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

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.

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.

IAIS meeting glimpse: Powerpoints, cap standard concerns, timetables

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

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

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

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

This data is being analyzed now to develop BCR formula.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Fed hires Tom Sullivan as its insurance chief

The Federal Reserve Board has hired an insurance regulatory chief after a long search for an insurance expert to fill the new position. Former Connecticut insurance regulator and industry consultant Tom Sullivan has accepted a position as the senior advisor for insurance to the Board of Governors.
A Fed spokesperson for the board said he starts the high-profile post June 9.
As such, Sullivan will be representing the Fed at all domestic and international insurance forums, he stated in an email to colleagues in the insurance sector.
Sullivan has most recently been a partner at PricewaterhouseCoopers. Word was that the well-regarded insurance regulatory expert was also once on the short list for NAIC CEO before the organization hired Sen. Ben Nelson, D-Neb., for the post a year and a-halfago.
The Fed, as a prudential regulator of systemically important insurers (non-bank SIFIs) and insurers with thrift holding companies (SLHCs), has an ever-more powerful voice in insurance regulation. The Fed is well as a member of the Financial Stability Board (FSB), has a seat at every table now, including at the International Association of Insurance Supervisors, in Basel.
The Fed has been seeking an insurance leader for some time, and several names have come up on the short list.
“I am excited to be joining the Fed and there is a lot of work to be done given their statutory authority as consolidated regulator for the designated insurer non-bank SIFI’s and the insurer owned SLHC’s,” Sullivan said in an email.
Sullivan will be working with insurance supervisory cohorts the NAIC’s international team of state regulators Kevin McCarty (Florida), Tom Leonardi (Connecticut) and Michael Consedine (Pennsylvania), among others, as well as the Treasury’s Federal Insurance Office (FIO.)
Sullivan takes the helm of the key insurance official title at a critical time. Controversial proposed capital standards are under development globally for insurers that are not only systemically important but that are also internationally active, and these standards must be translated to and put up for acceptance by local jurisdictions like the United States.
Congress, the Fed and U.S. insurers are struggling with what to do with seemingly inflexible strict minimum requirement capital standards that would also hammer down on insurance  SIFIs and thrift holding companies under Sections 165 and 171 of the 2010 Dodd Frank Act. Legislation is pending, with the American Council of Life Insurance (ACLI) taking out a full-page ad last week “highlighting the life insurance industry’s support for critical legislation (S. 2270 and H.R 4510) that would clarify the Federal Reserve Board’s authority to apply insurance-based capital standards to insurance companies under the Fed’s supervision.”
 Indeed,  a similar ad from the ACLI will run in Politico on June 4.
Sullivan served as Connecticut insurance commissioner throughout the 2008 financial crisis and AIG’s downfall. He was appointed by Republican Gov. Mary Jodi Rell in 2007. As chair of the NAIC’s LIfe Insurance and Annuities Committee  and has testified before Congress as a state regulator that prudential oversight of insurers by the states works, citing solvency and capital standards that “have ensured that policyholder commitments are met  and that companies remain stable.”
Sullivan is a lifelong Connecticut resident who graduated from Western Connecticut Sate University and got his MBA from the University of Connecticut.
Early reaction was positive from those who have worked with the amiable, well-seasoned executive.
“The Federal Reserve Board has made a solid appointment in choosing Thomas Sullivan, who has keen regulatory and industry insight. He understands the importance of state-based regulation, and the difference between banking and insurance. This is a great step forward that will benefit consumers and insurers,” stated current Connecticut commissioner and IAIS Executive Committee member Tom Leonardi.
Leonardi sits on numerous supervisory colleges as commissioner and is extraordinarily active in international insurance supervision,and will be working closely with Sullivan on capital standards for  and oversight discussions embedded in the IAIS’ ComFrame initiative and in higher loss absorbency standards for global systemically important insurers and reinsurers. The latter group, the reinsurers, is expected to be identified this summer by the IAIS.
NAIC President and North Dakota Insurance Commissioner Adam Hamm stated,”Tom’s strong regulatory experience, comprehension of the insurance sector, and thorough understanding of America’s national system of state-based insurance regulation will be a tremendous asset to the Board on both domestic and international issues.We look forward to working with Tom in his new position as we continue to enhance our working relationship with the Federal Reserve.”


Author: Liz Festa,  June 2, 2014



Gov’t OIG audit: FIO has been busy, but needs to track work, meet deadlines

The Federal Insurance Office (FIO) should keep records and create a plan for its functions and operations, as well as mid its report deadlines, according to the Office of the Inspector General (OIG).

The audit offered insight into why the reports have been months late, into the focus of FIO to date, and into its apparent shortcomings in tracking its own activities.

Four of the five reports required by the 2010 Dodd-Frank Act were completed well after their due dates, from about 10 to 23 months, and the fifth one, on global reinsurance,  which was due Sept. 30, 2012, has not yet been completed, the report noted.

In addition, FIO hasn’t yet documented a strategy for accomplishing its legislative functions, or developed a comprehensive implementation plan to direct the development of operational processes and ensure critical deliverables are met, the May 14 report stated.

Thus, in the future, FIO will be timely of future reports document its priorities and implementation plan, provide for record keeping, and develop performance measures, according to the audit report’s agreement reached with the Treasury office.

According to FIO management, the reasons that FIO missed the required deadlines vary, the report stated. As expected, the modernization report went through many drafts: “FIO management told us that the insurance industry modernization report was highly anticipated by the insurance industry, and the report underwent an extensive review process to ensure that the information and recommendations contained within the report were not misinterpreted.”

Much of this review process was outside the hands of FIO, some have related. FIO had key drafts done months in advance of their final publishing date, but  reports went through a tough multi-agency vetting process.

FIO officials told the OIG auditor that the global reinsurance report has been delayed while FIO focuses resources on drafting a higher priority report by the President’s Working Group on the availability and affordability of insurance for terrorism risk.

According to Treasury officials, FIO’s primary operational focus to date, the report stated, has been on representing U.S. interests in international insurance matters and working to establish strategic relationships within the insurance industry.

FIO management also were reported to have stated that the delays were due, in large part, to the considerable amount of time required to identify, attract, and hire staff with the knowledge and experience in several areas of insurance regulation needed to perform its work relating to the reports.

Some in Congress have asked McRaith, referencing overdue or late reports, chief among them, the almost two-year overdue report on Financial Modernization, if his office is adequate for the needs of preparing the statutorily-required reports on time.

In this audit report, the OIG was told by an official that the  FIO staff of 15 was determined by using the human capital planning approach which apparently identified the purposes of the office, the skills required for the office, and the skills already available.

However, “FIO was unable to provide us with a copy of this analysis,” the auditor stated.

According to this official, once FIO reaches15 full time employees, an assessment will be made to further evaluate the sufficiency of the staff size, the report said.

The Dodd-Frank Act required FIO to issue five reports, of which two reports are an annual requirement and three reports were a one-time requirement. Four of the required reports, including both initial annual reports, were completed well after their due dates, and the other one has not yet been completed.

The audit report did find that FIO has engaged in numerous activities such as representing U.S. interests related to international insurance matters, worked to establish strategic relationships within the insurance sector, staffed the office, and drafted reports.
Although FIO has worked to develop the European Union- U.S. Insurance Regulatory Dialogue, participated in the U.S.–China Strategic and Economic Dialogue, is building relationships within the domestic insurance sector and has provided a forum for the discussion of insurance topics within the federal government and the insurance sector, the audit found that FIO was unable to provide formal documentation to support the extent of its involvement in such activities.

“We believe that FIO needs to maintain a more complete record of the material activities performed by the office and their results to provide for greater transparency and to conform to Treasury’s record policy,” the OIG report said.

However, the main audit objective was to evaluate the status and effectiveness of Treasury’s process to establish FIO in a way that enables it to perform its functions. Image

In a polite written response, the tone of both the audit report and the letters back, FIO Director Michael McRaith said it agreed with the recommendations and is taking steps to implement them by working to finish the global reinsurance report “with deliberate speed.”

McRaith wrote May 1 in a letter to James Lisle, Jr, the OIG auditor, a CPA, that FIO has built an office of 15 staff and increasingly serves a a resource of insurance expertise not only within Treasury but also for third parties, including the GAO, the Financial Stability Oversight Council (FSOC) and members of Congress.

McRaith wrote that FIO agreed with the recommendations and will document FIO’s priorities and implementation plan, undertake record-keeping and develop performance measures to document the office’s progress.

The auditor also stated that FIO must put the estimated dates for completing corrective actions in the Joint Audit Management Enterprise System (JAMES), Treasury’s audit recommendation tracking system.

Reference for audit: OIG-14-036; Treasury Made Progress to Stand Up the Federal Insurance Office, But Missed Reporting Deadlines

Photo:  A statue of Abraham Alfonse Albert Gallatin, the longest-serving Treasury Secretary (1801-1813) presides over Treasury’s section of Pennsylvania Avenue, NW

Author, Photo: Liz Festa