NAIC CEO: US Will Gain Solvency II Equivalence

The state-based system of regulating insurance in the United States will be deemed equivalent to the European Union's Solvency II regulatory process without a significant overhaul of how it does business, National Association of Insurance Commissioners CEO Therese Vaughan said.

"Our system is one that we're quite comfortable with," Vaughan told Best's News Service. "We believe that equivalence should be assessed on an outcomes basis. On that basis, we should be found equivalent."

Representatives of the NAIC and the new Federal Insurance Office regularly engage with their European counterparts on whether, and how, to reach agreement on how industry oversight is treated on each side of the Atlantic.

Solvency II, the EU-wide uniform standard for insurers and reinsurers is set to go into effect in 2013. It will replace a set of requirements created by EU member states over the past 30 to 40 years that many saw as no longer adequate to address today's business practices. Under Solvency II, foreign firms operating in EU countries must be supervised by a "functionally equivalent" domestic regulator to receive equitable treatment.

Vaughan expressed confidence in the NAIC's solvency modernization initiative, which seeks to do for U.S. regulators' requirements for how insurers disclose risks what Solvency II is doing for their EU counterparts. The NAIC does not expect to have their Own-Risk Solvency Assessment draft ready until after the end of this year, commissioners said at the association's fall national meeting.

Vaughan lauded Solvency II's embrace of a risk-based system, saying the SMI, in various permutations since the mid-1990s, is based on that concept. While the United States, unlike the EU, will not have a single set of rules, the state-based system was tested by the financial crisis and is solid, she said.

"We've made it clear we're not going to adopt Solvency II," Vaughan said. "We have a system. We think our system works. We're engaged in continuous improvement."

The way the U.S. regulates insurance, with no national overseer, is a bit of a puzzler for some EU officials, said Howard Mills, chief adviser of Deloitte LLP's insurance industry group. While the FIO has a designated role to represent the U.S. in international insurance affairs, it does not have regulatory authority. Strict Solvency II compliance would not work here, he said.

"We can't get 50 states to agree on domestic concerns, much less international," said Mills, a former New York state insurance commissioner.

What is clear is that the United States will not be in the first wave of countries being considered for equivalency. The European Insurance and Occupational Pensions Authority, made up of insurance regulators from the 27 member states, has determined that Bermuda, Japan and Switzerland could be considered equivalent, with some suggested changes.

For the U.S., there will be a transitional equivalence process, but the details are still being determined, Vaughan said.

Without equivalence, U.S. insurers doing business in Europe may face barriers that would require restructuring, said David Snyder, vice president and associate general counsel for the American Insurance Association. "Nobody benefits if trade in insurance is blocked," he said. "At the end of the day, we shouldn't hurt what's working well."

The major hurdle between U.S. and EU officials is philosophical, Mills said. The two systems cannot be identical, but each side must be able to have faith that the other is making good judgments about the soundness and risk level of the companies they oversee, he said.

"It is in no one's interest for the U.S. to be found not equivalent," Mills said.

(By Sean P. Carr, Washington Bureau Manager: [email protected])