FIO Concerned Over ‘One-Size-Fits-All’ Regulation For Global Insurers
By Arthur D. Postal
InsuranceNewsNet
WASHINGTON – The director of the Federal Insurance Office (FIO) told Congress that the International Association of Insurance Supervisors (IAIS) is not trying to “shut out” state insurance regulators from its consultative process, but is instead trying to “improve the independence and transparency of its standard-setting activities.”
Moreover, the IAIS has not completed the reform process, and the U.S. government is working to ensure a strong voice for state regulators and other stakeholders going forward, said Michael McRaith, FIO director.
McRaith made his comments at a hearing of the Housing and Insurance Subcommittee of the House Financial Services Committee on "The Impact of International Regulatory Standards on the Competitiveness of U.S. Insurers, Part II."
The hearing was prompted by concern that the IAIS seeks to harmonize global insurance regulation through a rule commonly called “ComFrame.” This rule would create “a one-size-fits-all” regulatory regime for global insurers, including group-wide capital assessments and prescriptive prudential standards.
State insurance regulators and insurers are primarily concerned that the proposal would require insurers to have far more capital than required currently. This would make U.S. insurers unable to compete successfully with other financial service providers.
But Thomas Sullivan, senior advisor on insurance matters to the Federal Reserve Board, stated that, “it is important to note” that any standards adopted by the IAIS are not binding on the Fed, the FIO, state insurance regulators or any U.S. insurance company.
“During the development of global standards for insurance firms by the IAIS, the Fed 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,” Sullivan said.
In addition, he said, the Fed would adopt IAIS regulatory standards “only after following the well-established rulemaking protocols under U.S. law, which include a transparent process for proposed issuance, solicitation of public comments and rule finalization.”
McRaith’s comments on the IAIS process were prompted by a statement made by Adam Hamm, president of the National Association of Insurance Commissioners (NAIC) and North Dakota insurance commissioner, at the IAIS annual meeting Oct. 27 in Amsterdam.
“I am extremely disappointed that the IAIS [has] decided to drop the observer status system that provided NAIC members a voice in the IAIS standard-setting process,” Hamm said then. Under the old system, NAIC members were allowed to participate in some IAIS meetings.
The new system created new stakeholder consultation procedures. At the time, Hamm said that, “Observers run the range of consumer advocates, insurance experts, and industry representatives – all of whom have critical input to share on the real-world consequences of decisions made by regulators.”
“Shutting them out of the official process in favor of ‘invite only’ participation deprives IAIS members and stakeholders alike and could diminish the credibility of decisions made at the IAIS,” he added.
McRaith said at the hearing that under the old system, the IAIS charged stakeholders as much as $20,400 annually in order to receive the designation of “observer,” which would give them access to certain meetings and information.
“The IAIS received approximately 40 percent of its funding from industry and other stakeholders, thereby creating the appearance of a pay-to-play or quid pro quo arrangement that detracted from the credibility of IAIS members and stakeholders,” McRaith said.
McRaith said the current draft reform proposal “can be improved,” and said that, among changes the U.S. will seek will be a requirement that stakeholders who submit comments to the IAIS through a consultation process should receive the benefit of a substantive reply similar to the U.S. administrative law that requires an agency to address comments submitted when adopting a regulation.
“Stakeholders should have the opportunity to meet directly with the international supervisory community in a manner akin to that which has occurred during IAIS annual meetings,” McRaith contended.
McRaith said the FIO will work to ensure that U.S. stakeholders, including the NAIC, should have the opportunity to meet and present to all U.S. participants at the IAIS in advance of or after an IAIS meeting. “With experience, these opportunities have been increasing and will continue to grow in number and substance,” he said.
“I am concerned that the IAIS’ role has evolved from being an international coordinator to that of a global promulgator.” Housing and Insurance Subcommittee Chairman, Rep. Randy Neugebauer, R-Texas, said.
Neugebauer said that he and other members of the House Financial Services Committee “have expressed concern with the prescriptive nature of the ComFrame proposal, but many are equally concerned that it seems to be a mechanism for the European Union to export its consolidated, bank-like approach to regulating insurance here in the U.S.”
“While this system may work well for our allies across the Atlantic, it is inconsistent with our system of insurance regulation and I don’t believe it is in the best interest of U.S. consumers and insurers,” he added.
Rep. Ed Royce, R-Calif., raised the issue of transparency and accountability at both the IAIS and the NAIC during the hearing.
In a statement, Royce outlined a pattern of the NAIC claiming to follow an “open meetings” policy while, in fact, the association makes major policy decisions behind closed doors. “The Executive Committee holds day-long closed door meetings during commissioner-only junkets where it sets the NAIC policy agenda,” Royce said.
“I support pushing back against closed door meetings at the IAIS – but shouldn’t the NAIC be opening rather than closing its own meetings to build credibility on this subject? Frankly, I am concerned about the NAIC’s role as a private corporation—and about its arrogant response to oversight.”
Royce also voiced a desire to see a future committee hearing dedicated to NAIC governance and transparency.
In his comments about capital standards, McRaith made clear that the U.S. would fight for international capital standards that will help the U.S. insurance grow. “In our view, consistent with past practice, implementation at either the state or federal level of an international standard should occur in a manner tailored to the unique features of the U.S. insurance sector, promote competition and consumer choice, and safeguard policyholder protection and financial stability,” he said.
Michael F. Consedine, NAIC vice-president and Pennsylvania insurance commissioner, outlined the need for international standard-setting to reflect the needs of U.S. insurance consumers and companies.
"As international standard-setting continues, the NAIC will remain directly engaged to determine whether the concepts under discussion at the Financial Stability Board (FSB) and International Association of Insurance Supervisors (IAIS) make sense and add real benefit for U.S. policyholders," Consedine testified. "We are committed to working with our federal colleagues where appropriate, and sharing our views with Congress on these important issues."
Consedine added that the NAIC’s view is that “taking a more homogenous regulatory approach that treats insurers more like banks may actually encourage new risk-taking in the insurance industry.”
He said the IAIS “must recognize” that a system that has existing safeguards and controls to supervise the movement of capital within a group “may take a different approach to capital adequacy at the group level than jurisdictions that do not have similar requirements.”
Regarding the European Union-U.S. insurance trade talks that were started in 2012, Consedine said although there “has been progress” toward achieving a better mutual understanding of the regulatory tools and approaches used by the U.S. and Europe, “there are still many questions going forward about how the EU will treat U.S. firms under its new Solvency II oversight regime when it becomes effective in 2016.”
Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at [email protected].
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