"Uncertainty" sums up the regulatory environment for insurers in all lines in 2014, says Howard Mills, director and chief advisor of Deloitte's insurance industry group and former New York State Insurance superintendent.

"All of the regulations bode for higher capital standards for insurers, much heavier emphasis on consumer protection and risk management and governance," Mills says. "Companies are spending a lot of money on infrastructure, analytics and staff, preparing for that as we speak," Mills says.

Insurers will make two big investments in 2014, if they haven't already, Mills says: financial infrastructure improvements and predictive analytics to write better business and isolate risks they don't want to take. "Despite all that, there will be more and more ways insurers can get into trouble in coming years."

As if health insurers didn't have enough regulatory and legislative uncertainty with the Affordable Care Act, the exchanges and everything else associated with them, they will join the P&C and life industries in continuing to wait for the long-overdue Federal Insurance Office. The report on how to improve state insurance regulation - including how federal regulation could help - could add another layer of regulation for insurers, increasing the burden on the industry, which Mills says could potentially be a road map for greater involvement from the Federal government. While the FIO released a report in June 2013, it still hasn't released the official FIO report that the industry has been waiting two years for.

More than half of the June report describes industry 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, pointing to the proliferation of distribution channels and technologies, in particular.

The industry also will keep its eyes on the Financial Stability Oversight Council (FSOC), as it continues to make recommendations on non-bank systemically important financial institutions (SIFIs). Under the Dodd-Frank Act, FSOC is authorized to determine that a nonbank financial company's material financial distress - or the nature, scope, size, scale, concentration, interconnectedness or mix of its activities - could pose a threat to U.S. financial stability. In 2013, the Council voted to designate American International Group Inc. and Prudential Financial Inc. SIFIs. MetLife and Prudential have been pressing the Fed to avoid regulating insurers with bank-like capital rules tied to the Basel III standard. "There's a big fight over how the Fed is doing that because the industry still feels like they're applying bank-centric rules and bank-centric capital standards on insurers and that doesn't work," Mills says.

"Insurers will spend a lot of 2014 watching closely for 'Fed creep,' and it's not just FIO and FSOC," Mills says. "Dodd-Frank also created the Office of Financial Research. They have the authority to request data from all financial institutions, including insurers. And, while insurers are exempt from a few agencies, such as The Financial Consumer Protection Agency, they're still worried because we're seeing this kind of creep from other federal agencies - look at the disparate impact rule and the force-placed insurance. You've got the housing and urban development department now looking into insurance issues."

Insurers are caught in the middle of a "battle for supremacy" between the states and the federal government, Mills says. "Because the states want to show the feds they can be tough regulators, they're really focusing on consumer protection, transparency and improved corporate governance."

Now the international regulatory community - the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board, the Basel, Switzerland-based body set up to report to the G-20 - is staking a claim on the industry, looking at systemic risk and dragging insurers into that, Mills says. "There is a big push going into 2014 and 2015 for global capital standards. It could put the U.S. industry at a big disadvantage."

Perhaps a bit more certain is January 2015 deadline of the Own Risk and Solvency Assessment (ORSA), an internal process to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios. Insurance groups with less than $1 billion of direct premiums are exempted, but single companies with more than $500 million of premiums are required to file an ORSA report with their home state insurance commissioner, says Dave Ingram, EVP with Willis Re Inc. And, this exemption is not absolute. The model law gives the commissioner the authority to request an ORSA of any company and requires such assessment for particularly troubled companies regardless of size.

While most insurers likely already have begun preparation, this regulation forces more focus on enterprise risk management programs. For a company that has an ERM program and economic capital model in place, there still may be one to two years of setting the risk strategy, implementing and validating a capital model and developing effective risk reporting capabilities.

Experts say insurers exempt from the formal ORSA filing requirements still may want to consider an ORSA process to be able to immediately answer questions during their next quadrennial exam and inquiries from ratings agencies and investors.

"It all trickles down, even for the smaller to mid-tier insurers," Mills says. "Once companies are doing ORSAs, rating companies and investors could start asking for them. No one is immune."


To see all of INN's Top 5 Trends for 2014, click here.

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