The July 2009 edition
of the Solvency ii Association newsletter
Breaking News:
Solvency ii and the (June 16, 2009)
White House Financial Regulatory Overhaul Plan
The Financial Regulatory Reform: A New Foundation from the White
House covers the required changes in the insurance sector.
The Obama Administration Creates the Office Of
National Insurance to develop a "MODERN REGULATORY FRAMEWORK FOR
INSURANCE"
We read:
Enhance Oversight of the Insurance Sector
Our legislation will propose the establishment of the
Office of National Insurance within Treasury to gather information, develop expertise,
negotiate international agreements,
and coordinate policy in the insurance sector.
Treasury will support proposals to modernize and improve our
system of insurance regulation in accordance with six principles
outlined in the body of the report.
Insurance plays a vital role in the smooth and efficient
functioning of our economy.
By insulating households and businesses against unforeseen loss,
insurance facilitates the efficient deployment of resources and
provides stability, certainty and peace of mind.
The current crisis highlighted the lack of expertise
within the federal government regarding the insurance industry.
While AIG's main problems were created outside of its traditional
insurance business, significant losses arose inside its
state-regulated insurance companies as well.
Insurance is a major component of the financial system. In 2008,
the insurance industry had $5.7 trillion in assets, compared with
$15.8 trillion in the banking sector.
There are 2.3 million jobs in the insurance industry, making up
almost a third of all financial sector jobs.
For over 135 years, insurance has primarily been
regulated by the states, which has led to a lack of uniformity and
reduced competition across state and international boundaries,
resulting in inefficiency, reduced product innovation, and higher
costs to consumers.
Beyond a few specific areas where the federal government has a
statutory responsibility, such as employee benefits, terrorism
risk insurance, flood insurance, or anti-money laundering, there
is no standing federal entity that is accountable for
understanding and monitoring the insurance industry.
Given the importance of a healthy insurance industry to the well
functioning of our economy, it is important that we establish a
federal Office of
National Insurance (ONI) within Treasury, and that we develop a modern
regulatory framework for insurance.
The ONI should be responsible for monitoring all aspects of the
insurance industry.
It should gather information and be responsible for identifying
the emergence of any problems or gaps in regulation that could
contribute to a future crisis.
The ONI should also recommend to the Federal Reserve any insurance
companies that the Office believes should be supervised as Tier 1
FHCs (Financial Holding Companies).
The ONI should also carry out the government's existing
responsibilities under the Terrorism Risk Insurance Act.
In the international context, the lack of a federal entity with
responsibility and expertise for insurance has hampered our
nation's effectiveness in engaging internationally with other
nations on issues related to insurance.
The United States is the
only country in the International Association of Insurance
Supervisors (IAIS - whose membership includes insurance regulators
and supervisors of over 190 jurisdictions) that is not represented
by a federal insurance regulatory entity able to speak with one
voice.
In addition, the
European Union has recently passed legislation that will require a
foreign insurance company operating in its member states to be
subject to supervision in the company's home country comparable to
the supervision required in the EU.
Accordingly, the ONI will be empowered to work with
other nations and within the IAIS to better represent American
interests, have the authority to enter into international
agreements, and increase international cooperation on insurance
regulation.
Treasury will support proposals to modernize and improve our
system of insurance regulation.
Treasury supports the following
six principles for insurance regulation:
1. Effective systemic risk regulation with respect to
insurance.
The steps proposed in this report, if enacted, will address
systemic risks posed to the financial system by the insurance
industry.
However, if additional insurance regulation would help to further
reduce systemic risk or would increase integration into the new
regulatory regime, we will consider those changes.
2. Strong capital standards and an appropriate match
between capital allocation and liabilities for all insurance
companies.
Although the current crisis did not stem from widespread problems
in the insurance industry, the crisis did make clear the
importance of adequate capital standards and a strong capital
position for all financial firms.
Any insurance regulatory regime should include strong capital
standards and appropriate risk management, including the
management of liquidity and duration risk.
3. Meaningful and consistent consumer protection for
insurance products and practices.
While many states have enacted strong consumer protections in the
insurance marketplace, protections vary widely among states.
Any new insurance regulatory regime should enhance consumer
protections and address any gaps and problems that exist under the
current system, including the regulation of producers of
insurance.
Further, any changes to the insurance regulatory system that would
weaken or undermine important consumer protections are
unacceptable.
4. Increased national uniformity through either a
federal charter or effective action by the states.
Our current insurance regulatory system is highly fragmented,
inconsistent, and inefficient.
While some steps have been taken to increase uniformity, they have
been insufficient.
As a result there remain tremendous differences in regulatory
adequacy and consumer protection among the states.
Increased consistency in the regulatory treatment of insurance -
including strong capital standards and consumer protections -
should enhance financial stability, increase economic efficiency
and result in real improvements for consumers.
5. Improve and broaden the regulation of insurance
companies and affiliates on a consolidated basis, including those
affiliates outside of the traditional insurance business.
As we saw with respect to AIG,
the problems of
associated affiliates outside of a consolidated insurance
company's traditional insurance business can grow to threaten the
solvency of the underlying insurance company and the economy.
Any new regulatory
regime must address the current gaps in insurance holding company
regulation.
6. International coordination.
Improvements to our system of insurance regulation should satisfy
existing international frameworks, enhance the international
competitiveness of the American insurance industry, and expand
opportunities for the insurance industry to export its services.
Recommended Reading
Solvency ii - Understanding
the forest, not only the tree
The Solvency ii directive includes a number of improvements to the
existing system, which are
inspired by the Financial Conglomerates Directive
(2002/87/EC).
It is very important to study the Financial Conglomerates
Directive, in order to understand group supervision under Solvency
ii.
The Solvency ii Directive is constructed in a way that facilitates
efficient supervision of insurance groups and financial
conglomerates and avoids regulatory arbitrage between and within
financial sectors.
News
Bermuda, the first non-EEA
country that should be recognized as equivalent
The Bermuda Monetary Authority (BMA) works hard towards achieving
equivalent status.
The BMA has already established the necessary standards and
processes:
1. For the use of internal models to assess the
regulatory capital.
2. For enhanced transparency
Bermuda, referred to as the "world's risk capital", is the country
that has emerged as the leader in the development and regulation
of captive insurers. Today it is the home to more than 30 major
international insurance and reinsurance firms.
The BMA said that the above developments advance the
Authority's preparations for assessments to determine broad
equivalence of its insurance framework under regimes of other
major international jurisdictions, such as Europe's Solvency II
Directive.
News
Japan and the European Commission
discuss Solvency ii and Financial Regulation
The annual EU-Japan High Level Meeting on Financial
Issues, held in Brussels, provided an important opportunity for senior officials
from both sides to exchange views on the global financial crisis
after the G20 Summit held in London.
Both parties agreed to deepen their cooperation striving for more
open and competitive financial services markets with a view to a
coordinated response to the crisis.
Both sides discussed policies and reforms to be implemented to
strengthen the financial system - a key pledge endorsed at the
London G20 Summit.
The European Commission and the FSA officials (Japan) discussed
the impact of the financial crisis in their own system and
reviewed their commitments to follow up on the G20 action plan in
a coordinated way.
The FSA (Japan) briefed the Commission services on the progress on
the Better Market Initiative and on recent legislative
developments regarding financial services in Japan.
The Commission services
provided latest information on the Solvency II Directive, and the
next steps for implementation. In addition, both sides endorsed
the results of the first EU-Japan Insurance Dialogue held in
Brussels in January 2009.
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Next European open Solvency II Training Course:
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Location: Canary Wharf, London, UK
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Best Regards,
George Lekatis
President of the Solvency ii Association
General Manager, Compliance LLC
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