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CHICAGOThe global nature of insurance issues is putting pressure on U.S. regulators to modernize their state-based regulatory system and to engage in discussions about harmonizing global standards, like those that apply to accounting and collateral.
Some of the pressure is coming from recent congressional hearings and proposals, including a measure to reduce the regulatory burden on surplus lines insurers and reinsurers as well as a measure to create a national catastrophe program.
Overall, "the regulatory climate in the United States needs a thorough examination," said Frank Keating, president and chief executive officer of the Washington-based American Council of Life Insurers. He made that comment during one of several recent panel discussions where regulation was discussed at the International Insurance Society's annual seminar, which was held in Chicago in July.
Mr. Keating, a former federal official and Oklahoma governor, recommended that Congress adopt legislation to allow some insurers to obtain an optional federal charter. "We want our friends abroad" to open their markets and "national regulation on an optional basis will allow us to speak the same language," he said.
During another panel discussion, moderator Ernie Csiszar said rating agencies and state attorneys general are taking regulatory-type actions against insurers, which may foster support for a federal charter option. Mr. Csiszar is president and CEO of the Des Plaines, Ill.-based Property Casualty Insurers Assn. of America.
Two leaders of the Kansas City, Mo.-based National Assn. of Insurance Commissioners responded by acknowledging the issue and defending the current system of U.S. regulation, which relies on regulators from 51 jurisdictions.
"The federal regulatory threat is not new," said NAIC President Alessandro Iuppa, Maine's insurance superintendent. It has surfaced during the past decades, he said.
In addition, Mr. Iuppa urged the insurance community to remember that regulators have been the initiators of several important developments. For example, New York State's insurance regulator was directly involved with the initial contingent commission investigation by New York Attorney General Eliot Spitzer. In addition, the NAIC helped create the International Assn. of Insurance Supervisors and continues to be very active in its deliberations, Mr. Iuppa said.
The IAIS, established in 1994, consists of insurance regulators and supervisors from about 180 jurisdictions in more than 130 nations, according to an organization statement. Its members represent about 97% of the world's insurance premiums, the IAIS said.
It is interesting to note, though, that many individual U.S. states have insurance markets that are larger than those of some IAIS member countries, said NAIC President-elect Walter Bell, the Alabama insurance commissioner, during the panel discussion.
Overall, the existing U.S. regulatory system has evolved and been enhanced over time, Mr. Iuppa said.
"There are many efficiencies that have been driven by the NAIC" in recent years, Mr. Bell said. For example, he said technological improvements that encourage standardization across the country have helped eliminate so-called "desk drawer rules," which were generally unwritten, individual state requirements insurers were asked to meet. "I'm surprised that CEOs are not aware of that (change)," Mr. Bell said.
In addition, "one of the biggest improvements in regulation" has been the creation of the interstate compact to make regulation of some life/health products more uniform and efficient, Mr. Bell said.
The Interstate Insurance Product Regulation Commission held its first formal meeting in June with representatives of the 26 states, plus Puerto Rico, that signed agreements to participate. Those entities represent about 41% of the U.S. premium volume for the life/health products that the commission will regulate, which include annuities as well as group and personal lines life, long-term care and disability insurance.
For life/health insurers, the compact establishes a central place to file product information and obtain regulatory evaluation of those products. "The compact will speed the approval process," Mr. Keating said in a previous statement. The NAIC expects the compact's evaluation process to become fully operational by early 2007.
From a reinsurer's perspective, the United States has "a very conservative" state-based regulatory system, but one that "has worked very well from the consumer and ceding company perspective," said panelist Frank Nutter, president of the Washington-based Reinsurance Assn. of America.
Of the 218 insurer insolvencies from 1993 through 2002, none was due to a reinsurer's failure, he said.
U.S. regulators, however, should consider new initiatives that are being developed elsewhere, including the European Union's Reinsurance Directive, "which establishes a market passport system among member states," Mr. Nutter explained in his written presentation. In addition, regulators should consider Solvency II, which the E.U. is discussing "as a new basis for capital and risk assessment," he wrote.
Mr. Iuppa said that U.S. regulators are actively participating in many discussions globally about improving and harmonizing insurance regulation.
Sovency II is likely to be the next iteration of risk-based capital guidelines, he said. While U.S. regulators already have such guidelines, he said they will need to evaluate the specific international proposals to determine whether they will accept them, or not.
U.S. regulators, through the NAIC, also are very active in IAIS activities. There are continuing concerns, though, including the need to educate members about insurance regulatory issues as well urge them to fully fund the organization, Mr. Iuppa said. Currently, members contribute only about half of the IAIS' $3 million annual budget and the rest comes from grants from a variety of sources, including some countries. If the IAIS is going to be a standard-setting organization, its members should financially support it, he said.
In addition, Mr. Iuppa said some U.S. regulators "are concerned" that some EU proponents of solvency accounting changes are using the organization-as "a stalking horse"-to encourage adoption of those changes.
Panelist Bassel Hindawi, director general of Jordan's Insurance Commission, said in his presentation that "efforts of the IAIS to introduce principles, standards and guidance papers seek to build a well-structured regulatory and supervisory regimes, and consequently sound insurance markets."
"It's a crucial step in the right direction," he added.
"The increasingly dynamic changes within the insurance industry on the global level and the increase of cross-border insurance business have intensified the need for international cooperation among insurance regulators," Mr. Hindawi said.