By Arthur D. Postal
WASHINGTON – The Federal Reserve sought to reassure skeptical members of the Senate Banking Committee and concerned state regulators today that it will not unilaterally impose international capital standards on domestic insurers.
But the insurers might be subjecting themselves to international standards as they delve into other markets, said Mark Van Der Weide, deputy director of the Fed’s Division of Banking Supervision and Regulation, in committee testimony.
Van Der Weide also pointed out to the committee that some of the insurance holding companies subject to Fed supervision “are internationally active firms that compete with other global insurers to provide insurance products to businesses and consumers around the world.”
In his comments to the committee, Michael McRaith, director of the Federal Insurance Office, also noted international regulation is a two-way street.
McRaith told the Senate panel that the FIO’s latest report indicates that in the last 10 years, the pace of globalization in insurance markets has increased exponentially and is expected to continue to grow in the coming years.
“Insurers based in the United States are pursuing opportunities for organic growth in new markets,” McRaith said. “The FIO strongly supports continued growth of the increasingly international insurance market and the prudential standards that promote consistent and rigorous oversight across jurisdictions.”
McRaith added that insurers expect that 40 percent or more of their revenue will originate outside the United States. In 2014, well-known U.S. insurers that are subsidiaries of non-U.S. holding companies accounted for more than 13 percent of aggregate life/health and property and casualty premium volume, he said.
Van Der Weide’s testimony sought to allay fears voiced to the committee by S. Roy Woodall Jr., independent member of the Financial Stability Oversight Council who was appointed because of his insurance expertise.
In his testimony, Woodall said that “international regulatory organizations may be attempting to exert what I consider to be inappropriate influence on the development of U.S. regulatory policy,” not only by the International Association of Insurance Supervisors (IAIS), but also by the Financial Stability Board (FSB), another international body on which the Fed and FIO sit.
He said a number of interested parties are voicing their “legitimate concerns now,” ahead of any international commitments being finalized.
He said Congress “should be cautious about on-going initiatives by international bodies that could be used to influence policy decisions that Congress has either expressly delegated to the states, or that are the prerogative of the Congress itself.”
Woodall said that if federal government officials at the FSB are to commit, on behalf of the U.S. to implement international insurance standards in the U.S., then, given the regulatory structure endorsed by Congress, “I believe that the outcome of any such commitment should be consistent with proven effective state-based regulation and that any resulting agreement should contain express reservations preserving the discretion as to whether, or how, those standards will be implemented in the U.S.”
He was joined by Kevin M. McCarty, Florida insurance commissioner and past president of the National Association of Insurance Commissioners. McCarty noted that the IAIS recently changed its rules to limit state regulator involvement in its proceedings and allow the Fed and Michael McRaith, director of the Federal Insurance Office, to represent the U.S. at the IAIS table.
“We continue to believe the IAIS’s decision represents a step back for the openness and transparency necessary to give IAIS work credibility and legitimacy, particularly if and when legislative bodies are expected to consider IAIS proposals,” McCarty said.
He also said the NAIC and its members “have serious concerns” about the aggressive timeline of developing a global capital standard because of the legal, regulatory, and accounting differences around the globe.
He also said that state regulators remain “fully engaged in the process” in order to ensure that “any development appropriately reflects the risk characteristics of the underlying business and does not undermine legal entity capital requirements in the U.S.
The NAIC’s objective is to ensure that the capital proposals developed at the IAIS are reasonable and compatible with our system,” McCarty said.
McCarty said that while the NAIC is committed to collaborating with our federal and foreign counterparts where we can, “we have a responsibility to the U.S. insurance sector.
<p> “We will not implement any international standard that is inconsistent with our time-tested solvency regime that puts policyholders first,” he said.
McCarty’s testimony also addressed concerns regarding domestic and global capital rules for insurers. “Capital requirements are important, but if imposed incorrectly or without regard to the difference in products and institutions, they can be onerous to companies, harmful to policyholders and may even encourage new risk-taking in the insurance industry.”
In his testimony, Van Der Weide disclosed that through its oversight of systemically important financial institutions and insurers that operate thrift holding companies, the Fed oversees “approximately one-third of U.S. insurance industry assets,” and these institutions “vary greatly in size and in the types of products they offer.”
However, he told the panel, the concerns of Woodall and McCarty are simplistic.
He said that it is “important to note” that any standards adopted by the IAIS are not binding on the Federal Reserve, the FIO, state insurance regulators, or any U.S. insurance company.
He said that during the development of global standards for insurance firms by the IAIS, “the Federal Reserve will work to ensure that the standards do not conflict with U.S. law and are appropriate for U.S. insurance markets and U.S. insurers.”
Moreover, the “Federal Reserve would only adopt IAIS regulatory standards after following the well-established rulemaking protocol under U.S. law, which includes a transparent process for issuance, solicitation of public comments, and rule finalization.”
Van Der Weide also touched on McCarty’s concerns about the capital standards for domestic insurers it oversees. U.S. insurance companies have voiced deep concerns that Fed capital and other standards would hurt the competitiveness and increase the cost of insurance products to U.S. insurers.
He said the Fed “is investing significant time and effort into enhancing our understanding of the insurance industry and firms we supervise, and we are committed to tailoring our supervisory framework to the specific business lines, risk profiles, and systemic footprints of the insurance holding companies we oversee.”
Van Der Weide said the Fed conducts “our consolidated supervision efforts in a manner that is complementary to, and coordinated with, state insurance regulators, who continue their established oversight of insurance legal entities.”
He said the Fed does not regulate the manner in which insurance is provided by these companies or the types of insurance that they provide. “Those important aspects of the actual business of providing insurance are the province of the relevant state insurance supervisors,” Van Der Weide said.
To ensure their roles are compatible, Van Der Weide said, the Fed “has been engaging extensively “with insurance supervisors and regulated entities to increase the agency’s understanding of the regulatory capital regime that already applies to insurance companies under state laws and to solicit feedback on various approaches to the development of an appropriate consolidated group-wide capital regime for insurance holding companies that would be consistent with federal requirements.
McRaith presented some interesting statistics as he sought to present to the panel a picture of the global insurance industry. Measuring global market share by aggregate premium volume, from 2008 to 2013, the U.S. share of the world market declined from 29 percent to 27 percent despite an increase in real dollars of more than $32 billion.
For the same period, China’s share increased in real dollars by more than $137 billion and as a percentage of the global market from 3 percent to 6 percent. As reported in FIO’s 2014 Annual Report, South Korea, Brazil and South Africa experienced similar proportional increases, McRaith said.
“These numbers reiterate the message that developing markets present important growth opportunities for U.S.-based firms and that growth will continue at an increasing rate in the years to come,” McRaith said.
“Growing economies around the world seek private sector solutions through life insurance products for retirement security and through property and casualty insurers for private asset accumulation and protection,” he said.
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].
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