After a Comparison of the EU and U.S. Regulatory Regimes: What is Next for the EU–U.S. Insurance Dialogue?
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Several reports comparing the insurance supervisory and regulatory regimes in the
The EU–U.S. Dialogue is an attempt to identify and understand the differences and the similarities between the EU system of insurance regulation under Solvency II and the U.S. state-based system. Early this year, representatives of the regulatory communities of the EU and U.S. committed to a series of discussions to improve their understanding of each other’s regulatory systems. The discussions were led by a six-person Steering Committee that included three representatives from the EU and three from the U.S.
What has the Steering Committee accomplished?
In addition to having several meetings in person and via phone, the Steering Committee identified seven subjects that its members agreed were important to a sound regulatory system, the protection of policyholders and financial stability. It also established a technical committee comprised of regulatory experts for each of the seven topics to objectively compare the two systems and summarize the key differences and similarities.
The seven subjects or areas of regulation include: Professional Secrecy and Confidentiality; Group Supervision; Solvency and Capital Requirements; Reinsurance and Collateral Requirements; Supervisory Reporting, Data Collection and Analysis and Disclosure; Supervisory Peer Reviews; and Independent Third-Party Review and Supervisory On-Site Inspections.
Can we reach any conclusions about the analysis reported by the technical committees?
We can. First, and not surprisingly, both systems share the same mission – the protection of policyholders, solvency and financial stability. But there are some notable differences. There are differences in the structure and calculation of capital requirements, group supervision, financial oversight procedures, reinsurance collateral requirements, governance reporting and accounting principles. In some areas, the EU system seems more developed while, in other areas, the U.S. system seems more developed.
For example, there are significant structural differences in how each system actually monitors the financial condition of insurers. According to the reports, the U.S. system of financial analysis and examinations as well as its centralized data collection appear to be more comprehensive and rigorous than the EU system.
Following the financial crisis, insurance regulators became more concerned about regulating at the group level. It appears, from the reports, that the EU may be closer to the goal than the U.S. It was noted that, in the EU, groups are viewed as a single economic entity while in the U.S., regulators tend to concentrate on the individual entities. The reports indicate that a group supervisor in the EU has authority over non-domiciled and non-insurance entities in the group. Insurance regulators in the U.S. do not have such direct authority. They use a “lead state” concept, which depends upon collaboration with other regulators. Another difference is that, under Solvency II, there are group capital requirements. There is no similar requirement in the U.S.
Another notable difference is that U.S. regulators sometimes make exceptions or apply different rules to smaller insurers. For example, the technical committees noted that small insurers in the U.S. will not be required to conduct an Own Risk Solvency Assessment (ORSA). A similar exemption was not identified for EU insurers.
No, the reports will have no influence on the agenda. The members of the IAIS are regulators from all over the world and, as a result, their agenda has a broader focus. Still, the reports contain an interesting discussion about the differences between the involvement of the U.S. and the EU in supervisory colleges. The IAIS recently released its proposal for a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), which provides a structure for supervisory colleges. Some of the issues discussed in the reports are similar to those facing the IAIS as it finalizes ComFrame.
There have long been concerns regarding collateral requirements placed on EU insurers operating in the US.Was the collateral issue discussed in the reports?
Yes, the report did address this issue. Reinsurance was one of the areas of regulation assigned to a technical committee. A key difference noted by the technical committee was that a foreign reinsurer could be subject to different collateral requirements in different states, even under the recent changes to the model acts adopted by the
It was interesting that the report on reinsurance contained a reference to the power granted by the Dodd-Frank Act to the Treasury and the United States Trade Representative to enter into agreements with other countries on insurance matters. If reinsurance would become the subject of such an agreement, it is possible that state collateral requirements for foreign reinsurers could be preempted.
Now that these reports have been released, what can we expect from the EU-U.S. Insurance Dialogue?
The reports provide the ground work for additional discussions. They were not intended to provide any solutions or guidance. The analysis was very important and quite detailed. The reports will guide the Steering Committee’s future discussions and conclusions.
We can expect the Steering Committee to focus on the differences between the two regulatory systems and to consider whether changes can be made on either side that will help align the systems more closely. The Steering Committee’s challenge is to determine whether, on any of these topics, the two regulatory systems should move towards convergence or improved harmonization. Given the findings in the technical committees’ reports, this could put the Steering Committee in the difficult position of having to decide that certain aspects of one system are superior to the other system. Ultimately, it may come down to the degree of difference that regulators will be willing to accept.
If the Steering Committee members agree that changes are desirable, the next challenge will be how to effect those changes. The EU is continuing to develop guidelines for the implementation of Solvency II and the states are working on a Solvency Modernization Initiative. Both of these initiatives could provide opportunities to converge and harmonize the two regulatory systems.
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