Alphabet Soup

Last August I took a semi-serious look at the acronymic National and International insurance regulatory agencies, institutions and forces of nature (“Late Summer Delights: Fishing for Acronyms,” IA, August 19, 2013), with a somewhat jaundiced view of how these paragons of regulatory expertise may affect the future course of the insurance industry and its denizens. I thought it would be interesting to take a look at what these initialized institutions have been up to these past 12 months in the name of saving our industry from itself.

As a refresher and guide, the principal players reviewed below are: FSOC

– Financial Stability Oversight Council FIO

– Federal Insurance Office G20

– International Group of Finance Ministers and Central Bank Governors FSB

– Financial Stability Board IAIS

– International Association of Insurance Supervisors NAIC

– National Association of Insurance Commissioners

The most noise this past year was probably caused by the FIO , which was created by the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) for the purpose of collecting data from and monitoring the insurance and reinsurance businesses. The noise was all the industry talk and speculation about the FIO ’s breathlessly anticipated, long-overdue report on the state of insurance regulation. The anticipation, however, was far more exciting than the report itself. Like so many over-hyped premieres, the report, finally issued last December under the profound title “How to Modernize and Improve the System of Insurance Regulation in The United States ,” came out with a melded approach between Federal and State regulation of insurance. The FIO

report was probably a disappointment to the supporters at both ends of the Federal v. State debate, but also a relief to most by not making any strong push for immediate intervention by the Feds.

Causing less obvious noise than the FIO

but with decidedly more authority and ability to dispense pain to the insurance industry is the FSOC , also established by Dodd–Frank and charged with “identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States’ financial system.” You may recall that the FSOC

has ten voting members but only one that has any insurance expertise, and five nonvoting members, including the director of the FIO

and a state insurance commissioner designated by the NAIC . The major accomplishment of the FSOC

this past year was to designate a third company, Prudential Financial, Inc., as a strategically important financial institution (SIFI ) subject to enhanced oversight and capital standards by the Federal Reserve (the other two being AIG and GE Capital, with Met Life fighting the designation).

The other major accomplishment of the FSOC

was the publication of an annual report, which neatly divides the world into two parts: banking and non-banking, but then treats them all as banking institutions. The report’s major observation regarding insurance was to note the strain that low interest rates place on insurers, particularly life insurers.

Meanwhile the standard bearer for state-based regulation of insurance, the NAIC, continued to plod along with its promotion and development of its various ongoing initiatives including ORSA

(Own Risk Solvency Assessment), and enhancements to group (i.e., holding company) reporting requirements, including ERM

(Enterprise Risk Management). Because the NAIC

has no enforcement authority – other than the threat of dcertification – much of the activity regarding these initiatives has necessarily come from the individual states. For instance, since the adoption of the revised holding company model act in 2012, close to half of the states and other NAIC

member jurisdictions have passed amendments to their holding company statutes to conform or substantially conform to the enhanced reporting requirements of the model act. Then of course there is New York. In lieu of a legislative change, the NY regulators adopted a new “emergency” regulation governing its required ORSA

and ERM

reports from insurers, while seemingly trampling on the confidentiality protections of the NAIC

It is interesting to note, however, that many of these Federal and NAIC

initiatives actually arise from or mimic international initiatives, particularly those of the IAIS

as “requested” by the FSB , the entity chartered by the G20

to develop worldwide financial standards for financial institutions.

Over the past year, the IAIS

has been showing off its extraordinary skills in collecting, organizating and largely ignoring comments from the industry and industry experts. These comments have been solicited by the IAIS

as part of its ongoing charge (from the FSB ) to develop global capital standards to be applied to G-SIIs (Global Systematically Important Insurers), the international equivalent of SIFIs

(or is it vice versa?). These standards are being developed in three stages: basic capital requirements (BRC ) to be submitted to G20

by the end of 2014; higher loss absorbency requirements (HLA ) by the end of 2015; and ultimately the development of a risk-based group-wide global insurance capital standard (ICS ) by the end of 2016 to be applied to internationally active insurance groups (IAIGs ).

Come on, I see the eyes glazing over. You have come this far, so stick with me a bit longer!

For the past several years the agenda for regulation of the U.S. insurance industry has trended away from State regulators and the NAIC. However, the fact is that even the Feds have been following the lead of the International community. The agenda seems to be controlled by G20

with the FSB

and the IAIS

as its principal agents. Consider for example all the games and manipulation between the Feds and the NAIC to ensure a place at the IAIS

table as it pursues establishing global insurance capital standards, including the step taken earlier this year to have the IAIS

add the Federal Reserve as a member.

To their credit, I suppose, the Feds and the IAIS have each acknowledged that bank capital requirements are not necessarily appropriate for insurance companies. But in reading through their proposals, methodologies and formulae (no easy task, by the way) it is still not at all clear what the ultimate goal is for establishing capital requirements for insurance entities, or what consideration is being given to the downside of increasingly strict reporting and capital requirements on issues like availability, market flexibility or new product development. This top-heavy, ivory tower emphasis on capital standards has overwhelmed any consequential dialogue on the actual business of insurance.

While insurance companies continue to get beat up by the Federal, State and International turf war over capital standards, the mundane regulation of the everyday conduct of the business of insurance at street level is left to an increasingly ignored, marginalized and underappreciated state-level bureaucracy.