Commentary: NAIC should not allow Europe to write our insurance rules

By Doug Dean

Should U.S. state insurance regulators cede regulatory authority to foreign regulators outside our borders?

That is not how any regulatory environment should operate. But today, many of the rules being contemplated by the National Association of Insurance Commissioners are being handed down by global insurance regulators and nongovernmental organizations. This is even worse than federal regulation of insurance – it is international regulation of U.S. insurance markets.

This problem is slow growing. After the 2008 financial crisis, it made sense for global insurance regulators to meet and compare notes to assess the resilience of the industry. But when European regulators led the International Association of Insurance Supervisors to agree to Euro-centric global capital standards, U.S. state insurance regulators rightfully objected. Our system of insurance regulation allows for a balance between state sovereignty and cooperation among the states to protect consumers and insurer solvency.

State regulators vocally opposed the imposition of global capital standards that would have reflected European markets and disadvantaged U,S, consumers. This was the right move. It is disappointing and perplexing that years later, NAIC is allowing European and other global regulators to regulate our markets through the back door when we didn’t let them in the front door.

Specifically, NAIC is clamping down on market innovation in life insurer investments and responding to international finger-wagging on offshore reinsurance. In an unusual move, the NAIC gave center stage to a European International Monetary Fund official at the recent NAIC meeting to scold members for failing to adequately address issues that the IMF has decided are a problem for the U.S. This outsourcing of our regulatory views to foreign officials must stop.

NAIC’s proposal to increase the capital charge on asset-backed securities is a clear example of this bowing to external pressure. Last year, NAIC hastily imposed a 45% charge on the equity portion of asset-backed securities without pausing to understand the asset or consider data. The justification for this move was that the asset class was “fast-growing.” One wonders why regulators didn’t simply feel a sense of urgency to understand the asset and gather data instead of rushing to shut down investments with zero evidence of a problem.

We believe, and recent third-party data demonstrates, that the asset is high-performing and the prior 30% charge was a reasonable assessment of risk. By imposing the increased charges, regulators have merely rushed to push inurers out of an appropriate investment (potentially into riskier ones) not based on data. This is sending a clear signal to life insurers that they cannot innovate for the benefit of policyholders.

Adding insult to injury, NAIC has just proposed expanding the scope of this punitive charge to include property and casualty and health insurers. The process by which this charge was plucked out of thin air is being held up as a model for regulators to use any time they don’t understand an asset class that insurers invest in, with a current focus on “funds.” Shutting down innovation is never the answer. NAIC must take the time to understand these assets without allowing personal biases and preconceived notions into insurance regulations.

State regulators have good reason to trust the rigorous regulatory system we have built over many decades in this country. Every single state has robust tools to continuously monitor insurer solvency and market conduct and protect policyholders. The track record of insurer insolvencies in the U.S. is far better than in the banking system. This is true for a reason – state insurance regulators should stop taking instructions from global constituencies who don’t understand our markets and regulatory regime and get back to allowing innovation in the insurance industry.

Doug Dean served as Colorado Insurance Commissioner from 2003–2005. Dean also served as Colorado House of Representatives Majority leader from 1999-2001 and Colorado Speaker of the House from 2001-2003. Contact him at [email protected].