By HOWARD MILLS, director and chief advisor, Insurance Industry Group, at Deloitte LLP; and JOE GUASTELLA, Global Insurance Leader, Deloitte LLP
While the goal of global regulatory cooperation has been pursued for some time, recent economic challenges have served to fast-track the drive toward financial stability reform initiatives globally, as well as in specific geographies, such as the United States and the European Union.
To this end, one of the most active standard-setters for insurance in this arena is the Basel, Switzerland-based International Association of Insurance Supervisors (IAIS). Representing more than 190 jurisdictions in 140 countries and hosting some 120 observers, the IAIS is has become woven into the global effort to reform and strengthen insurance regulation as it works in concert with other such standard setters as the Joint Forum, the Financial Stability Board, the Group of Twenty (G-20) Finance Ministers and Central Bank Governors, and the International Organization of Securities Commissions (IOSCO), among others.
And while the efforts of the IAIS can be viewed on a very granular level, its main objectives, at a very high level, boil down to developing common insurance supervisory standards, developing cooperation between regulatory jurisdictions, and fostering international dialogue between insurance regulators and supervisors of other financial services sectors throughout the world.
Starting with the goal of creating global insurance regulatory standards through a common assessment framework, the organization is ramping up the effort to promote and maintain financial stability within the insurance sector. It is doing so in part by evaluating existing assessment frameworks of other financial standard-setting bodies and other organizations.
Key to its current work is the evaluation of global regulatory frameworks. Particularly of interest is the European Commission's Solvency II, which seeks to embolden economic risk-based solvency and capital requirements for firms across the European Union. Set to go into effect in member states in 2012, at its simplest level, Solvency II is expected to boost risk avoidance while creating greater protection of policyholders and providers alike.
Of particular interest to the IAIS has been Solvency II's framework for the supervision of internationally active insurance groups. In January 2010, the IAIS announced that it had approved development of a Common Framework for the Supervision of Internationally Active Insurance Groups. Moving the effort forward, a comprehensive concept paper on the issue is planned to be released in the first half of 2011, with a full framework expected to be complete by 2013.
According to IAIS Executive Committee Chairman Peter Braumuller, the framework would position internationally active insurance groups on a more common footing with each other while allowing home and host supervisors to better understand and supervise such groups.
"We are confident that the framework will become an important contribution to our ongoing wider efforts to promote financial stability," Mr Braumuller said in statement earlier this year.
FOSTERING INTERNATIONAL DIALOGUE
Moving beyond the framework initiative, other recent efforts of the IAIS include an update of its Insurance Core Principles (ICP), the development of guidance on supervisory colleges and the expansion of its Multilateral Memorandum of Understanding (MMoU) for the exchange of information among insurance supervisors.
Of these efforts, standing front and center is the revamping of the organization's ICPs. In 2009, in the midst of global economic challenges, the IAIS formed its ICP Coordination Group to advance draft revisions of the ICPs by October 2011. The end goal is a single set of principles that would act as an umbrella, or guidepost, for all IAIS supervisory papers. With strong, updated core principles in place, regulators hope the IAIS would be positioned to realize increased sign-on of its standards by a growing number of regulatory jurisdictions.
The ICP initiative blends well with the IAIS' aim to strengthen supervision of cross-border insurance groups via supervisory colleges as well. It is seen as a way to get regulators on board with IAIS standards, so increasing the number of jurisdictions that are speaking a common regulatory language. The development of supervisory colleges has been encouraged by the G-20, as noted in its November 2008 declaration, calling for such collaborative efforts. In addition to the IAIS' initiative in this space, supervisory colleges are currently under development by the NAIC, CEIOPS and others.
The IAIS MMoU is another piece of the puzzle that allows for multiple global jurisdictions to speak the same language.
Because the IAIS has no binding authority over any jurisdiction, its MMoU is seen as a way to create a global framework for improved cooperation among IAIS members. By setting minimum standards for MMoU signatories, the IAIS aims to foster greater uniformity in cross-border supervision and to contribute to improvements in global efforts towards regulating systemically important companies. In March 2010, the IAIS announced two new MMoU signatories, bringing its list to eight, with several others awaiting validation.
To the extent that regulatory congruence is the goal, it is not yet clear how the IAIS' efforts will impact or be impacted by the initiatives of other standard-setters or of the efforts of various world governments.
Global standard-setting groups are working to improve international cooperation and to foster coordination and information sharing. The International Monetary Fund (IMF) is collaborating with the FSB to enable greater sensitivity to global systemic risks and to assess international regulatory policy. In addition, current mandates of the FSB include setting guidelines for the establishment of supervisory colleges and reviewing policy development of other global standard-setting bodies to ensure they are coordinated and focused on priorities.
To be certain, other moving parts include a new framework in the EU, which consists of two new authorities: A European Systemic Risk Council, which would enhance macroprudential supervision while identifying and red-flagging systemic risk; and a European System of Financial Supervisors, which would run day-to-day supervision of individual entities while supporting a network of national financial supervisors. This group would be overseen by three European supervisory authorities who would work from a single set of rules across the EU and coordinate response across borders in the case of a crisis.
As mentioned before, also on the regulatory modernization front in the EU is Solvency II. While underway well before the current economic crisis took hold, the concepts of Solvency II have gained greater attention worldwide as a possible model toward regulatory harmonization. Taking cues from Switzerland's Basel II for the banking industry, the risk-based regulatory regime for insurers is slated to be adopted in October 2012.
In the United States, as of this writing, Congress is working feverishly to adopt broader federal regulatory powers over the financial system, including the insurance industry, with Sen. Chris Dodd releasing his reform proposals in March. As insurance regulation in the United States has historically been under the authority of the states, calls for various degrees of government intervention have created cause for concern by some state regulators and members of the insurance industry, who fear the usurpation of the current state-based regulatory regime for insurers or the creation of a system that would cause there to be overlapping regulation between the state and federal governments.
Other areas of the world are also looking to move toward prudential oversight. Many countries in Asia, for example, are keeping an eye on the evolution of Solvency II to determine whether that would be a model to follow, and India has declared its desire to adopt a risk-based approach to regulation within three years.
But could these individual regional efforts be the building blocks toward a global convergence of insurance regulatory regimes? While, there seems to be no lack of initiatives geared toward heightening global regulatory cooperation and establishing harmonized rules, the insurance industry would be wise to be alert and aware as the scene swiftly unfolds.
The Geneva Association, a leading global economics think tank made up of 80 chief executive officers from the world's top reinsurance companies, has stated that the insurance sector "has a strong interest in securing an effective and efficient financial system."
However, in a letter to the G-20, the association listed supervision and regulation as a top area to be addressed in creating a new framework for insurance supervision. In this area, the association noted, it is important for standard-setters to distinguish the differences between banks and insurance and that there are many obstacles to overcome in achieving international regulatory convergence.
According to a January 2010 report of the Joint Forum (which acts as a working group attended by IAIS, IOSCO and the Basel Committee on Banking Supervision), some of the main hurdles supervisors have to overcome in gaining convergence include key regulatory differences across the banking, insurance and securities sectors. Because international financial regulation is sector specific, cogs on the road to convergence may been seen in regulatory gaps between jurisdictions that open the door for regulatory arbitrage. Differences between jurisdictions also exist in the areas of global uniform capital framework, prudential regulation, and regulatory views on market conduct and consumer protection.
The move toward cross-border regulatory communication and uniformity has been made clear in the United States, where President Obama has called for a "global race to the top" in terms of taking on a global view that prevents regulatory arbitrage. That view is in lock-step with the G-20's call for a "more globally consistent supervisory and regulatory framework to ensure a level playing field and to avoid regulatory arbitrage."
However, some are saying, not so fast.
The House of Commons Treasury Select Committee has publicly expressed concerns over the EU's plans for a systemic risk board which would have powers to override national regulators, saying that there is a great deal of unease about the detail and timeline.
Meanwhile, the Property Casualty Insurers Association (PCI) of America has sent the message to international regulators at the IAIS that, in the zeal to put to use lessons learned from the recent economic turmoil, they should be clear on the point that insurers do not represent a systemic risk and should therefore not be regulated like the banking sector.
One fear is that the IAIS would harm the industry by considering whether existing IAIS measures should be adjusted to address the "too big to manage or supervise," according to PCI.
However, moves toward global regulatory harmonization are not necessarily causing a hue and cry of protest from the insurance industry. From a broader perspective, many are viewing the future standards and guidance of the IAIS and others as a clear step in the right direction.
In an article he wrote for a publication distributed at the IAIS annual meeting, Geneva Association Secretary General and Managing Director Patrick Liedtke stated that his organization's members support the concept of creating a stronger financial system for insurers to do business in. But he also raised some thought-provoking questions.
"One important part of our endeavor to study the credit crisis has been to think about possible consequences: Will policy action result in more protectionism, more cost and less efficiency in the markets? Will future regulation target the right objects? How can governments avoid that subsidies will result in market distortions?" Mr. Liedtke pondered.
These are questions the IAIS and others involved in reshaping the global regulatory framework for the insurance industry would be wise to keep in mind.
April 1, 2010
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