The Federal Insurance Office released its first annual report yesterday; however, this is not the official FIO report that the industry has been waiting more than 18 months for, and which is expected to contain specific recommendations for changing the regulatory landscape.
The FIO’s first annual report arrives eight days after AIG and Prudential were nominated to be designated as systemically important financial institutions, which subjects them to supervision by the Federal Reserve and “enhanced prudential standards,” according to the FIO report.
More than half of the report, 29 pages, describes financial results and market performance, which finds, in acknowledging the recent growth of both the P&C and life/health markets, that the industry generally “moves in parallel with broader market indices.” The FIO also acknowledges the transformation the industry is undergoing in this section, pointing to the proliferation of distribution channels and technologies, in particular.
There also is a sections on current issues and emerging trends, such as the trouble caused by ongoing low interest rates and the vast potential for growth of the insurance market globally, and a section dedicated to legal and regulatory developments; the following is a list of several takeaways from that section.
The FIO is committed to its international responsibilities.
Howard Mills, director and chief advisor of Deloitte’s insurance industry group and former New York State Insurance superintendent, was quick to remind that the FIO’s authority with the IAIS is implied in Dodd-Frank, and that it does not possess the power to speak for any individual state or the NAIC, both of which also are engaged with the IAIS. Nevertheless, much of the report had a global tilt, especially when discussing the growth and potential of the global insurance market, and the regulatory ground yet to be covered in that landscape.
“[FIO Director Michael McRaith] definitely did make an effort to address global insurance issues, not just focus on U.S. markets. I think that does speak to the FIO’s interest in global regulatory activity and the global markets,” Mills said.
Two SIFI’s have been named in the U.S., but final guidelines for naming Global Systemically Important Insurers (GSIIs) have yet to be published.
The annual report serves as a reminder that not only is a higher level of oversight being sought by U.S. regulators, who last week designated AIG and Prudential as SIFI’s, but internationally speaking, the same process is in an earlier state.
G-20 leaders and the Financial Stability Board requested that the International Association of Insurance Supervisors (IAIS), of which the FIO is on the executive board, to develop a methodology for designating an international insurer a GSII. A proposed methodology was announced more than a year ago, subsequent public comments were received, and now the industry awaits a final methodology as well as subsequent recommendations of firms to be designated as such.
Solvency Modernization Initiative (SMI) efforts continue at the state level.
The amending of the National Association of Insurance Commissioners (NAIC) model insurance holding company law and regulation in 2010 and the creation of an Own Risk and Solvency Assessment (ORSA) last year were major steps for this effort, but according to the FIO, work to review solvency laws and regulations is ongoing.
ComFrame efforts continue at the international level.
While similar to SMI efforts in their broad scope, the development of the Common Framework for the Supervision of International Active Insurance Groups has not moved as quickly. However, a second draft of a concept paper intended to “establish a range of qualitative and quantitative requirements for IAIGs” is due out in October of this year.
State regulators will oversee failing insurers, though the FIO and Federal Reserve will do the designating.
As per the Dodd-Frank Act, Orderly Liquidation Authorities oversee financial companies “in default or in danger of default and the failure of which could have significant systemic consequences.” If this were an insurer or a holding company in which the largest U.S. subsidiary is an insurer, the FIO director and Federal Reserve both need to provide a recommendation. Once that’s done, however, the liquidation or rehabilitation of that insurer would fall to “the relevant state insurance regulator under applicable state law.” This responsibility would only bounce back to the federal level if the state regulator fails to file the appropriate judicial action within 60 days.
Lastly, with the annual report out of the way, the FIO may now focus on finishing its official report.
“It appears that the Treasury is starting to address the backlog of things directed by Dodd-Frank,” said Mills. “So I do think the fact that this report was issued is significant, in that, it may signify that the FIO is now ready to move on to the next task, which presumably, might be the more substantive prescriptive report, where the FIO might make suggestions on how to change the regulatory systems. That’s what the industry is waiting for.”
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