Brexit, new capital standard top of mind for insurer CEOs

WASHINGTON – Insurers are prepping for the consequences of Brexit despite the political uncertainty surrounding the United Kingdom’s planned exit from the European Union as well as for a new global insurance capital standard that several executives at major insurers believe may be unnecessary.

The U.K.’s exit was delayed to Oct. 31 after political representatives were unable to reach consensus on an agreement to exit the European Union.

American International Group Inc.’s entire European operation was headquartered in the United Kingdom so “Brexit to us was a particular problem,” Brian Duperreault, president and CEO of the New York-based insurer, said at the National Association of Insurance Commissioners’ International Insurance Forum in Washington, D.C., on Monday.

The company established a holding company in Luxembourg to underwrite European business following Britain’s decision to leave the European Union.

“We moved immediately,” he said. “We didn’t waste any time. The can continues to get kicked down the road. Nobody knows what’s going to happen with Brexit so you have to plan. You have to make decisions. There’s some unintended consequences that may be positive. The business we do in U.K. is very large commercial. It’s a different marketplace. The European marketplace serves a somewhat different clientele – (small and medium enterprise) style. Now we have a more European continental focus to what we do with our clientele. There’s some benefits to it for us – a kind of resurgence of our efforts in Europe. All you can do is try to plan as much as you can and deal with the contingents as they come up.”

Hamilton Insurance Group Ltd. had a Lloyd’s of London syndicate, but the company also established a Brussels office that gave it access to the European Union, said Pina Albo, CEO of Hamilton, which is based in Pembroke, Bermuda.

“But strategically, we knew we needed more than that,” she said. “Part of our M&A strategy was to find a non-Lloyd’s platform in the EU that gave us access beyond Lloyd’s.”

That came when Hamilton agreed to acquire Liberty Mutual Insurance Co.’s Pembroke Managing Agency Ltd., “which gives us a Dublin platform with access to the EU outside of Lloyd’s and also to the U.S.,” she said. “It was a deliberate M&A search for a platform that gave us that optionality.”

MassMutual’s asset management business was already domiciled in Dublin, but Brexit is “just another symptom of nationalism rising,” said Roger Crandall, chairman, president and CEO, Springfield, Massachusetts-based MassMutual. Brexit also points to “how critical it is to build an organization that’s agile. That’s what we’re trying to do from a cultural perspective because more so than any time that I can remember, I literally have no idea what the world looks like in five years. I don’t know if the EU as we currently know it is going to exist.”

Nationalism also comes into play when it comes to international standard setting, according to the executives. The International Association of Insurance Supervisors is developing a risk-based global insurance capital standard for internationally active insurance groups.

“It’s not surprising,” Mr. Duperreault said. “You have an international forum and they are there to talk, but if your representative isn’t representing the national interest, there’s something wrong. Everybody must come with their own constituencies in mind. To make sure there’s a fairness on a global scale is an important, but secondary thought. It would be surprising if nationalism isn’t occurring all the time and maybe it’s appropriate in balance.”

But in terms of “the international capital standard itself … I’m not sure one is needed,” he said. “An overarching set of standards makes sense – an actual one, I’m not sure it’s needed.”

“I would rather leave ICS as concept and overall framework and not an actual thing because I think we can work around that by allowing experimentation to take place and just saying, ‘if it’s good enough, it’s good enough’,” Mr. Duperreault said.

Deanna Mulligan, president and CEO, New York-based Guardian Life Insurance Co. of America, said she supports a “framework that focuses on outcome rather than a prescriptive one size fits all, that’s the way it has to be (approach) and the only hope that I have is that once they come out with this framework that they leave sufficient time for market feedback and dialogue.”

While a lot of attention is paid to capital, insurers fail for other reasons such as pricing and compliance – some failures “have nothing to do with capital,” she said.

In March, the Financial Stability Oversight Council proposed changes to the nonbank systemically important financial institution designation process that would implement an activities-based approach to identifying and addressing potential risks to financial stability and enhance “the analytical rigor and transparency” of the council’s process for designating nonbank financial companies.

“It’s evolving into something that I think that does make sense,” Mr. Duperreault said. “Our system needs to allow some failure in the process. I think the U.S. regulatory system has always allowed for companies to have some failures in the industry, in other words, not to have so much capital that nobody could possibly fail and they fail anyway for other reasons. (The notion that) ‘capital solves the problem’ has gone a little too far and I think ‘nobody should fail’ is not a good concept.”

AIG had previously been tagged as “too big to fail,” but the council removed the designation in September 2017.

“Being big isn’t necessarily a reason to designate,” Mr. Duperreault said. “I think a whole activities-based approach is the more logical approach. By the way, it fits with how you develop capital standards because you’re looking at what you do and do you have the right capital to do it.”