U.S. regulators, insurers skeptical of global capital standards
A new report commissioned by the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies has found there would be significant economic costs associated with imposing global capital requirements on U.S. property and casualty insurers.
This cost is particularly important in light of the report’s other conclusion: that the industry already is exceedingly well capitalized. More specifically, the trade groups find the resources set aside by the industry are enough to cover a 100-year even more than twice as large as those of the record 2005 hurricane season, including Hurricane Katrina.
Insurance is an international business. Standards and trade practices span not only time zones, but also regulatory jurisdictions. To introduce conformity to the practice of insurance regulators around the world, globe-spanning organizations like the Financial Stability Board and the International Association of Insurance Supervisors were founded.
While the rules promulgated by the FSB and IAIS do not bind U.S. jurisdictions directly, they do foster frameworks of considerable persuasive authority. As a result, U.S. regulators and associations monitor their products closely.
Last week, at a hearing of the U.S. House Financial Services Subcommittee on Housing and Insurance, the National Association of Insurance Commissioners expressed concerns similar to those articulated in the PCI/NAMIC study, particularly when it comes to steps taken by international organizations that could have a deleterious impact on U.S. policyholders.
Pennsylvania Insurance Commissioner Michael Consedine, the NAIC’s president-elect, focused his testimony on three issues: transparency, capital standards and the IAIS common framework, also known as “ComFrame.” The theme of his testimony was “too much, too soon.”
On transparency: a decision by the IAIS to disallow the involvement of both consumer advocates and the industry itself has NAIC regulators worried that the IAIS has precluded the kinds of stakeholder engagement that is crucial to the development of consensus-based regulatory practices. The IAIS approach is predicated on a concern that transparency will lead to regulatory capture. For its part, the NAIC believes such issues can be addressed by maintaining balance between confidentiality in the ultimate decision-making process and openness in the preceding steps.
On capital standards: IAIS is currently working on a collection of capital standards for insurers. Standards for globally systemically important insurers, standards for basic capital requirements and standards for risk-based global insurance capital are all under consideration.
The purpose of these kinds of standards is to see that insurers do not slide into insolvency or otherwise threaten the viability of the global insurance market. Yet, standards also run the risk of ossifying parts of the insurance industry, by limiting growth and circumscribing the universe of products that can be offered.
Further, the NAIC believes that capital standards, insofar as they treat insurers like banks, may actually encourage risky behavior.
On ComFrame: ComFrame has been an ongoing project of the IAIS since the start of the decade. The project’s goal is to develop a foundation to establish better oversight of international insurance groups. In its testimony, the NAIC expressed concern that the approach creates a “one-size-fits-all” set of requirements, rather than a flexible approach that accounts for shared objectives, if not specific practices.
By the hearing’s end, it was evident that the NAIC, while eager to continue to participate in the development of global models, is decidedly reluctant to devolve any of its jurisdictions’ regulatory sovereignty to the IAIS. In light of the findings of the PCIAA/NAMIC study, particularly the potential cost implications for domestic policyholders, U.S. reluctance to submit to international standards is understandable.