Deloitte Sounds Alarm on Insurance Industry Scrutiny

WASHINGTON – The insurance industry should get ready for national and international regulation, along with greater scrutiny of popular products such as annuities, according to a Deloitte & Touche report.

Regulators far and wide are bearing down on insurers and advisors in “a trend which is expected to accelerate and add to rule-making and overlapping of regulatory roles.” And it is not only the federal government that is tightening up oversight of insurers, the report says.

The National Association of Insurance Commissioners has developed its own self-regulatory system for insurers, Own Risk and Solvency Assessment (ORSA). ORSA went into effect this year. The report said that it will evolve over the next several years as regulators receive initial filings and provide feedback to industry.

“As the NAIC’s Solvency Modernization Initiative bears fruit, most US companies will be filing their first ORSAs in 2015 — even as they prepare for their first Corporate Governance Disclosure Statements in 2016,” the report said. And, of course, there is always a chance for the unexpected, perhaps from the Federal Insurance Office (FIO), which has been relatively quiet in 2014, the report said.

The report did not say so, but a year-end report by the FIO indicated that federal officials are considering pre-empting inconsistent state laws regarding reinsurance collateral because the inability of states to adopt a uniform approach is increasing the costs of insurance for U.S. consumers.

Capital and governance are not the only issues insurers must deal with. Products, too, are under scrutiny. “Regulators are continuing to scrutinize annuity products, which are growing by leaps and bounds in the marketplace,” the report says.

The report, “Forward look: Top regulatory trends for 2015 in insurance” said annuity products “are becoming increasingly popular as consumers look for reliable, lifelong sources of future income.”

Annuities tend to be more complex than other insurance products, increasing the potential for misunderstandings and misrepresentation, according to the report. With interest rates likely to remain historically low for a while, it could make it difficult for insurance companies to deliver the anticipated payment streams.

That scrutiny and the increased focus from feds means that, “insurers need to keep a close eye on potential changes and expected impacts so they don't find themselves blindsided and scrambling at the last minute to achieve compliance.”

The report says that before the Dodd-Frank financial services reform law, enacted by Congress in 2010, regulation of the insurance industry in the U.S. primarily has been the business of the states since the mid-19th century, beginning with New Hampshire’s appointment of the first state insurance commissioner in 1851.

The report notes that the pressure is not only coming from the federal government, it marks a convergence of U.S. and international regulatory principles.

“?The U.S. insurance industry faces increasing pressure to follow international regulatory standards,” the report said.

Global capital standards are being field-tested, and are expected to begin to go into effect in 2015 for G-SIIs, and in 2019 for insurers designated as Internationally Active Insurance Groups (IAIGs) under the Common Framework (ComFrame) for the Supervision of IAIGs, the report said.

Insurers have formed a coalition aimed at either delaying or forestalling federal regulation. Besides a few being designated a systemically important financial institutions (SIFIs), other insurers are regulated by the Federal Reserve as thrift holding companies. The Fed has never disclosed how many insurers are overseen as thrift holding companies. These companies include MetLife, Prudential Life Insurance Company, New York Life Insurance Co., TIAA-CREF, Nationwide Mutual Insurance Co., Mutual of Omaha Insurance Co. and State Farm Mutual Insurance Co.

Other issues that insurance company compliance officials must deal with include use of captives, principles-based-reserving (PBR) and cybersecurity threats.

“Change will continue to be a defining feature of insurance regulation in 2015,” the report said.

It said the Fed is staffing up and is soon expected to issue new rules governing SIFIs.

“This is relevant both for existing SIFIs, for companies being considered for the designation, as well as applying Fed regulatory compliance standards to insurers who own thrifts,” the report said.

G-SIIs and IAIGs likely will begin to feel the impact of new global capital standards, the report said. Meanwhile, here at home, U.S. insurance groups “can expect to face increasing pressure for more direct supervision at the holding company level.”

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].