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U.S. insurers face new, complicated regulatory environment

U.S. insurers face new, complicated regulatory environment

Despite a stable marketplace, U.S. insurers and their regulators face an unprecedented threat of scrutiny and intrusion from U.S. and foreign entities. Such efforts could negatively affect the industry they purport to assist, says Dave Snyder, vice president, international policy at the Property Casualty Insurers Association of America.

Property and casualty insurers are capitalized at historically high and safe levels, according to findings earlier this year by the Property Casualty Insurers Association of America and its partners, the Insurance Services Office Inc. and the Insurance Information Institute Inc. These positive findings were consistent with last December's International Association of Insurance Supervisors Global Insurance Market Report, which stated: “During the past year, the global reinsurance sector has proven to remain well-functioning and stable amid an often challenging environment.”

Despite this unmatched record of performance, the push for changes in the substance and architecture of insurance regulation, often originating from nontraditional insurance regulatory sources, never has been greater. And, frequently, it's without objectively demonstrated need or cost/benefit analyses. Ironically, the effects of these developments, if not carefully overseen by policymakers, could be higher costs for businesses and consumers, more financial volatility, less competition and diversity in insurance markets, and even the creation of systemic risk in a sector that does not have it today.

Although there have been some promising signs of late, both as to timing and substance on some issues, thoughtful and consistent engagement from insurers, consumer groups, and most importantly lawmakers in Congress and the states, will be critical to assure outcomes that protect consumers and competitive markets, here and abroad.

Last November, Robert Shapiro, an economic advisor to several U.S. presidents and the International Monetary Fund, created a methodology to estimate cost to the average U.S. consumers of imposing the wrong higher capital standards on U.S. internationally active insurance groups. His conclusion was that it would increase automobile premiums and increase homeowners' premiums up to $100 per year per policy, even as it provides no real consumer benefits and reduces the ability of insurers to provide coverage. Similar findings might apply in the business sector when additional regulatory burdens are imposed.

Beyond capital, decisions about all aspects of insurance regulation are increasingly being made from behind closed doors. We are seeing increased focus on governance, risk management, remuneration and cyber risk, and so the lack of transparency will have ramifications beyond capital issues. The Financial Stability Board, a group of global banking and consolidated regulators that functions behind closed doors without U.S. state regulators' participation, is increasingly determining international insurance regulation priorities and ordering the insurance regulators to comply. Following suit, the International Association of Insurance Supervisors, which had been functioning openly and similarly to U.S. state regulators, voted to close its doors to insurers, consumers and others. State regulators opposed the scheme, and Congress introduced bipartisan and bicameral resolutions to oppose it. But the U.S. federal representatives did not similarly oppose it, thereby undermining the position of U.S. state regulators and resulting in new procedures with far less meaningful participation by U.S. consumers and companies.

Recently, the U.S. Department of the Treasury and the Federal Reserve Board voted to designate another insurer as systemic, thereby imposing regulation by the Fed on another insurer in the face of reasoned opposition by state regulators and the Treasury Federal Stability Oversight Council's independent insurance expert. The dissent of the independent insurance expert pointed out the issue that these agencies had earlier, in closed door meetings with the Financial Stability Board, apparently helped designate that insurer as globally systemic. This apparently carried with it a commitment to do the same in the U.S. While some transparency improvements have been announced for the U.S. systemic risk designation process, they don't remedy the interna-tional/domestic due process issue; they do not provide an activities-based approach; and they would apparently not allow a company once designated to take actions to remove the designation.

State regulators and the National Association of Insurance Commissioners are attempting to work in this new environment with the federal agencies in a “Team USA” approach on the capital standards issue. And, the U.S. is undergoing a review by the IMF and World Bank on its compliance with international standards that are increasingly reflecting the activity of banking regulators. Already, changes to U.S. insurance regulation are occurring through model law changes, including new insurance company risk reporting, and additional regulation of holding companies and corporate governance.

In response to some of these developments, especially capital standards and the lack of transparency, state and federal lawmakers have become engaged. During the last session of Congress, there were hearings, resolutions proposed and appropriations language. Even more activity is expected this year.

Representing state legislators, the National Conference of Insurance Legislators has passed resolutions critical of some of the developments. It also has demanded a greater role for state legislators.

As a result of federal and state lawmaker engagement, there has been recent progress on some issues. But the involvement by nontraditional insurance regulatory bodies will continue and will require the continued focus of our legislators.

In sum, we are seeing fundamental changes develop to both the substance and architecture of insurance regulation. In the U.S., that means a hybrid or hydra system of regulation where federal agencies will play a greater role along with the states. Internationally, it means that traditionally bank-centric regulatory agencies also will play a greater role in determining international insurance regulatory standards.

In terms of substance, regulation may resemble more of the top down European model than the bottom up U.S. state regulatory model. While some of these developments will affect large international companies first, once established as standards, there will be both regulatory and market pressure to apply the same standards to all competitors — small as well as large, domestic as well as international. And some of the international standards already are meant to apply to all companies.

The new, complicated, and often nontransparent regulatory environment poses unique challenges to the industry, regulators and legislators. Currently, the two most crucial issues are the capital standards and the growing lack of transparency. But the regulatory changes also will affect all other areas of insurance regulation, including corporate governance, market conduct and even company officer compensation. Technical engagement by the industry, to the extent permitted, is obviously important. But it is also critical that state and federal lawmakers continue to be engaged to assure that the outcomes truly benefit consumers and protect competitive and diverse markets.

Dave Snyder is vice president of international policy at the Property Casualty Insurers Association of America. He can be reached at and 202-349-7463.

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