (ICS) for Internationally Active Insurance Groups (IAIGs.)
The BCR will serve as the comparable foundation for the HLA. Together, BCR and HLA will provide a consolidated group-wide capital requirement that will apply to G-SIIs only. When the ICS is finalized, it will replace the BCR in its role as the foundation for HLA. Got it?
The ICS is expected to be adopted in late 2018 and the HLA from 2019 onward, initially based on BCR as a foundation, moving later to ICS.
From 2019, G-SIIs will be required to hold capital no lower than the BCR plus HLA.
Missouri Insurance Director John M. Huff, in his keynote address,speaking on behalf of the NAIC, notably wavered from the perceived absolutism of a capital principle. He called upon global regulators to “acknowledge that our approaches to capital can be very different.”
Huff called upon the global community to give jurisdictions time needed to “develop standards appropriate to the insurance industry, and resist the pressure to homogenize regulation to treat all products and all investments the same.”
“In the U.S. as an example, with the exception of SIFIs, … the goal of the insurance capital requirements is not to prevent failure of a firm but to ensure the impact to policyholders is minimized. In other words, firms are allowed to fail but policyholders still need to be protected,” Huff stated.
He cautioned that if regulators require too much capital, then prices for consumers go up.
“A delicate balance needs to be achieved, and we must leverage other supervisory powers to complement capital such that we do not become over reliant on it,” Huff stated.
McRaith did acknowledge that a wide variety of views must be taken into account in development of global standards, according to a Tweet from an IAIS official.
Huff partially echoed that sentiment in his remarks: “When it comes to core principles, let’s truly make them principles where there is broad agreement they are critical to policyholder protection …true international norms that individual members can implement in a way appropriate for their home jurisdiction.”
“When it comes to the capital requirements, …we need to recognize that given the timelines, we need to work with present supervisory systems rather than thinking such standards could be used to dramatically reshape those established under existing law. As we move forward on these issues, practical and implementable change will be evolutionary, not revolutionary,” Huff stated.
Based on end-2013 data received during field testing, the average level of the BCR is 75% of the reported jurisdictional group-wide Prescribed Capital Requirement for G-SIIs, and 67% for all 2014 field testing volunteers, the IAIS stated.
Beginning in 2015, the BCR will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of refining the BCR.
The development of HLA requirements to apply to G-SIIs is due to be completed by the end of 2015. The final step is the development of a risk-based group-wide global ICS, due t by the end of 2016 and applied to IAIGs from 2019.
BCR is calculated on a consolidated group-wide basis for all financial and material non-financial activities. It is determined using a “factor-based” approach with 15 factors applying to defined segments and their specified exposure measures within the main categories of a G-SII’s activity – traditional life insurance, traditional non-life insurance, non-traditional insurance, assets and non-insurance.
All holding companies, insurance legal entities, banking legal entities and any other companies in the group will be included in the consolidation.
For more information, see PDFs on the iAIS website here.

FIO wants national approach in key areas, is watchful in others

Washington-Sept. 24, 2014
In the U.S. Department of the Treasury’s Federal Insurance Office (FIO) newly-released second Annual Report on the Insurance Industry, there are a few glimpses into further action FIO might be considering beyond its standard “monitor and report on” response to state-by state variations and issues of concern.
For example, the FIO is concerned with consumers’ retirement needs in the form of insurance products like life insurance and annuities and the availability of products and access to them in a safe manner.
In light of the decrease in life insurance agents and policies sold to individuals while needs remains high, FIO is looking into ways to promote access to what it deems “essential insurance products.”
The report discusses going beyond efforts in addition to the already preemptive pending legislation known as the National Association of Registered Agents and Brokers Reform Act of 2013 (NARAB II.)
Additionally, the report also says that questions concerning reinsurance collateral should be uniformly addressed on the national level.
FIO has been monitoring measures state-by-state to reform the requirements relating to collateral for reinsurance for almost three couple years now (the NAIC model law passed November 2011) but has found that in the 23 states that have adopted some measures of reform, authorization to accept less than 100% collateral has not been uniform in structure or implementation.
Thus, FIO suggests in its report, it is time for it to step in perhaps or at least make sure the issue is tackled at the national level.
FIO also voices its continued concern with the use of captive reinsurance as a source of risk in the life sector. The report acknowledges state regulatory attempts to address the issue but follows up with continuing concern from various sectors. However, FIO is still at the “monitor and report” stage here.
Also, the approach to ensuring availability and affordability of personal auto insurance remains open, as FIO is till monitoring the issue after receiving requested comments this spring and summer from stakeholders on how to define affordable personal auto insurance, including possible metrics.
The FIO is also appears to be getting involved with the Death Master File data to help make sure beneficiaries receive death benefit payments on policies. FIO said in the report is working to support stakeholder efforts to identify suitable alternative data sources, while working with stakeholders (including the National Technical Information Service, which supervises public access to the DMF) to support appropriate access to the DMF.

The report is largely positive on market performance. It stated that bottom-line numbers in the insurance marketplace in 2013 were encouraging and that at U.S. insurers have continued to show resilience in the aftermath of the financial crisis. Gains in net income drove reported surplus of both the P/C and L/H sectors to record levels.
At year-end 2013, the L/H sector reported approximately $335 billion in capital and surplus, and the P/C sector reported approximately $665 billion in capital and surplus, although net written premiums for the L/H sector were down slightly, from records set in 2012.
FIO has pointed out before, and does so here again, that while the United States remains the world’s largest insurance market by premium volume, its share has declined both as a percentage of domestic GDP and as a percentage of worldwide market share. Emerging economies have seen dramatic increases in premium volume, the report graphs.
This segues into updates on international supervisory activities and progress, the Federal Reserve supervision of insurers and matters examined in the watershed FIO Modernization report, released last December.
FIO’s support of international prudential standard-setting activities spearheaded through the International Association of Insurance Supervisors (IAIS), and implementation of such standards by the “appropriate national authorities” is clear in the new report, which sites financial stability, enhanced understanding and consistency as guiding principles in global insurance supervisory efforts.
FIO, which was established within Treasury as part of the Dodd-Frank Act, has a statutory duty to monitor all aspects of the insurance sector, including identifying issues that could contribute to systemic risk in the insurance industry or the U.S. financial system, which is where captive reinsurance concerns could play out. FIO also is supposed to assess the availability and affordability of insurance to traditionally underserved populations, advise the Secretary of the Treasury on major domestic insurance policy issues, and represent the United States on prudential aspects of international insurance matters, a role which FIO Director Michael McRaith has, by all accounts, heartily undertaken.

‘Team’ USA trying to fashion own capital standard for global stage

The development of group capital standards or the global insurance capital standard (ICS) has reached U.S. shores and the sector is working together–or listening together–to develop possible approaches.
To that end, U.S. regulators and stewards of domestic insurance policy met with the insurance industry Friday to discuss possible approaches to a U.S.specific group capital framework that would satisfy the International Association of Insurance Supervisors (IAIS).
The National Association of Insurance Commissioners (NAIC) hosted its ComFrame Development and Analysis Working Group in Washington with members of the insurance industry, and representatives from the U.S. Treasury Department’s Federal Insurance Office (FIO) and the Federal Reserve Board to discuss a U.S. group capital proposal that respects jurisdictional accounting requirements and perhaps also incorporates the U.S. risk based capital (RBC) approach.
Many in the U.S. favor jurisdictional-based approach rather than a standard imposed globally, leading to proposed solutions for crafting a domestic capital standard that would be okay’ed by global supervisory forums .
Any standard would be adopted by the Fed for its stable of insurers–thrifts and systemically important insurers–and the states, via the NAIC for all other insurance groups.
The Fed and Treasury are influential members of the G-20’s Financial Stability Board (FSB) and have a great role in capital standard development for financial institutions worldwide.
The meeting was led by Florida Insurance Commissioner Kevin McCarty, past NAIC president, Pennsylvania Commissioner Michael Consedine, head of the NAIC’s International Insurance Relations (G) Committee and NAIC president-elect, Tennessee Commissioner Julie Mix McPeak and New Jersey Commissioner Ken Kobylowski.
The NAIC staunchly adheres to a position that any capital objective be the protection of policyholders.

Staircase at National Fire Group, Hartford, Dec. 10, 1941, courtesy Library of Congress archives via Gottscho-Schleisner, Inc.,  photographer

Staircase at National Fire Group, Hartford Stair, Dec. 10, 1941, courtesy Library of Congress archives via Gottscho-Schleisner, Inc., photographer

Various companies suggested as possible approaches and alternatives as “work to date on these standards has revealed numerous issues and difficulties calibrating a global capital standard for such a diverse industry,” as Liberty Mutual wrote in a presentation submitted to the NAIC.
Suggested capital development approaches, based on materials submitted to the NAIC, include use of an insurance group’s own capital mode, more use of supervisory colleges, developing a group RBC formula which considers banking and non-insurance entities operating within the group (CNA), valuing cash flows, calibration with potential disaster scenarios and risks, replacing insurance reserves with best estimate liabilities to remove the major source of inconsistency across companies and regimes (Prudential Financial) while maintaining consistency between he valuation of assets and liabilities (a life insurance sector approach), and mutual recognition of local solvency regimes for international groups (Aegon/Transamerica) and use of U.S. statutory reporting measurement framework as a way to assess capital adequacy (Allstate.)
“It is more important to focus on the total asset requirement than the level of required reserves or capital on a separate basis. The focus should be on holding adequate total assets to meet obligations as they come due,” stated the American Academy of Actuaries.
New York Life put forth that “the new standards should require insurers to stress test cash flows under a set of prescribed stress scenarios. We believe that a cash flow stress testing approach offers the best way to ensure solvency and financial stability in a globally comparable manner, while preserving appropriate incentives for U.S. life insurers to continue offering sound, long-duration products that provide security to consumers.”
Or, as one person summarized. “Don’t come up with a dollar amount, come up with a probability that your cash inflows over time will exceed cash outflows…”
Non-life, property casualty companies were not so interested in matching long-term liabilities or cash flow testing because they are invested in short and medium-term municipal bonds of about seven years in duration, which need to be rolled out several times over the course of 30 years. The 30 year-notes are not as attractive anymore among low interest rate environment.
Most tossed out any mark to market accounting approach for valuations. Representatives discussed the need for a level playing field between large and small companies, the compliance costs involved for all companies in meeting these or any standards and the need for more meetings, including and in-person meeting before November.
The NAIC wants to have a recommendation for discussion and action at its Nov. 16-19 national meeting in Washington.
Some of the ideas advancing from the Sept. 19th meeting include the sentiment that domestic coordination is important if ideas are to advance internationally with a broad desire ti have all US voices say the same thing, and that p/c and life insurance need different standards, according to Dave Snyder of the Property Casualty Insurance Association Of America (PCI).
Other points include a skepticism about comparability between countries, a standard that recognizes the US model as one of the standards for compliance and an appreciation, he said, for NAIC’s transparent process.
However, Snyder said, there is “no guarantee at this point that the IAIS will accept an RBC-based system as one option for compliance…However, there are regulators outside the US that might share similar views and their systems ought to be recognized as being compliant with an ICS.”
The IAIS May 2014 ICS Conceptual Memorandum introduced jurisdictional group capital methods (the oft-cited paragraph 30) that could be accepted instead of the ICS as-is.
Although there is general NAIC and industry acceptance, if not enthusiasm here, that there will be an ICS of some sort, a byproduct–or product–of the IAIS ComFrame project which has been re-imagined by the FSB since ComFrame’s 2010 inception, not many in the U.S. are true believers.
“It is interesting to note that the effort to converge insurer accounting standards has failed after a ten year effort. Many times during the last decade it was asserted that the ‘train has left the station,’ regarding that effort. Apparently, U.S. accounting standard setters discovered “reverse” gear,” stated Marty Carus, former AIG compliance executive and a former long-time New York insurance regulator.

Lawmakers to Lew: why treat insurers differently in FSOC risk review?

Two days before the Financial Stability Oversight Council (FSOC) is due to discuss, at minimum, insurance company systemic risk designations, a group of seven Congressmen led by Rep. Scott Garrett, R-N.J., wrote to Secretary Treasury Jacob Lew with concerns that the Council is not giving insurers a fair shake.

 1839 Kollner ink and ink wash landscape of Capitol Hill,  before the dome had been added to the Capitol. Courtesy, LOC.

1839 Kollner ink and ink wash over graphite landscape of Capitol Hill, before the dome had been added to the Capitol itself. Courtesy LOC.


The treatment of the insurance industry didn’t get the public analytical effort that the asset management industry did in the FSOCs “rush” to designate firms as systemically important financial institutions (SIFIs), leading to disparate treatment of insurers, the Congressmen charged in the Sept. 2 letter.

Treasury has said before it does a very through review of the companies it reviews. metLife has been under consideration as a potential SIFI for over a year-the deliberations have not been made public nor has Treasury ever acknowledged that this company was under review.

The Council has devoted far less effort to empirical analysis, stakeholder outreach, and transparency in its consideration of insurance companies for designation than it has for asset management firms,” the Congressmen alleged.

The preliminary agenda of the Sept. 4 closed FSOC meeting includes a discussion of nonbank financial company designations as well as consideration of the Council’s fiscal year 2015 budget, and discussion of the Council’s work on asset management, according to a notice from the Treasury Department.

Joining Garrett, chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, were GOP Reps. Ed Royce, R-Calif., Sean Duffy, R-Wis., Dennis Ross, R-Fla., Spencer Bachus, R-Ala., Steve Stivers, R-OH, and Mick Mulvaney, R-SC.

They asked Lew for the rationale behind the approaches to the insurance industry in its consideration of potential SIFIs, including MetLife, which may or may not go to a Council vote tomorrow for proposed SIFI designation, depending on how ready Council members are.

The Office of Financial Research (OFR), which provides research for FSOC, published a report on the asset management industry in September 13. Although the quality of the report was roundly criticized by the Congressmen and some in the industry, they used it as a point of comparison in contrast with lack of such a report for the insurance industry. The lawmakers also noted that the FSOC held a public conference on asset management back in May but questioned why a similar exercise was conducted before designating insurers as SIFIs.

Some prominent lawmakers have been busy this year sending letters to Lew and otherwise passing legislation along party line votes through committee to attempt to gain some insight control over the FSOC process, either through efforts to make it more transparent to the public or at least certain Congressional members, or to get concrete feedback on the decision-making process for nonbank SIFIs.

Garrett himself, who introduced the Financial Stability Oversight Council (FSOC) Transparency and Accountability Act (H.R. 4387), was barred from a March 2014 FSOC meting he tried to attend.

Thus far, non bank SIFIS are AIG, GE Capital and Prudential. No asset managers have yet been named. Two insurers are under consideration, MetLife, which underwent Stage 3 analysis and has had its books formally “closed by the FSOC and another company in Stage 2, according to the minutes, which is perhaps Berkshire Hathaway, as a reinsurer, but which could be another big life insurance company, as well.

If  MetLife is designated, it would be subject to enhanced prudential supervision from the Federal Reserve Board, with a host of accompanying  holding company oversight and capital standards, a yet to be worked out by the Fed. A vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing until the time-frame to respond elapses.

FSOC’s Woodall troubled by IAIS’s proposal to limit involvement; others weigh in

The ability for international authorities to confer with policymakers with authority for financial stability in the insurance sector would be greatly hindered under an International Association of Insurance Supervisors (IAIS) proposal to basically cease “Observer” status Jan. 1. argues a member of the US Financial Stability Oversight Council (FSOC.)

FSOC Independent insurance member Roy Woodall says that the proposal detailed in the IAIS Notice of Request for Comment of Aug. 4, 2014, would render null and void  the purpose for joining as an “Observer” earlier this year, (see http://www.insurancejournal.com/news/national/2014/02/18/320673.htm) and could dampen oversight of global financial stability.

“Relegating systemic risk policymakers to only those opportunities afforded to the general public would reduce the likelihood of effective attainment of the IAIS goal of providing a meaningful contribution towards global financial stability,” Woodall stated in a comment letter to the IAIS late last week.
The IAIS is and must remain a critically important resource to systemic risk policymakers throughout the world.  To achieve its objective of contributing to global financial stability, the IAIS should consider how best to ensure that it continues to have the strongest possible ties with systemic risk policymakers so that they will benefit from and be able to act upon the informed and knowledgeable efforts of the IAIS in the area of global financial stability,” Woodall wrote.

Comments on the proposal are due Sept. 2.

The Notice of Request for Comment announced  two agreements by the  IAIS Executive Committee: an agreement that non-members would no longer generally participate in meetings but rather be invited when necessary to provide targeted, technical input; and that IAIS engagement with outside stakeholders would increase through special sessions, more dissemination of   documents and the use of conference calls as opposed to the in-person high-level meetings the IAIS has been holding  thus far.

But the IAIS proposal could have the unintended effect of excluding policymakers with legal authorities for financial stability regarding the insurance sector and who may not themselves be supervisors–like himself, Woodall argues.

For global financial stability to be most effective it needs experts on the insurance sector, and to include those with legal authority, he points out.

Woodall suggests that the IAIS could provide for participation by systemic risk policymakers as non-voting members, a suggestion that has been thorny in the past.

The IAIS could reconsider revising its bylaws so that  the IAIS could include “national organizations” and their members, which would  include systemic risk policymakers who serve on the FSOC — and members of other similar national bodies elsewhere, Woodall suggests.

For instance, the IAIS has similarly recognized the need for engagement by critical participants in other areas and has welcomed the participation of organizations like the World Bank, the Asian Development Bank and others as non-voting members, he notes.

Woodall acted to join as an “Observer” after a proposed IAIS bylaw amendment that would have permitted systemic risk policymakers to join as non-voting members was tabled by the IAIS Executive Committee at the annual meeting in Washington, D.C. in 2012.  U.S. members of the IAIS Executive Committee at the time  were divided on the motion, with reports of concern about the wording and  the inclusion of too many non-specific insurance entities with too broad a view of a jurisdiction’s financial  stability officials.

The NAIC and the U.S.  are already heavyweight members because of their numbers and agencies represented, which include the Federal Insurance Office and the Federal Reserve Board now, too.

Woodall noted that as an “Observer” he benefits from perspective of other Observers, who also would fall off the IAIS rosters under the proposal. Woodall says the other groups help give a by better understanding the implications for industry and consumers of matters under IAIS consideration.

As such, he says he is sympathetic to the goal of ensuring that the IAIS not become wholly detached from those who may be able to provide such important perspectives.

Consumer advocates who recently also were granted Observer status, including those in the U.S. funded through the National Association of Insurance Commissioners (NAIC) are also slamming the proposal by the IAIS.

Center for Economic Justice (CEJ)’s Birny Birnbaum, a seasoned consumer advocate and also a member of FIO’s advisory committee, criticized the unequal access some parties have had  and its potential effects on all stakeholders, including his constituency, consumers, in his Sept. 2 comments.

“We applaud the IAIS proposal to stop ‘pay-to-play’ and allow any interested party to follow and participate in the activities of the IAIS. However, meaningful participation by consumers of insurance in IAIS processes requires the establishment of a formal IAIS consumer participation program reflecting a commitment to obtain consumer input….”

“We note the irony of a request for comment on public participation procedures with a note on page 1 limiting the information to Members and Observers,” Birnbaum added.

Peter Kochenburger, one of the internationally-focused NAIC consumer advocates, and an insurance law professor at University of Connecticut where he  is executive director of the Law School’s Insurance Law Center, said he agrees with the serious concerns state regulators, insurers and trade associations that the IAIS draft procedures would greatly limit stakeholder involvement.  

“Closing most meetings to outside observers reverses the presumption of openness and transparency, and doesn’t speed up any processes – allowing stakeholders to observe proceedings does not mean IAIS working groups must have public comment periods, or even interact with stakeholders at these sessions,” Kochenburger said.  “If the IAIS was considered a public deliberative body, its draft procedures would violate many state open meeting laws,” he added.  

Consumer observers are further disadvantaged, though, he said.

“We don’t come with the power and resources of insurers and other stakeholders; if we are listened to it is not because of our market share in a country, but the quality of ideas, and commitment and experience in consumer (policyholder) protection.  Our credibility and therefore our effectiveness often depends on speaking publicly at hearings and committees and being able to communicate directly with supervisors.  Much of this will be lost, along with the opportunity to meet consumer observers from other countries, who will now have equally minimal opportunities to meet in person,” Kochenburger said.

The proposed procedures will reduce the opportunity for contributions by closing meetings that once were open, says Property Casualty Insurers Association (PCI)  of America’s Dave Snyder, a long-time Observer.

The general rule in the proposal is that meetings will be closed but guests may be invited in at the discretion of the IAIS.

“This is the most fundamental of all flaws in the new procedures. The reverse should be the case, especially when the role of IAIS, as noted by the paper, has significantly increased,” stated Snyder, who says PCI strongly agrees with the remarks of the NAIC (comments here), which trumpets transparency and stakeholder participation for their own sake and as a means to increase the likelihood of acceptance and overall efficiency.

Snyder welcomed open Executive Committee sessions  but said these would not  compensate for closing other meetings and closing meetings combined with inviting “guests” into them.

Observers have decried  the proposed policy not only because it will change the dynamics  of interaction but because it comes at a critical time–the IAIS is not a sleepy organization leased a few desks by a banking oversight body in Basel, anymore.

A global insurance capital standard by 2016 for globally active insurance groups is under development, with expected  implementation by 2019, alongside the 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.

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.

International organizations such as the International Actuarial Association, the World Federation of Insurance Intermediaries and Insurance Europe are also Observers.

Right now, all eyes are on 21st Annual Conference of the IAIS in Amsterdam, October 23- 24, 2014. The theme of IAIS 2014 will be: ’Enhancing policyholder protection and financial stability through governance and risk management’. The group will decide then how to proceed. See: http://www.iais2014.org/
However, the American Council of Life Insurers (ACLI) warns, “that the IAIS should refuse to become an ivory tower bureaucratic elite,” by instead continuing inclusive interaction with diverse stakeholder groups with… those who may not agree on approach but who have the same objectives. “This is how you will be prepared for the next crisis and not the last one,” stated the ACLI comments, written by Robert Neill, formerly of FIO.

NAIC does its housework, ponders internat’l stance amid concerns

Reports from the National Association of Insurance Commissioners (NAIC) summer meeting in Louisville, Ky., demonstrate a desire for the United States to take a uniform national position in international insurance capital regime debates, work on a better way to achieve sound corporate governance and make progress on the reinsurance framework for captives.
On the domestic front, the Executive Committee of the NAIC adopted the XXX/AXXX Triple X/ Actuarial Guideline 38) Reinsurance Framework, which carries with it an action plan to develop proposed changes to the insurer/captive regulations and model laws dealing with ceding reserves in these transactions.
The framework would require the ceding company to disclose the assets and securities used to support the reserves and hold an risk-based capital cushion if the captive does not file RBC. It would not change the statutory reserve requirements. 

The NAIC agreed to move forward to develop a comprehensive framework proposal while numerous groups will develop the details to create the framework, to be approved later by NAIC membership.

The XXX/AG 38 issue propelled itself to the regulatory spotlight more than three years ago in the life actuarial task force meetings, and in the ensuing months and  years, caught the interest of the  Financial Stability Oversight Council (FSOC), the Federal Insurance Office (FIO) and the Federal Reserve. The pressure to find solutions has been ongoing, with the NAIC using its resources and an outside actuarial consultant to create the semblance of a national system  to deal with what some in the life insurance industry say are redundant reserves that choke their books ad others claim is regulatory arbitrage.

The NAIC also  adopted a Corporate Governance Annual Disclosure Model Act and supporting Model Regulation Monday, Aug.. 18. Under it, U.S. insurers will be required to provide a detailed narrative describing governance practices to their lead state or domestic regulator by June 1st of each year. This narrative will be protected by strict confidentiality measures,  which was vastly important to insurers as they would be baring their governance practices to regulators. 

The new corporate governance disclosure requirements are expected to start in 2016, according to the NAIC.

An international capital standards forum featured insurers and regulators, both from the states and the Federal Reserve Board’s insurance policy shop pushing for a U.S.-centric approach or position, with both life insurance and non-life insurance standards, according to one attendee.
The International Association of Insurance Supervisors (IAIS) is creating insurance capital standards under the auspices of the Financial Stability Board (FSB.)
Insurers are concerned that standards are appropriate to the life insurance industry, which offers long duration products and requires a different valuation principle to capture market swings over a generational period of policy obligations. Otherwise, insurers argue, these market swings could create capital standard costs that would be passed on to consumers making products such as long term care and annuities, essential retirement products, unattractive to consumers.
Even the consumer advocates, who may or may not have a role in the  IAIS going forward, if the IAIS drops its observer status, pointed out that the focus on capital is misplaced, according to attendees. It doesn’t address defective, systemically risky products, it was argued.
Pennsylvania Commissioner Michael Consedine noted that when the U.S. speaks with one voice, it is hard to ignore. Consedine is NAIC vice president and chair of the International Insurance Relations (G) Committee (NAIC) but it is hard to fathom what that will be with the FIO  reflecting the Treasury position and maintaining an essential role at the IAIS, along with the NAIC and now the Federal Reserve.

The NAIC, according to a source recap of the meeting, would like to see any model adequately tested, and generally embraces its approach, which protects consumers and not allow capital to flow outside the policyholder protection net.
Consedine has a big year ahead of him as NAIC president-elect and international leader on state insurance regulatory matters–if his governor, Tom Corbett, a Republican, survives a challenge from Democratic opponent, Tom Wolf. Recent polls show Corbett, who was drastically down in the polls, starting to gain some points back.

Another veteran on the international state regulatory scene, the previous head of the G Committee and a member of the IAIS executive committee, Tom Leonardi, is also appointed by a governor facing a tough reelection campaign in Connecticut, where the Republican contender, Tom Foley is polling ahead of Gov. Dannell Malloy.

Leonardi said that although there are potential benefits to adoption of a uniform global capital standard, he still questions the need for a global capital standard. Capital is not fungible, particularly when a company is in financial distress, he noted at the meeting. Implementation with another capital standard that has little in common with existing regulatory standards and industry practices make it a very expensive process to implement, he told attendees at the event.  There is a need to look at a jurisdiction’s entire solvency regulatory regime, which is not standard around the world, Leonardi noted.  

A concern we have, stated Montana Insurance Commissioner and current NAIC president-elect  Monica Lindeen in  an International Insurance Society address June 23,  “is that the last crisis was a banking crisis, not an insurance crisis, yet much of the international discussion and some of the prescriptions proposed for insurers seem very similar to banking solutions developed by banking regulators.”

“In the U.S., we regulate insurance on a legal-entity basis…. If the liabilities are in the U.S., then we expect the assets and capital that support the U.S. business to be there as well. In fact, the strongest protection to the financial system and policyholders might well be that each legal entity, including the holding company, holds capital commensurate with its risks,” Lindeen told the international audience.

Renewed FACI to meet Thursday, group now weighted with industry execs

The Federal Advisory Committee on Insurance (FACI) meets today, Aug. 7, in Washington, with a slate of new members. For the first time, industry participants outnumber state regulators.
The agenda is broad, including the first time the committee will meet to discuss the FIO report, How to Modernize and Improve the System of Insurance Regulation in the United States, issued in December.
There are nine high-level insurance or broker industry members, including two from non-U.S.-domiciled holding companies, two academics, the addition of a state legislator with insurance interests, one consumer advocate and eight state insurance regulators. State regulators number eight for a total of 21 members.
FIO Director Michael McRaith oversees the committee, which will again be chaired by the CEO of Marsh & McLennan Cos., this time in the person of Dan Glaser rather than the retired Brian Duperreault.
Originally, half the slots were for state regulators.
Seven are original members of the 15 named almost three years ago, when industry members numbered six participants, state regulators seven, with the addition of one each of an academic representative and a consumer advocate. A few represent the same firms or entities as their predecessors.
The FACI is also scheduled to review of the renewed charter of the FACI and give a status report on international developments. McRaith is a member of the International Association of Insurance Supervisors, and Pennsylvania insurance Commissioner Michael Consedine chairs the National Association of Insurance Commissioners (NAIC) International Committee (G) as well as NAIC vice president. The G Committee is scheduled to have a conference call to discuss, among other things, technical issues with the IAIS’ Basic Capital Requirements (BCR) consultation paper at about the same time as the FACI meeting.
There will also probably be an update on the The EU-U.S. Insurance Project, in which other FACI members are involved. By end 2014, the steering committee of the project has proposed to evaluate the use of a covered agreement to achieve the group supervision stated objectives such as working towards achieving greater comparability between groups in relation to an overall group solvency assessment.
One original and continuing member, Benjamin Lawsky, New York’s Superintendent of Financial Services, recently wrote to members of the Financial Stability Oversight Council, which include McRaith as a nonvoting member, asking for careful consideration in the Council’s review of MetLife as a potential systemically important financial institution and noting that MetLife’s life insurance businesses already are “closely and carefully regulated” by the state of New York and other regulators.

The domestic  insurers named as SIFIs so far by the FSOC,  Prudential Financial and AIG, now have executives on the FACI, as does Allianz, deemed a  global systemically important insurer, as designated by the IAIS/Financial Stability Board (FSB.) Prudential and AIG are also G-SIIs, as is MetLife. Only MetLife, expected to be named a potential SIFI by FSOC soon, is not represented on FACI. Prudential Financial is now overseen on a consolidated basis by the Boston Federal Reserve Bank and AIG by the New York Fed.
The original FACI charter called for the FACI to consist of not more than 15 members. The duties of the FACI are “solely advisory and shall extend only to the submission of advice and recommendations to the FlO, which shall be non-binding,” to the original charter. No determination of fact or policy shall be made by the Committee, according to this 2011 charter, which was renewed in August 2013 for another two years.
FACI has met in person, in public meetings, about half a dozen times since its first meeting in March 2012, and weighed in heavily on the topics of availability and affordability of insurance and the use of captive arrangements by insurers, in open discussions which sometimes turned tense as when former FACI member Thomas Leonardi sparred with McRaith on whether the investigation of captives was even necessary by FACI and FIO. There were also forays into catastrophes, the national flood program and Superstorm Sandy, and an overall broad commitment to look into the retirement and aging of the world’s insurance-buying public.
However,the FACI has seemingly been dormant for at least half a year, although phone calls are not made public.
The 21 individuals (Asterisk denotes original member)appointed today to the Federal Advisory Committee on Insurance include:

· Gary Bhojwani, Chairman of Allianz of America

* Birny Birnbaum, Executive Director, Center for Economic Justice

· Elizabeth Brown, Professor, Georgia State University

* Michael Consedine, Commissioner, Pennsylvania Insurance Department

· Brenda Cude, Professor, University of Georgia

* Jacqueline Cunningham, Commissioner, Virginia Bureau of Insurance

· John Franchini, Superintendent, New Mexico Office of the Superintendent of Insurance

* Loretta Fuller, CEO & CFO, Insurance Solutions Associates

· Nicholas Gerhart, Commissioner, Iowa Insurance Division

· Daniel Glaser, President & CEO, Marsh & McLennan Companies (Chair of the Committee–was Brian Duperreault, retired CEO of Marsh)

· Mark Grier, Vice Chairman, Prudential Financial, Inc.

· David Herzog, EVP & CFO, American International Group, Inc.

· George Keiser, Representative, North Dakota House of Representatives

· James Kelleher, EVP & Chief Legal Officer, Liberty Mutual Insurance

* Scott Kipper, Commissioner, Nevada Division of Insurance

* Benjamin Lawsky, Superintendent, New York Department of Financial Services

· Theodore Mathas, Chairman, President & CEO, New York Life Insurance Company (was Michael Sproule from NY Life)

* Sean McGovern, Chief Risk Officer & General Counsel, Lloyd’s of London

· Julie McPeak, Commissioner, Tennessee Department of Commerce and Insurance

· Franklin (Tad) Montross, Chairman, President & CEO, General Re Corporation

· Theodore Nickel, Commissioner, Wisconsin Office of the Commissioner of Insurance

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.