NAIC decries the member vote to end IAIS ‘observer’ status

Oct. 27, 2014, Washington — The National Association of Insurance Commissioners (NAIC) expressed strong opposition to the International Association of Insurance Supervisors (IAIS) vote to end observer membership status for non-members. The vote, which took place in closed session at the annual general meeting on Oct. 25 in Amsterdam, amended IAIS bylaws to end this observer status, which included participation in some IAIS meetings.
The IAIS is creating new stakeholder consultation procedures which have not at all been embraced by the once and former observers.
Ahthough the vote occurred in a closed session, the NAIC delegation voted against the measure, while the Federal Insurance Office (FIO) voted for it and the Federal Reserve Board representative allegedly left the room.
After attempts to work together, the schism on international supervisory issues among U.S. representatives is still defined by issues such as this.
“I am extremely disappointed in the outcome of Saturday’s vote to end observer status at the IAIS,” said Adam Hamm, NAIC President and North Dakota insurance commissioner and IAIS member. “Observers run the range of consumer advocates, insurance experts, and industry representatives – all of whom have critical input to share on the real-world consequences of decisions made by regulators. Shutting them out of the official process in favor of ‘invite only’ participation deprives IAIS members and stakeholders alike and could diminish the credibility of decisions made at the IAIS,” said Hamm, who also sits on the US Financial Stability Oversight Council (FSOC.)
ALthough the FSOC role does not assure one of membership, the fact that the NAIC members are state regulators does.
Observers, from insurance groups and lobbyists to consumer advocates to the insurance expert on the FSOC have previously spoken out against the change, criticizing the long-anticipated move for lack of access and lack of time to effect any important and long supervisory process of crafting rules — rules that would be eventually applied to insurance companies, and effect regulations, markets and consumers.
“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,” FSOC Independent Insurance Expert Woodall stated in a comment letter to the IAIS in early September.
Said consumer advocate Peter Kochenburger, executive director of the Law School’s Insurance Law Center,”I would say that the IAIS annual conference in Amsterdam further confirmed the value of stakeholder participation: (1) without any consumer (policyholder) participation the dialogue is either regulators talking only to themselves, or to the industry, with the crucial second party to any insurance transaction, the policyholder, not having a voice (2) as the industry points out, they will be responsible for ultimately following and implementing changes in national (or state) insurance laws and have a knowledge base and stake in participating in its making.”
The new consultation procedures being developed will likely outline how certain stakeholders may participate in portions of some meetings by invitation only as well as the creation of open hearings with stakeholders separate from IAIS meetings.
The Center for Economic Justice (CEJ), run by IAIS observer consumer advocate Birny Birnbaum, said also in a comment letter Sept. 2, the IAIS new, proposed policy for consultation of stakeholders is not a good solution because it “will not ensure all relevant stakeholders are properly consulted because there is no formal consumer participation program or assistance, because the implementation is left to the discretion of the Chair and because there is no formal training for members or committee leadership in implementing public participation policies and procedures.”
Besides being “clearly not transparent,” the proposed ‘standardized framework’ is too short on the required interactions and too long on the options to ensure consistent stakeholder interaction across committees and projects,” Birnbaum wrote.
The IAIS is in part funded by Observer fees and some anticipate that the G-20’s Financial Stability Board (FSB), which is directing many of the IAIS work on international capital standards, may pay the funds now.
“Over the years, the IAIS has benefitted from the input and ideas provided by our observers which not only result in quality end products, but also provide our stakeholders with a better understanding of our work and our development processes,” said Kevin McCarty, Florida insurance commissioner and past NAIC president, who has served in IAIS roles for some years and who serves on the IAIS Executive Committee.
“…we are concerned about changes which will result in less transparency and openness by closing all meetings to stakeholders going forward,” he continued, contrasting the NAIC’s policy of transparency with the IAIS’ plan.
U.S. state regulators are not alone in their concern with the new process. Congress has introduced a bipartisan resolution calling for openness and transparency by the IAIS, the NAIC pointed out in a release.
Dave Snyder of the Property Casualty Insurance Association (PCI), who recently returned from Amsterdam, remarked that”the NAIC vote upholds the views of our federal and state lawmakers and our traditions of openness to all interested parties. On the other hand, the IAIS action is a serious mistake as it will make it more difficult to meaningfully consider the views of all stakeholders. It will also potentially result in flawed standards and guidance that will run into preventable opposition and thereby fail to be implemented.”

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.

‘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.

Yes, the book on MetLife is closed; vote on SIFI desgination next step

The Financial Stability Oversight Council voted Aug. 19 unanimously to close the evidentiary record on a what it says is a nonbank financial company, which we shall refer to as MetLife.
MetLife has been in Stage 3 of the review process for potential designation as a systemically risky financial institution (SIFI) for over a year.
Closing the books is the next step before the FSOC gathers in person or by phone to vote to potentially designate the largest U.S. life insurance company a SIFI, as it has for AIG, GE Capital and Prudential Financial, the second-largest U.S. life insurer. Prudential contested its proposed designation in an appeal, lost its bid and finally accepted it in lieu of a further battle and a higher standard of proof in the courts.
MetLife has long argued that it is not a SIFI, and it will be of interest to many to see whether the vote is unanimous or not.
The vote for Prudential was broken by three dissents, two from voting members Roy Woodall, the appointed independent member with insurance expertise, and Edward DeMarco, then acting chair of the Federal Housing Finance Agency (FHFA), and one from the representative from the state regulators, Missouri Insurance Director John Huff. The Securuties and Exchange Commission (SEC) had abstained in light of the recent Mary Jo White appointment.
When MetLife reached Stage 3 of the FSOC’s designation process in mid-July 2013, CEO Steven Kandarian stated that,
“I do not believe that MetLife is a systemically important financial institution. The Dodd-Frank Act defines a SIFI as a company whose failure ‘could pose a threat to the financial stability of the United States.’ Not only does exposure to MetLife not threaten the financial system, but I cannot think of a single firm that would be threatened by its exposure to MetLife.”

He argued against the scenario that the FSOC in large used that summer to finally designate Prudential, a run on the bank scenario.

“The life insurance industry is a source of financial stability. Even during periods of financial stress, the long-term nature of our liabilities insulates us against bank-like ‘runs’ and the need to sell off assets,” Kandarian said July 16, 2013.
“If only a handful of large life insurers are named SIFIs and subjected to capital rules designed for banks, our ability to issue guarantees would be constrained. We would have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether.”
MetLife is already a global systemically important insurer, as designated by the Financial Stability Board (FSB) after a review by the International Association of Insurance Supervisors (IAIS), as are AIG and Prudential.
The FSOC said in its resolution approving the completion of the record that “the nonbank financial company” has submitted written materials and information to the Council and the Office of Financial Research (OFR) and the staffs of the Council members and their agencies have analyzed such materials and information. The council member agencies are led by the Treasury Secretary or his designee. Including him, there are 10 voting members. They are listed here, by agency: http://www.treasury.gov/initiatives/fsoc/about/council/Pages/default.aspx
The OFR was planning on hiring more insurance expertise at one point, in the spring.

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.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

S&P questions G-SII merits while acknowledging uncertainty in outcome of designation

Standard & Poor’s  is asking whether the global systemically important  insurers (G-SIIs) designation’s costs outweighs it benefits and appears in its analysis to be sliding toward the answer of yes, at least for some.

Of course, the effects of the designation have not played out at all, yet, so anyone who analyses any effects couches their prognosis in terms of uncertainty.

“The merits of the G-SII designation for global financial stability are not clear, in our view, and may not outweigh its costs for insurers and their regulators,” stated Standard & Poor’s (S&P) Financial Services LLC in a June 3rd report on its global credit portal.

S&P said it concluded after some analysis that “ultimately, the net impact of the designation may be negative for some G-SIIs and positive for others. The picture will become clearer as the new regime takes shape and the G-SIIs take management actions to respond.”

S&P analysts considered the positive and the negative and did find potential for both, but ultimately questioned whether insurers pose a systemic risk like some of  the large banks have been found to do.

This sentiment, and the question analysts posed, whether naming certain insurers as G-SIIs enhances financial stability and warrants the resulting costs to insurers and their regulators, colored the report’s analysis.

In fact, the analysis suggest that the creation of G-SIIs could possibly destabilize parts of the industry itself if there is too much  regulatory focus on these largest, most interconnected global insurers while the rest of the industry goes its own way, in a way, less scrutinized.  “We further believe that the creation of G-SIIs could divert regulatory resources toward these entities while more risk accumulates at the non-G-SIIs,” the analysts said.

The analysts do suggest there is a place for a systemic risk scrutiny domestically, though: “We believe that systemic risk was more evident in insurance at a national, rather than global, level during the financial crisis, when U.S. bond and mortgage insurance and trade credit insurance in some European markets posed systemic concerns.

It may be that the FSB [G-20 Financial Stability Board]  would never have pursued the G-SII regime were it not for AIG’s failure, S&P analysts stated. It was “a failure that resulted, in our view, from its shadow banking activities, which other insurers largely avoided,” S& P said.

Potential identification of systemically risky/important  global reinsurers by the International Association of Insurance Supervisors (IAIS)  in concert with the FSB, is expected in November.

“The FSB has postponed the announcement of reinsurer G-SIIs twice, which may be indicative of differing views on the potential candidates,” S&P stated.

The IAIS is expected to deliver the basic capital requirement (BCR) n November, but S&P  believes significant later modifications are likely as work continues on the other elements,  including the higher loss absorbency for G-SIIs (by 2015). IAIS said that ComFrame field testing is progressing well, with many meetings taking place over the next month to analyze data and prepare for the next BCR consultation in July.

S&P says that although basic capital requirement, higher loss absorbency, and advocated global insurance capital standard won’t be “hard” capital tests that require insurers to act on deficiencies until 2019, it expects the development of these myriad capital standards to influence regulatory supervision before then.

The ratings agency questioned also this need for capital loadings for G-SIIs.

“It’s understandable for banks, where recent empirical evidence has shown what a failure can cost taxpayers…While insurers, including some large insurers, have failed in the past, their resolutions have generally come at limited cost to taxpayers, in our view…. In light of the lack of data on the cost of these resolutions in general and for taxpayers, it’s unclear to us how the IAIS will calibrate the G-SIIs’ capital loadings,” they stated.

S&P has taken no rating actions on insurers thus far as a direct consequence of a G-SII designation so far.

However, insurers should not expect a ratings boon from S&P for their global designations, at least:

“We anticipate that governments would play a role in resolving failing G-SIIs (and D-SIIs), but don’t see the same incentive for governments to provide capital support to the insurance sector. Accordingly, we factor no government support into insurers’ ratings unless they are government-owned,” S&P stated.

“In our view, the G-SIIs generally aren’t too big to be allowed to fail because we believe it’s possible to resolve their liabilities post-failure without disrupting the financial system and without the injection of taxpayers’ money. Capital injections generally aren’t necessary when resolving insurers because, relative to banks, they have low financial leverage, lower liquidity risk, low interdependency, and extensive use of subsidiaries (rather than branches). The infrequency of insurer bailouts historically bears this out,” the S&P analysts team stated in the research report.

Policy measures under consideration for G-SIIs include heightened oversight, resolution plans, and capital loadings to absorb potential losses.

The U.S. G-SIIs are Prudential Financial, AIG and  MetLife.

Domestic systemically important insurers (SIFIs), as designated by the Financial Stability Oversight Council (FSOC)  are expected to match up with these, according to S&P, with a MetLife designation coming down the pike. MetLife has been in Stage 3 of the FSOC review process for months.

S&P states that  heightened oversight is already a reality: AIG’s lead supervisor, the Fed, has already allocated a dedicated staff of nine to the task–and “colleges” of most of the G-SIIs’ main supervisors are already in place, S&P points out.

Insurers must submit detailed resolution plans to their group supervisor by July, for example.

The primary analyst for this S&P research report, which looks at the nine G-SIIs globally, is in London, with a team in New York, Frankfurt and Singapore.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action).

What do you think the overall effect will be on G-SIIs, or for that matter, U.S. insurance SIFIs?
AUthor: Liz Festa, June 5, 2014

Is FSOC exploring other options besides SIFI designations?

In a week when U.S. insurers flocked to testify or follow or promote Congressional hearings addressing easing Dodd Frank’s federal government powers strictures on insurance company oversight, U.S. Treasury Under Secretary for Domestic Finance Mary Miller opened the door to policy options for review of industries or companies under review for systemic risk.

But is it enough to allow insurers through? Or, has that door shut?

The Treasury Secretary chairs the Financial Stability Oversight Council (FSOC) that reviews threats to stability and designates financial institutions like Prudential Financial and AIG as systemically risky (SIFIs.) If FSOC identifies risks posed by asset managers or their activities that pose a threat to financial stability, it has a number of policy options, Miller stated during an FSOC-hosted conference on the asset management industry May 19.

These options include highlighting potential emerging threats in its annual reports to Congress, making recommendations to existing primary regulators to apply heightened standards and safeguards, and, of course, the SIFI-label: designating individual firms on a company-specific basis.

“If we identify risks that require action, we will seek to deploy the most appropriate remedy,” Miller stated in her remarks. However, “it is possible that at the end of this comprehensive review, the Council may choose to take no action,” she allowed.

Options seen as less radical than a SIFI designation which subjects  a company to enhanced (to put it mildly) prudential supervision under the Federal Reserve Board’s regime were previously raised in the dissent of then-acting director of the Federal Housing Finance Agency, Edward DeMarco, to the FSOC’s 7-2 vote on Prudential’s SIFI designation.

“To the extent that the Council has concerns about the potential for runs on standard products and existing regulatory scrutiny, those concerns would be better addressed by tools other than designation, such as the Council’s Section 120 authority,” DeMarco wrote in September in his dissent. Section 120 holds that FSOC may provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards, including standards enumerated in section 115, for a financial activity or practice conducted by bank holding companies or nonbank financial companies under their respective jurisdictions, instead of blanketing the company itself with a SIFI designation.

FSOC’s plunge into the intense review of the asset management industry coupled with this apparent new tack doesn’t mean that MetLife is off the hook as a future SIFI, though, even though MetLife is a huge asset manager already.

The New York insurer, and one-time bank holding company, has been under Stage 3 review since mid-July 2013, likely the longest Stage 3 review thus far for a company.

If MetLife were cited as a SIFI on the same basis as Prudential, beginning with a distressed company and a run-on-the-bank by millions of policyholders and the ensuing contagion scenario, the oft-cited dissent from FSOC insurance expert Roy Woodall would probably be similar, which may be unpalatable to Treasury, even if the votes are there to designate MetLife.

At a hearing also this week on FSOC designations as a possible danger to the U.S. financial system, Woodall’s statement that FSOC’s “underlying analysis utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems,” was quoted by Eugene Scalia of Gibson, Dunn & Crutcher LLP in Congressional testimony May 20.

Treasury probably wants to avoid listening to, over and over again refrains similar to, “the designation of Prudential purports to be based on a risk assessment, but a risk analysis that assesses neither the probability nor the magnitude of the event is not a risk assessment at all,” as stated by as Scalia in the Tuesday House Financial Services  hearing.

Also this week, House Financial Services Chairman Jeb Hensarling, R-Texas, called on FSOC to “cease and desist ” SIFI designations until it gets questions answered, and many are trying to push for greater FSOC transparency, so the FSOC bloom is off the rose, for now.

“Many think it odd that FSOC has chosen insurance companies and asset managers as targets for SIFI designation when there are others that pose far greater risks to financial stability.  Insurance companies are heavily regulated at the state level, and asset managers operate with little leverage. And since they manage someone else’s funds, it is almost inconceivable that an asset manager’s failure could cause systemic risk,” Hensarling stated.  

Treasury’s Miller also broached the  subject of the work of the Financial Stability Board (FSB) in ongoing work regarding the identification of global systemically important financial institutions. MetLife has already been identified as a global systemically important insurer (G-SII) by the International Association of Insurance Supervisors (IAIS), under the direction of the FSB, and some on Congress have expressed concern that a foreign body that is not a regulator is somehow directing domestic policy on U.S. capital and other standards. The NAIC, the state insurance regulators,  think the FSB mandate is so powerful, they want to be part of the group or its discussions.

Miller took the opportunity to try and allay these concerns.

“While the FSB and the Council have a shared objective of promoting financial stability, it bears emphasizing that the domestic and international processes are entirely independent.  In its work, the Council adheres to the standard and considerations for designations that are listed in the Dodd-Frank Act and in the Council’s public guidance,” Miller stated.

The Council is the only authority that can designate an entity for Federal Reserve Board supervision and enhanced prudential standards,” she stressed.

Concerns about dealing with so-called bank-centric capital standards themselves also had another airing when the Housing and Insurance Subcommittee of the Committee on Financial Services heard testimony on H.R. 4510, the legislative fix to the Collins Amendment in Dodd Frank that would free Federal Reserve-supervised insurers from preparing statements in accordance with GAAP and their assets and liabilities from the minimum leverage capital requirements and risk-based capital requirements required under Sen. Susan Collins’, R- Maine, now infamous Section 171.

 

Author: Liz Festa, in Washington, May 21, 2014

Day One of NAIC Int’l forum showcases CT — and corporate governance

“When it comes to insurance, we, the states,  are here to stay,” said Connecticut Gov. Dannel P. Malloy to attendees at the NAIC International Forum in Washington, D.C., today.

Malloy sought to turn the conversation about states versus federal regulation on its head by asking whether enough is being done in Washington to open up the door of opportunity for U.S. companies.

Malloy, whose appointed  insurance commissioner Tom Leonardi is traveling on international insurance supervisory business, acknowledged that the state system has to  “continuously evolve and consistently live up to the responsibility” of supervision, but expects to be nothing less than partners with the federal and international apparatus set up to also oversee insurers.

Connecticut is very active in international supervisory colleges overseeing insurance companies and Leonardi has made no bones about his distaste for the Federal Insurance Office (FIO) to join them.

Malloy made it clear he thoroughly backs the bold-speaking Leonardi.  When asked by NAIC President Adam Hamm about what advice he would give to the three U.S. federal officials who sit on the G-20’s Financial Stability Board (FSB) about the  lack of a state regulatory  voice in global insurance supervisory deliberations at thee top level, Malloy answered, “Give up your seat to Tom and myself.”

The three FSB members are Treasury Secretary Lew, SEC Chair Mary Jo White and Federal reserve Chair Janet Yellen.

“We are wasting a lot of time and  a lot of energy with a debate that has no chance of success, so let’s get to work and get it working for all of us,” he said to a room of European and U.S regulators and lobbyists.

Malloy said he takes his state as an insurance capital seriously, and means to supervise companies doing  business in his state so risk “has no safe place to hide.”

Connecticut made a strong showing at the forum this year, with Kathy Belfi, director of financial regulation for the state insurance department speaking on best practices for supervisory colleges.

On Belfi’s wish list for future  supervisory colleges are long term relationships with non-US supervisors and increasing the number of participants.  Belfi would also like to see a more coordinated approach on target exams, she said.

The ascendance of corporate governance as a focus formed a large part of the panel discussions Tuesday. More questions keep arising and it will be a large part of reviews, of the IAIS’ ComFrame process and of just assessing other insurers, Belfi and non-U.S. regulators agreed.

It is part of “everything we think and do from now on,” said Vermont Insurance Commissioner Susan Donegan, who had just returned from Kuala Lumpur for the NAIC. Donegan even wrote a haiku on corporate governance during a panel discussion

“You know if there is a company failure,  you know there re corporate governance failures,” said Christina Urias, a seasoned regulator  on the state and international arena and  now an insurance consultant for the IMF.

Whatever happens on the world stage with respect to international standards and reviews, Gov. Malloy stressed that the states will not be “dictated to.”

“We may get a set of regulations that we significantly embrace,” Malloy said, noting there was a lot of room for modernization but that the supervisory apparatus should go slower.

Author: Liz Festa

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