Insurance regulation

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See also bond insurance and insurance.


Insurance regulation under Dodd-Frank

Congress squandered a rare opportunity to reform the financial markets that spun out of control and wreaked havoc on our economy and the lives of millions of Americans. In the process, it revealed its inability to overcome the influence of vested interests and to generate a solution that is more than a patch for the holes in the existing flawed model.

H.R. 4173 (now known as the Dodd-Frank bill) contains more than 2,000 pages of new legislation and amendments to existing law. It creates the Consumer Financial Protection Bureau and a Resolution Authority to determine "systemic risk" and break up troubled financial institutions. The bill also enhances bank capital standards and limits a bank's ability to trade for its own account, invest in hedge funds and to trade derivatives unless on open exchanges (although these three limitations were significantly diminished in the final conference committee rush to arrive at a compromise bill). What is more significant, however, is what Dodd-Frank does not address: insurance regulation.

Insurance Regulation

Insurance as a "financial service" could easily have been drawn into the Dodd-Frank maelstrom, but it was not, except in two respects. First, the bill creates an Office of National Insurance ("ONI"), which has only minimal investigative and oversight authority. Second, the bill enacts the "Nonadmitted and Reinsurance Reform Act." This Act has nothing to do with the financial crisis and is indeed so non-controversial that it was easily added to H.R. 4173 as a vehicle of opportunity.

Why was the insurance industry barely affected? Even though the collapse of AIG was a precipitating force in the financial crisis, it became clear that AIG's insurance companies were not at risk of insolvency. In fact, the insurance industry as a whole has survived the financial crisis quite well.

The insurance industry survived without any government bail out funds (with the exception of a few of the very largest insurers which had dabbled in derivatives) because almost all insurers are not "too big to fail." There are probably 5,000 insurers in the United States, each of which is regulated by its state of domicile and the other states in which it is licensed. The state-based regulatory system, with all its complexity and administrative cost, has the salutary effect of limiting the concentration of risk so the failure of any single insurer presents no risk to the entire system. No one in Congress or the White House seems to understand this obvious lesson that 5,000 competing financial institutions are safer to the public than the current banking model; i.e., numerous very small banks and a handful of banks that are "too big to fail."

Even the ONI is a diminished version of the originally introduced office. It is authorized to conduct a study of the insurance regulatory system. This should be helpful in future efforts at reform, but ONI's preemptive authority is very limited. It can preempt a state law only if such law "results in less favorable treatment of a non-United States insurer domiciled in a foreign jurisdiction that is subject to an international insurance agreement on prudential measures than a United States insurer domiciled, licensed or otherwise admitted in that State." In order to do this, the ONI will have to consult with the "appropriate State regarding any potential inconsistency or preemption" and then adhere to the federal Administrative Procedure Act by providing notice in the Federal Register, opportunity for comment and a further notice that the preemption has become effective. Any such finding is subject to judicial review. The Director of the ONI further has the opportunity (in addition to the opportunities presented by the Administrative Procedure Act) to "consult with State insurance regulators, individually or collectively...."

Freddie, Fannie and "Too Big to Fail"

H.R. 4173 does not even mention Fannie Mae and Freddie Mac, the Government Sponsored Entities ("GSEs") whose debts are growing daily without any relief in sight. Fannie and Freddie are at the heart of the financial crisis. The politically driven easy credit for unqualified borrowers spurred mortgage brokers, lenders and Wall Street investment bankers into a frenzy of risky behavior and short term profit taking.

Why has Congress avoided dealing with perhaps the biggest problem in Washington? Because the solution will be difficult, and no one inside the Beltway will benefit from it. By mandating that banks provide easy credit and forcing GSEs to take the risk, the politicians received the two things they live on - votes from constituents who received easy credit and money from the financial industry that benefitted from it.

Now, the house of cards has collapsed. In order to reform the mortgage lending system, Congress would have to acknowledge fault and impose the duty to clean up the mess on the taxpayers. There is no "upside" for Congress to do this, and there is no measurable "good government" lobby in Washington to force Congress to act. Moreover, there has been no leadership from the White House (which is the normal counterweight to Congress) to address this issue. So, Fannie and Freddie roll on, untouched.

While Congress pretended in Dodd-Frank to address the "too big to fail" problem, it only made it worse. Working on the assumption that the crash of the financial markets was the result of regulatory failure, Congress enacted provisions that will facilitate the recognition of "systemic risk" and the winding down of those institutions that are "too big to fail" by the FDIC under the auspices of the Resolution Authority. This, ultimately, will encourage the moral hazard that creates the risk in the largest financial institutions.

What Congress has refused to do (and what the White House has refused to advocate) is to limit the size of financial institutions so that none of them are too big to fail. Again, this seemingly obvious solution was not considered seriously.

In sum, even though the United States suffered the worst financial collapse since the Great Depression, Congress failed to produce legislation to prevent the next big crash. At best, it will help to modulate the boom and bust cycle.

Insurance regulation, as cumbersome as it can be, should have been at least considered by Congress as a model to end the "too big to fail" problem. It wasn't.

The Dodd-Frank Wall Street Reform and Consumer Protection Act will make an important impact not only on banks but also on insurance companies, a rating agency says.

Standard & Poor’s Ratings Services, New York, says it does not expect the legislation, HR 4173, would have an immediate effect on its credit ratings for U.S. insurance and reinsurance companies.

“Indeed, we believe several aspects of the reform bill could help U.S. insurance/reinsurance companies maintain their competitive positions in the global marketplace,” S&P states in a comment on the legislation.

The establishment of the Federal Insurance Office within the Department of Treasury, as provided under the act, will create a central point for information on the insurance industry, it notes. That office would also represent the U.S. in the International Association of Insurance Supervisors and help negotiate agreements by that group that affect U.S. insurers.

“In our view, U.S. reinsurers would be particularly vulnerable to increased operational costs and lower profit margins if the U.S. regulatory system were to fail to gain full equivalency recognition” among international bodies,” S&P observes. “As their cost of capital increases, the cost of reinsurance could increase, and the amount of reinsurance available to primary insurers could decrease.”

Where the Dodd-Frank bill may not be so helpful is its requirement that diversified insurance groups with $50 billion in consolidated assets and nonbank financial companies or bank holding companies be subject to the assessment on large financial firms.

“In our view, no insurance company (excluding American International Group Inc.) poses a systemic risk to the financial system,” S&P observes. “As such, the insurance groups subject to this assessment will likely make disbursements that are not specifically related to the risks borne by the insurance/reinsurance industry and will generally decrease absolute capital levels.”

Congressional lawmaking and oversight

Senator Merkley wants to states to retain insurance oversight

Sen. Jeff Merkley (D-Ore.) is leading an effort to ensure state insurance regulators keep strong powers under Wall Street overhaul legislation

Buried in the 1,400-page bill to revamp the financial regulatory system is a provision to create a new Office of National Insurance to monitor insurers at the federal level.

Merkley is concerned the measure, drafted by Senate Banking Committee Chairman Chris Dodd (D-Conn.), would give the federal government too much power to negotiate international insurance agreements that could then preempt state regulations. Merkley is supporting an amendment that would limit those federal powers and ensure states keep their powers over the industry. The amendment would give more power for Congress to consult on international insurance agreements, said Julie Edwards, Merkley’s spokeswoman. The House reached a similar agreement last year before passing the Wall Street overhaul in December.

“State laws protecting their citizens shouldn’t be voided in order to give special treatment to foreign companies, and this amendment will make sure they won’t be,” Edwards said.

Consumer Watchdog, U.S. PIRG (Public Interest Research Group), Public Citizen and the powerful National Association of Insurance Commissioners (NAIC) are backing Merkley’s amendment and calling on senators to change the Dodd bill. A spokeswoman for Dodd did not respond to a request for comment.

“We don’t believe that a provision which would in effect deregulate state insurance protections should be part of the regulatory package,” said Carmen Balber, of Consumer Watchdog.

“This issue is critical to state insurance regulators as the Department of the Treasury under the bill would, for the first time, have the power to make determinations on the pre-emption of state insurance matters,” the insurance commissioners association wrote to Merkley.

The issue has divided the insurance industry ever since President Barack Obama laid out his overhaul plan last year and included a new federal office to monitor insurers. The debate mirrors a long-running split in the industry between companies that favor greater federal oversight and those that support the current system of state-based rules.

Benjamin McKay, senior vice president at the Property Casualty Insurers Association of America, said his group supports the amendment because it would give needed protection for state regulators.

Supporters of federal oversight of the industry say the Merkley amendment would limit the government’s ability to oversee an industry that includes major multinational companies that insure risk in many countries.

Blain Rethmeier, spokesman at the American Insurance Association, said: “The U.S. needs a strong national voice on insurance matters. We believe the Merkley amendment would strip the U.S. of that power.”

The American Council of Life Insurers supports the Dodd language.

House Fin Service Comm passes homeowners insurance act

Today, the House Financial Services Committee approved by a vote of 39-26 the Homeowners’ Defense Act, innovative bipartisan legislation to reduce insurance premiums for homeowners around the country.

The Homeowners’ Defense Act, authored by Rep. Ron Klein (D-FL) and co-sponsored by more than 70 of his colleagues representing over 30 states, allows states that choose to participate to join a national catastrophe insurance pool that will drive down costs. The pool could include the risk for hurricanes in Florida, earthquakes in California, mudslides in Colorado, wildfires in Arizona, tornadoes in Kansas and more.

“Today marks an important step forward as we continue fighting to bring down homeowners’ insurance costs for hard-working families,” Klein said. “By working across party lines with Democrats, Republicans and Independents, we have passed a private-market solution to drive down premiums and make a real difference for homeowners around the country.”

“The Federal government’s response to Hurricane Katrina has unfortunately created an expectation that the government will provide similar financial assistance in future disasters,” said Rep. John Campbell (R-CA). “This bill would instead give states, including my home state of California, the tools to set up effective disaster insurance programs by sharing risks across the country.”

“Over the years, homeowners’ insurance rates have skyrocketed in at-risk states, putting a heavy burden on families in Florida and throughout the nation,” said Rep. Suzanne Kosmas (D-FL). “This bipartisan, common-sense solution will allow states to pool together to make insurance premiums more affordable, protect taxpayer dollars, and help provide peace of mind for working families.”

“This is a positive step toward helping make homeowner's insurance more affordable,” said Rep. Bill Posey (R-FL). “The legislation also takes important steps to help homeowners and localities prepare for future disasters before they occur. Preplanning helps save lives, property and money.”

“Some problems are too big for one person to solve. Hurricanes are an example of that. The wake of a hurricane brings lost lives and lost property. If we don’t pass this bill, it will mean bankruptcy for huge numbers of storm victims as well. People need insurance and deserve to have it. That’s what this bill accomplishes,” Rep. Alan Grayson (D-FL) said.

In addition to saving families money on their homeowners’ insurance premiums, this legislation also saves every American taxpayer money by taking smart, preventative action before disaster hits. This puts an end to the current system, where taxpayers are stuck with an expensive bill following any major disaster – like the nearly $800 per family paid by American taxpayers in the wake of hurricane Katrina.

The legislation now moves to the full House for consideration.

House hearing on insurance holding company supervision

10:00 a.m., Thursday, March 18, 2010, 2128 Rayburn House Office Building

Federal Insurance Office Act passes Fin Services Comm


  • Federal Insurance Expertise. Insurance plays a vital role in the smooth and efficient functioning of our economy, but the credit crisis highlighted the lack of expertise within the federal government regarding the industry, especially during the collapse of American International Group, also known as AIG, and last year’s turmoil in the bond insurance markets. A Federal Insurance Office will provide national policymakers with access to the information and resources needed to respond to crises, mitigate systemic risks, and help ensure a well functioning financial system.
  • International Coordination. Although America’s insurance markets still operate on a state-by-state basis, today’s financial markets are global. The Federal Insurance Office will therefore provide a unified voice on insurance matters for the United States in global deliberations. The Federal Insurance Office and the United States Trade Representative will share the authority to enter into and negotiate agreements with foreign entities.
  • Promote Financial System Stability. Insurance accounts for 10 percent of the assets of the financial system and employs almost 40 percent of the employees in the financial services industry. Having a strong knowledge base at the Federal level of government will be instrumental in helping to promote stability in our financial system.

Federal Insurance Office Act

Federal Insurance Expertise. Insurance plays a vital role in the smooth and efficient functioning of our economy, but the credit crisis highlighted the lack of expertise within the federal government regarding the industry, especially during the collapse of American International Group (AIG) and last year’s turmoil in the bond insurance markets. A Federal Insurance Office will provide national policymakers with access to the information and resources needed to respond to crises, mitigate systemic risks, and help ensure a well functioning financial system.

International Coordination. Although America’s insurance markets still operate on a state-by-state basis, today’s markets are global. The Federal Insurance Office will therefore provide a unified voice on insurance matters for the United States in global deliberations.

"...Meanwhile, insurance lobbyists are closely examining a draft amendment to legislation setting up a Federal Insurance Office. The markup of legislation had been put on hold for two weeks while insurance interests clashed about the scope of the new office, particularly on matters relating to international agreements.

In earlier legislation, Kanjorski said the office should have the ability to coordinate and negotiate “international agreements on prudential measures.”

Insurance interests that traditionally have called for a new federal office that could preempt state laws were supportive of that language. But insurance groups that favor state-based regulation strongly opposed it and argued that the new federal office would sweep away state regulations.

The new amendment appears to make a significant change to the provision. In draft language, Kanjorski said that nothing in the bill should be “construed to affect the authority of any federal financial regulatory agency … and to preempt state measures.” That appears to favor the state-based interests.

Lobbyists for insurance industries that favor stronger federal powers may object to the new language.

On Friday, lobbyists for their counterparts praised the direction of the amendment.

“We’re pleased with some of the changes they’ve made on the international issue,” said Marliss McManus, senior federal affairs director at the National Association of Mutual Insurance Companies (NAMIC). The association continues to have other issues with the broad scope of the office.

“The authority to demand data and document productions more closely resembles the character of a regulatory agency than an information and research office,” NAMIC wrote in a letter on Thursday.

The National Association of Insurance Commissioners (NAIC), which represents state insurance commissioners, is continuing to review the new language and has yet to say whether it is in support."

"The objective of the draft “Federal Insurance Office Act” is to create a new Office of National Insurance at the Treasury Department, which will be responsible for aggregating state insurance data. It is likely the legislation is a placeholder, deferring significant insurance industry reforms until the next Congress."

H.R. 3424 to close foreign reinsurance loopholes

The CEOs of some of the nation’s largest U.S.-based insurance companies urged quick passage of legislation to close a loophole cited in President Obama’s FY 2011 budget proposal that allows foreign- controlled insurance companies operating in the U.S. to avoid paying U.S. income taxes.

“The President’s proposal is a good start,” stated William R. Berkley, Chairman and CEO of W. R. Berkley Corporation. “We now call on Congress to pass the Neal bill and end hurtful tax loopholes that for years have benefited foreign-controlled insurance companies and created a competitive disadvantage for insurance companies based in the United States.”

Representative Richard E. Neal has introduced H.R. 3424, a bill that will eliminate current tax loopholes that permit foreign-controlled insurers to escape U.S. income tax on profits from policies covering U.S. risks. This practice of reinsuring U.S.-written business with a foreign affiliate in a low or no-tax jurisdiction [Related Party (Affiliate) Reinsurance] costs the U.S. Treasury billions of dollars in tax revenues, and gives foreign insurers a significant advantage over U.S. competitors in attracting capital to write U.S. business. A similar bill has been released by the Senate Finance Committee staff.

“The President’s proposal brings much needed attention and momentum to this issue that for years has created an uneven economic playing field,” stated John Degnan, COO of The Chubb Corporation. “In this time of economic crisis, we cannot afford to give foreign-controlled insurers continued tax breaks. They should not be allowed to avoid taxes at a time when others are being asked to contribute to our nation’s economic recovery.”

"It has been obvious for years that a loophole in our tax laws is increasing the burden on American taxpayers and giving foreign insurance companies a huge advantage over American firms,” stated Jay Brown, CEO of MBIA Inc. “The President is right -- we must put a stop to it. We urge Congress to support the Finance Committee and Congressman Neal's efforts to pass effective legislation to close this loophole and prevent foreign companies from avoiding tax on their income from insuring U.S. risks."

Treasury's negotiation of international insurance agreements

House lawmakers this week will attempt to alter legislation creating a new federal insurance office after lobbying interests clashed over its proposed powers.

The insurance industry is divided over whether the new office under the Treasury Department should negotiate international insurance agreements on prudential matters.

The issue taps into a long-running split between insurers who favor the existing system of state laws and regulations and those that favor setting up a new federal power. Those who support the state-based system say a new office that could negotiate the agreements would infringe on state rights.

The House Financial Services Committee postponed a markup of legislation on the new Federal Insurance Office because of the opposition, but lawmakers are slated for another markup this week.

Staff on the Financial Services Committee and Ways & Means Committee, which has jurisdiction over the U.S. Trade Representative (USTR), have been trying to hash out the legislation. The issue sets up a regulatory turf question between the Treasury Department and USTR.

One option under discussion would be to let either the new office or the USTR reached an international agreement, but then require congressional ratification. The current bill under debate does not require congressional approval.

That alternative would still raise a legal question of whether the congressional approval automatically preempts state regulations. But it would raise the bar and allow lobbying groups to attempt to influence congressional lawmakers to vote down the international agreement.

Committee staffers are also debating how to clarify the role of the USTR in negotiating international insurance agreements. The new insurance office could play a complimentary role to the USTR.

House hearing October 6, 2009 creating national insurance office

10:00 am., Tuesday, October 6, 2009, 2128 Rayburn House Office Building

Archived Webcast of hearing.

Regulators and representatives of the insurance industry appeared before Congress today to discuss a new draft of the Federal Insurance Office Act of 2009. The House Financial Services Committee discussed three components of financial regulatory reform: strengthening investor protection, enhancing oversight of private pools of capital and creating a national insurance office.

The revised version of HR 2609, the bill drafted by Paul E. Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, calls for the establishment of the Federal Insurance Office inside the Department of the Treasury. In previous versions of the bill, it was called the National Office of Insurance Information.

That office would not only monitor all aspects of the insurance industry but also recommend that the Federal Reserve System designate carriers and their affiliates as Tier-1 financial holding companies.

Though representatives from the American Council of Life Insurers and the National Association of Insurance Commissioners supported the establishment of the insurance office, they wanted to limit the extent of the office's power.

Dennis S. Herchel, assistant vice president and counsel of Massachusetts Mutual Life Insurance Co., speaking on behalf of the ACLI, said that while the industry wanted the federal insurance office to work with financial industry regulators, he warned against adding more regulators to the current battery of more than 50 state insurance commissioners.

“We think it's important to clarify that the [Federal Insurance Office] is not to have any general supervisory or regulatory authority over insurance companies,” Mr. Herchel said in his testimony. “The industry does not support adding an additional regulator on top of the 50-plus we already have.”

The group also suggested that some of the funding directed toward the insurance office be used to obtain industry experts, and that Congress may want to create an insurance industry advisory committee that can work with the insurance office on relevant issues.

The NAIC, a group of state insurance regulators, said that though it acknowledged there were areas that need regulatory reform, it opposed any initiatives that would undermine its authority. The current draft that Mr. Kanjorski has released goes beyond previous bills for the Federal Insurance Office and has reduced the role of state regulators, noted Therese M. Vaughan, chief executive officer of the NAIC.

In her testimony, Ms. Vaughan also said that the state regulatory group had considerable access to insurers' financial data and information through its producer license database. She was concerned about the role the NAIC would play in providing that information to federal regulators and whether state regulators would have access to data collected by the national insurance office.

“While nothing in the proposal precludes the national insurance office from being able to collect information from the NAIC,” Ms. Vaughan said in her testimony, “information-sharing between state and federal counterparts too often has been a one-way street, where information may be taken from the states through the NAIC without reciprocation.”

“Our support for any national insurance office is predicated on the notion that the office be a tool to connect the state regulatory system with the federal regulatory system, and not be an instrument to displace or diminish state insurance regulation,” she said.

House hearing March 10 on natural catastrophe insurance

  • Source: Kanjorski and Waters Announce Hearing on Various Approaches to Addressing Natural Catastrophe Insurance, House Financial Reform Committee

Congressman Paul E. Kanjorski (D-PA), the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, and Congresswoman Maxine Waters, Chairwoman of the Subcommittee on Housing and Community Opportunity, today announced that they will hold a joint hearing to examine H.R. 2555, the Homeowners Defense Act, introduced by Congressman Ron Klein (D-FL), which aims to address the growing problem of the availability and affordability of homeowners insurance around the country. Witnesses will testify about how the bill would affect homeowners, businesses, and communities.

WHO: House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises and Subcommittee on Housing and Community Opportunity WHAT: Hearing Entitled “Approaches to Mitigating and Managing Natural Catastrophe Risk: H.R. 2555, The Homeowners Defense Act” WHEN: Wednesday, March 10, 2010, 2:00 p.m. WHERE: 2128 Rayburn House Office Building

Senate hearing, July 28, 2009

Regulatory Modernization: Perspectives on Insurance

Tuesday, July 28, 2009, 09:30 AM - 12:00 PM, 538 Dirksen Senate Office Building, room 538

View archived webcast

Ranking Member Richard C. Shelby view statement

The witnesses were:

  • Mr. Travis B. Plunkett view testimony Legislative Director, Consumer Federation of America
  • Mr. Baird Webel view testimony Specialist in Financial Economics, Congressional Research Service
  • Professor Hal Scott view testimony Nomura Professor of Harvard Law School
  • Professor Martin Grace view testimony James S. Kemper Professor of Risk Management, Georgia State University

"Members of Congress are being urged to create — at a minimum — a new regulatory body within the federal government to focus on the insurance industry.

“There is some systemic risk in insurance requiring a regulator,” said Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, who was part of a panel of experts testifying today at a Senate Banking Committee hearing on modernizing insurance regulation.

“In order to fully understand and control systemic risk in this very complex industry, the federal government should take over solvency and prudential regulation of insurance as well.”

The CFA, which previously opposed federal regulation of insurance, has revised its policy positions “to learn from the regulatory failures that contributed to the economic meltdown,” Mr. Plunkett said.

While he said the states have done a “pretty good job” of solvency regulation of insurance, he was critical of the National Association of Insurance Commissioners in Washington for agreeing last winter “in secret meetings to fast-track several significant changes to life insurance accounting and reserve practices which would have weakened the financial condition of life insurers and misled the public about the financial strength of some of these insurers.”

NAIC backtracked on the changes, but they were adopted by several regulators in important states with large insurers, he said.

Mr. Plunkett did not identify the states.

While the CFA supports creating an office of national insurance as called for by the Obama administration in its regulatory-reform plan, it opposes giving the proposed group the power to pre-empt state regulations in connection with international treaties.

That could weaken state consumer protections, which states should continue to regulate, Mr. Plunkett said.

A different view was expressed by Hal Scott, a professor at Harvard Law School in Cambridge, Mass., who called for an optional federal charter for insurance.

The state regulatory system costs the life insurance industry alone $5.7 billion annually in additional costs, which are passed on to consumers, he said.

“The current system puts the insurance industry at a competitive disadvantage to other financial services firms offering competing products,” Mr. Scott said.

Federally regulated financial institutions can get nationwide approval of products in a shorter period of time than it takes insurers to receive multistate approval, he said.

To protect consumers, a consumer financial protection agency, proposed by the Obama administration, should have jurisdiction over federally regulated insurers, Mr. Scott said.

Federal regulation should be mandatory for large insurance companies, he said.

“The failures of such firms pose risks to the financial system and taxpayers, as demonstrated by [American International Group Inc. of New York].”

The federal government must require large insurance firms to have sufficient capital as a buffer against their failure and expenditure of taxpayer funds, Mr. Scott said.

But capital requirements for insurance firms must differ from requirements for banks, since insurance firms engage in different activities and incur different risks.

Some members of the Senate Banking Committee were skeptical, however, of the ability of the federal government to regulate the insurance industry adequately.

Ranking Minority Member Richard Shelby, R-Ala., questioned whether the Federal Reserve Board is the appropriate agency to regulate the industry.

“In my judgment, I think they’ve failed as a regulator of the [bank] holding companies. It has no expertise, no history of insurance regulation,” Mr. Shelby said.

Committee Chairman Christopher Dodd, D-Ala., declared himself “agnostic” on whether the industry should have federal regulation.

But he said policyholders need more certainty. “We need to provide them with peace of mind. We need to protect our policyholders to make sure that our insurance industry is strong and stays strong during this time of economic difficulty,” Mr. Dodd said."

President's proposal

Mr. Obama’s white paper detailing the financial regulatory overhaul proposed the creation of the Office of National Insurance inside the Department of the Treasury, which would develop expertise, gather information and recommend to the Federal Reserve any insurers that it thought should be supervised as Tier 1 financial holding companies. The current state-based regime remains intact.

Global oversight of insurers

Source: Global Insurance Regulators Eye New Solvency Rules - Sources Wall Street Journal Asia, June 24, 2009

"Global insurance industry regulators will begin talks on creating the first common rules on solvency requirements for international insurers, in an effort to prevent AIG-like crises. The International Association of Insurance Supervisors (IAIS) was expected to work out a detailed schedule to come up with requirements for major insurers’ solvency margin ratios.

The move is in line with a mandate handed down by the G20 in November.

That mandate was triggered by a U.S. federal bailout of AIG, the country’s biggest insurer, which now tops $180 billion in overall value. Solvency margins are a key gauge of how much capital an insurer has measured against risks. The higher it is, the better equipped a firm would be if faced with unexpected investment losses or surges in claims.

In addition to AIG, international insurers such as Prudential PLC, MetLife Inc. and Tokio Marine Holdings Inc. could be affected, while big European players, likely to be subject to tighter regional rules in future, may be less involved. “The goal is to build a framework to enable regulators to examine things without being hindered by regulatory differences [among countries] and grasp risks in the global insurance system,” one of the people involved said.

Observers say new rules on solvency margins, though nonbinding and likely to take years to finalize, given that the IAIS represents insurance regulators from 140 countries, would carry significant weight. “If there are unified gauges or regulatory standards … they could help improve the transparency of insurance groups operating globally,” said Kenji Kawada, a director at credit rating agency Fitch Ratings.

Many details of possible new rules still need to be worked out, but one element will be central: any changes in solvency ratio requirements will be applied to all group companies of insurers, including non-insurance businesses, rather than just the insurer itself.

Insurer solvency requirements already exist in advanced industrialized countries, and many also have group-wide capital rules, but the minimum regulatory ratios and the calculations vary from country to country. The AIG debacle prompted the U.S. government to include plans to oversee all insurer group companies, including non-insurance units, in its own regulatory reform proposals. The EU is moving toward a new regulatory regime called Solvency II.

The complexity of insurance regulation in the U.S. will do little to accelerate the IAIS plan.

Insurance regulation in the U.S. is a state matter rather than a federal issue, something the Obama administration hopes to reform. The IAIS has no specific proposals on the maximum common solvency margin ratio but first must determine more basic details, including the definition of capital, risk weights of each type of asset or liability held by insurers and a formula to calculate the ratio. Within a couple of years the organization is expected to come up with a “tentative” ratio. The next stage will be more time consuming, when members will conduct feasibility studies on their own and iron out their competing interests."

US omitted from first wave of equivalence discussions

The Committee of European Insurance and Pension Supervisors (Ceiops) has omitted the US from the first-wave equivalence negotiations, arguing its state-based regulatory structure means it "would not currently seem appropriate". Advertisement

Consultation paper (CP) 81 sets out the framework for equivalence discussions – where third-party regulatory regimes are regarded as on par with Solvency II – and includes Bermuda, Switzerland and Japan (reinsurance only) in the first wave of negotiations.

In the US, insurance is regulated at state level with guidance and co-ordination to ensure these standards are uniform across the country provided by the National Association of Insurance Commissioners (NAIC). However, in CP 81 Ceiops argues this structure could not be considered a competent authority under European Union regulation.

"The NAIC acts as the forum for co-ordinating policy on the development of the supervisory regime in the US, including for the drafting, negotiation and promulgation of model laws," the paper says. "However, the NAIC is not a supervisory authority in its own right, and an assessment of equivalence under the Financial Conglomerates Directive in 2008 foundered on the fact the NAIC was not a ‘competent authority' as understood in the relevant EU directives."

Ceiops quoted a recent report by the International Monetary Fund as proof of the difficulties in assessing the quality of insurance regulation in the US. Despite the IMF report praising the NAIC's "well-developed procedures", Ceiops points out it added the caveat that the state structure provided a sub-optimal level of transparency.

"The assessors note that their conclusions are subject to the unavoidable limitations on their ability to verify practices across the country (particularly in the implementation of regulatory requirements) that result from a state-based system with more than 50 separate authorities."

Ceiops also says the US set-up means the issue of exchanging information between regulators – which it described as "fundamental" to the equivalence process – could not be completed due to the NAIC not being regarded a competent authority. "For equivalence to be determined for the US as a whole, Ceiops members would need to explore the possibility of a joint agreement with the US state supervisory authorities collectively," it says.

"Since individual US states have their own separate professional secrecy requirements and freedom of information provisions, any agreement/memorandum of understanding would need to be very tightly drafted to ensure restricted information is protected, and not subject to any onward disclosure without the agreement of the provider. It is unclear whether the creation of a new federal office dealing with insurance would facilitate an agreement covering the exchange of information."

International Association of Insurance Supervisors

The International Association of Insurance Supervisors (IAIS) was established in 1994. The IAIS represents insurance regulators and supervisors of some 190 jurisdictions in nearly 140 countries, constituting 97% of the world's insurance premiums. It also has more than 120 observers. Its objectives are to:

  • Cooperate to contribute to improved supervision of the insurance industry on a domestic as well as on an international level in order to maintain efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders
  • Promote the development of well-regulated insurance markets
  • Contribute to global financial stability.

Solvency II regime

Fitch Ratings expects Solvency II to reshape the insurance landscape with some fundamental shifts to lower risk product mix, more cautious investment strategy, and for certain products higher premiums. Any rating impacts will likely be driven by exposure to risks that require significantly more capital under Solvency II such as equities, low-grade corporate bonds, products with high guarantees, and marine, aviation and transport insurance. However, provided the final requirements of Solvency II are similar to those set out in the current draft of Quantitative Impact Study 5 (QIS5), Fitch Ratings does not expect a substantial movement in the average rating across its portfolio of insurers as a whole.

The Solvency II regime is a three-pillar structure that defines financial, risk management and disclosure requirements using an economic risk-based approach. This means that the type and intensity of requirements and supervisory interventions are calibrated according to the true risk profile of each company and that sound internal risk management is promoted.

Pillar I will introduce a transparent valuation of assets and liabilities and define capital requirements which will explicitly reflect their inherent volatility under a predefined risk tolerance measurement. This standard method as well as internal methods to determine capital requirement will take into account all reasonably quantifiable risks.

This approach, besides being a precondition for proportionate and progressive supervisory interventions, will give insurers a better understanding of the risks they bear. Furthermore, by recognising both risk mitigation (such as reinsurance, hedging, securitisation, profit sharing) and diversification effects, Solvency II provides an incentive to companies to optimise their risk management strategy.

Pillar II will require insurance companies to have in place a comprehensive risk management framework. This forms part of the Own Risk and Solvency Assessment (ORSA) that will require companies to have appropriate processes for identifying, assessing and managing their risks in a coherent framework at all levels within their organisation.

In addition, Pillar II will provide supervisors with forward-looking supervisory tools and processes. The expectation is that supervisors will be able to detect any threat earlier and insurers will strengthen their ability to resist potential financial crises.

Pillar III aims to enhance disclosure requirements, creating more transparent, timely and reliable information about companies’ financial situations and risks. This will trigger market discipline and provide an additional incentive for the implementation of sound risk management practices.

Solvency II “not as comprehensive as US regulation” says NY insurance chief

Lack of Federal oversight should not be obstacle to equivalence, says key state regulator.

The Solvency II European insurance supervision directive is "not as comprehensive and transparent" as US regulation, according to New York's state insurance regulator. Jim Wrynn, superintendent of the New York State Insurance Department, also criticised efforts by stakeholders in the process of the European regulatory overhaul to deny equivalence status to the US while its state-based regulation remains in place.

Both the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) and the Solvency II parliamentary rapporteur, Peter Skinner, identified the lack of federal oversight of the insurance industry as a roadblock to the granting of equivalent status to the US, and therefore exemption from punitive capital charges. Ceiops omitted the US from its first wave of countries to be considered for the measure; the International Association of Insurance Supervisors later disagreed with Skinner's comments.

Wrynn was critical of this approach, and described the current US model as "a well-tested and comprehensive regime". He said that, as individual regulators are required to comply with guidelines drawn up in the US's National Association of Insurance Commissioners (NAIC) to ensure their accreditation as a member of the body, the system amounted to a coherent regime across the country.

"The decision of equivalence should be determined by an outcome-based approach," he said. "The development of national standards in the NAIC means regulation is consistent across the US and its territories, and it has performed very well through the crisis. The national system of state-based regulation should not in and of itself be an obstacle to the granting of equivalence."

He lauded its system of quarterly risk reporting, as well as unscheduled risk analyses that can be carried out at the regulator's discretion and comprehensive data sharing, as examples of how European regulation should look to the US system.

"One area in which Solvency II could learn from the US system is transparency. We have very detailed disclosure requirements, including annual and quarterly financial statements that list details down to the individual securities a company holds. From that specific information, we can quickly develop risk-based analyses on a more ad hoc basis as needed. Within hours of Lehman Brothers collapsing, we knew what the impact was across the industry."

Insurance Amendment Act is 'exciting' for Bermuda

Original posted in the Bermuda Sun by Greg Wojciechowski:

Bermuda is a pioneer and leader of the offshore insurance industry and the third largest insurance market in the world - it comprises nearly 1,400 companies, has total assets of $442 billion and gross premiums of $142 billion.

At the heart of this insurance market is the Bermuda Stock Exchange (BSX), which has listed insurance companies and insurance-linked securities worth $39 billion.

Regulating is the Bermuda Monetary Authority (BMA), under whose auspices the Insurance Amendment Act 2008 came into effect in October 2009.

Described as an "exciting development for Bermuda" by Andre Perez, CEO of Horseshoe Group, the Act provides specific risk-based regulations for the establishment of special purpose insurers (SPIs) as a new class of insurer.

It recognises and facilitates the structure of insurance-linked securities (ILS) such as catastrophe bonds (cat bonds).

A listing on an internationally recognised stock exchange makes these securities significantly more attractive for potential investors.

The BSX has already successfully listed seven cat bonds with a combined value of $370 million, the most recent being the Montana Re Principal at Risk Variable Notes cat bond in December 2009.


Once an SPI is licensed, attention is placed on the original insured, shifting the focus from the SPI to the ceding entity.

This is because the SPI is fully funded and therefore perpetually solvent.

The minimum capital requirement for an SPI incorporated in Bermuda is just $1 and it no longer has the same financial reporting and audit obligations as under the previous classification system, provided the issuer has met its regulatory obligations.

Also, provided all documents are presented correctly to the BMA, the SPI approval process can be completed within a week.

In addition, the BSX has specific regulations for ILS listings, which are not always mirrored by other jurisdictions. They focus on transparency, which has become even more important to the end-investors.

Cat bonds are an alternative asset class and are a compelling diversification tool due to their low correlation with global stock and real estate markets, being linked instead to natural disasters.

They are likely to be used more frequently as a mechanism for capital raising to ensure sufficient levels of coverage for catastrophic events.

Like every other asset class, they were impacted as a result of the global financial market dislocation. But since then, the cat bond market has recovered significantly, with the Swiss Re Catastrophe Bond Total Return Index rising 10 per cent in the first three quarters of 2009.

Some experts believe there is easily enough risk transferred in the market today to fuel a $50 billion per year market.

Bermuda is a leader in risk-based solvency regulation for the global insurance and reinsurance sectors and an economic success story.

Because of this, the island's indigenous (re)insurance industry has developed strongly and now supports the global insurance industry, particularly in the U.S.

Bermuda provides approximately 40 per cent of U.S. and EU broker placed catastrophe covers.

It is the most important offshore supplier of insurance, reinsurance and payer of property and casualty losses to the U.S.

Andre Perez, CEO of Horseshoe Group, said: "Since Hurricane Andrew, Bermuda has emerged as the foremost property catastrophe reinsurance market in the world and this new SPI regulation is a step towards consolidating this lead by making it easier for cat bonds to be done out of Bermuda." Those suspicious of offshore jurisdictions should be comforted by the BMA's strengthened regulations governing money laundering and terrorism financing.

An independent Financial Intelligence Agency has also been formed to monitor suspicious transactions.


After signing 18 tax information treaties, Bermuda has secured its place on the OECD's 'white list' - a high profile recognition the country is committed to tax transparency - and is fully implementing established international standards.

It is also a vice-chair on the steering group of the OECD's new Global Forum. Unlike some other British overseas territories, Bermuda is financially independent and has remained so during the global financial upheaval.

Bank of Butterfield's successful $200 million preference share offering and BSX listing in the first half of this year, guaranteed by Bermuda Government, is a perfect example of the island's ability to cope on its own and demonstrates that there is a healthy investor appetite here.

Guy Carpenter say between $1.2 and $2.2 billion of cat bonds could be issued in the fourth quarter of 2009 -40 to 55 per cent of the issuance for 2009. A fourth quarter accounting for more than 40 per cent of any year's total issuance has only been reached once, in 2004.

Bermuda can play an important role in supporting this growing market by providing listing services for these securities on an internationally recognised stock exchange.

It is an exciting opportunity for the island in the convergence of the capital and insurance markets.

Mr. Perez said: "The Cayman Islands have been a leader on cat bonds but Bermuda now provides a viable alternative."

EU legal and legislative developments

"Guy Carpenter & Company, LLC published its annual update on legislative and legal developments affecting insurers and reinsurers in Continental Europe. The report addresses the implications of the ongoing global financial crisis and highlights key trends, laws, and reforms that have been introduced or are expected in the region.

Developed with the insurance practice of law firm Heuking Kühn Lüer Wojtek, the report indicates that both the European Union (EU) and national parliaments continue to revise and institute laws to align insurance law throughout the EU, increase corporate responsibility and protect policyholders. The report details the latest legislative and legal developments in Austria, Belgium, France, Germany, the Netherlands, Norway, Spain, Sweden, and Switzerland.

See the report

“This report contains the latest developments in insurance legislation, from mandatory self-insured deductibles in D&O insurance in Germany, to the rights of direct access against liability insurers in Switzerland,” said David Lewin, Managing Director, Guy Carpenter & Company.

Mr. Lewin added, “Of particular interest are the findings of the Rome II study, which highlight the variations of compensation levels and claims limitation periods across EU countries. This study will likely have a significant impact on the final content of the 6th EU Motor Liability Insurance Directive.”

UK - FSA insurance oversight

Australian "group supervision"

"... By 2010 we have a relatively small number of insurance institutions that are rather larger than the 1970s variety.

They are geographically diverse but their size also represents a concentration of capital and in effect a concentration of risk. Offsetting this concentration to some extent is the diversification that occurs when portfolios are more widely spread. The industry is now less fragmented, more concentrated and -

  • structures are more complex,
  • financially and legally some international companies have large market shares in several jurisdictions and have branches and solo entities in many countries some companies have a diversity of activities, not only in direct insurance and reinsurance but in distribution ownership and, in some cases, involvement in other financial sector businesses
  • solo regulation has developed strongly
  • supervision is generally more intrusive and more effective..."

Australian insurer soundness

"...APRA’s other supervised industries are traditionally less susceptible to cyclical developments in the economy but, as I have mentioned, they have not been immune from the equity market impacts of the crisis. These made 2008/09 a very challenging year for the life insurance industry (including friendly societies).

Industry profitability was significantly lower than in recent years as a result of lower fee revenues, declines in investment premium income and investment losses. Over the year, life insurance assets fell appreciably because of declines in asset values but there was little sign of any material increase in withdrawals or insurance claims as a result of market volatility.

In this environment, our supervisory focus on the life insurance industry has naturally been on capital positions. As equity markets continued to deteriorate, we undertook a comprehensive stress-test of the industry in December 2008 to ensure that appropriate contingency plans were in place to deal with further shocks. With our encouragement, a number of life insurers have taken active steps to protect their capital through capital injections, de-risking of investment portfolios, protection of downside valuation risks through derivatives, revised target surplus policies and deferral of dividend payments.

As a result of these various initiatives, the capital position of life insurers and friendly societies remains generally sound. Obviously, the recovery in domestic and global equity markets over recent months has provided an additional buffer of support, enabling us to ease back on the intensity of our supervision..."

Australian insurance data reporting

In November 2009, the Australian Prudential Regulation Authority (APRA) released a discussion paper, Release of life insurance data. The discussion paper sought comment from life insurers and friendly societies on what life insurance data could be released publicly by APRA. APRA requested that responses include supporting reasons why data should be or not be released including reasons why specific data are considered to be commercial-in-confidence.

APRA also sought comments on the content and format of the two proposed new publications, Half Yearly Life Insurance Bulletin and Annual Friendly Society Bulletin.

Responses were required by 18 December 2009.

This paper discusses the main issues raised in the submissions received and APRA’s response to those issues.

The purpose of this paper is to seek comment from life insurers and friendly societies on what life insurance data could be released publicly by APRA.

These data have been collected under reporting requirements which became effective from 1 January 2008.

APRA is also seeking comments on the content and format of the two proposed new publications, Half Yearly Life Insurance Bulletin and Annual Friendly Society Bulletin.

APRA requests that responses include supporting reasons why data should either not be released or be released including, but not limited to, detailed reasons why specific data are considered to be commercial in confidence.

Australian XBRL insurer reporting

The following provides information to assist reporting entities provide data to APRA:

  1. Reporting periods and due dates
  1. Frequently asked questions
  1. GRF Data Validations
  1. Taxonomies

Australian terrorism insurance scheme

Australia’s terrorism insurance scheme was established to minimise the wider economic impacts that flowed from the withdrawal of terrorism insurance in the wake of the terrorist attacks in the United States of America on 11 September 2001.

The lack of affordable terrorism insurance forced commercial property owners, banks, superannuation funds and funds managers to assume their own terrorism risk as existing policies expired and renewal policies explicitly excluded terrorism cover.

These institutions were not set up to manage insurance risk.

With a large pool of assets uninsured for terrorism risk, the uncertainty facing financiers and investors could have had broader economic impact by delaying the commencement of investment projects and altering portfolio management decisions.

The Australian government was concerned that the lack of terrorism insurance for commercial property or infrastructure would lead to less financing and investment in the Australian property sector, with subsequent wider economic impacts.

In May 2002, the government announced that it would act to protect the Australian economy from the negative effects of the withdrawal of terrorism insurance cover, and that any intervention should be consistent with:

  • the need to maintain, to the greatest extent possible, private sector provision of insurance;
  • the need to ensure that risk transferred to the Commonwealth is appropriately priced to minimise the impact on the Commonwealth’s financial position, and to ensure that the Commonwealth is compensated by those benefiting from the assistance;
  • the need to allow the commercial insurance and reinsurance markets to step back in to the market when they are able (that is, ensuring an appropriate exit strategy for government); and
  • the need to be compatible with global solutions.1

Subsequently, Australia’s terrorism insurance scheme was established under the Terrorism Insurance Act 2003 to replace terrorism insurance coverage for commercial property and associated business interruption losses and public liability claims. Under the Act, the scheme is administered by the Australian Reinsurance Pool Corporation (ARPC). The scheme started on 1 July 2003.

AU insurers to develop mandatory definition of "flood"

The third meeting between the Federal Government and the Board of Insurance Council of Australia has resulted in clear wins for consumers and agreement between the Gillard Government and the insurance industry for further discussions on reform of flood related insurance.

The Assistant Treasurer, and Parliamentary Secretary David Bradbury who was also in the meeting, welcomed the release of the hydrologist's reports for Toowoomba and the news that the remaining hydrologists reports will be finished and publicly available by the end of February.

"The Government has also reached agreement with the ICA to develop a mandatory definition of "flood" to be incorporated into the Insurance Contracts Act, and a plain-English, one page summary statement which will help ensure that consumers are aware of what their insurance policies cover them for.

"The ICA is consulting with its membership on the definition for "flood" and, once they have done so, I will consult with consumer groups to nail down a consensus definition which the Government will move to quickly adopt," Mr Shorten said.

"Both the standard definition and one-page summary statement are complicated issues and there is more work to be done, but it is encouraging to see the insurance industry express its willingness to embrace change."

A national flood-mapping database was also discussed and methods of funding the database will form the basis of future talks. Already the Government has offered to share the costs of the mapping with the insurance industry.

NY state to license "insurance exchange"

"In a bid to create jobs and bolster New York’s position as a financial center, Gov. David A. Paterson announced plans on Wednesday to create an international insurance exchange, modeled after Lloyd’s of London.

The exchange would specialize in coverage of complicated risks — oil rigs in hurricane regions, tall buildings that are potential targets of terrorists or corporate directors who could be blamed for accounting scandals.

Such risks are hard to insure because they are unpredictable and potentially catastrophic. As a result, many companies go offshore for such coverage, usually to Lloyd’s or to other exchanges in Bermuda and Dublin. Currently, about 50 percent of the insurance placed through Lloyd’s originates in North America.

Governor Paterson is hoping to keep some of that business at home because insuring complex risks can be very profitable. The governor announced his plans in his State of the State address, calling it “part of a bold and decisive plan to rebuild our state’s economy.”

Officials associated with the project said they believed it could eventually generate 2,000 to 3,000 jobs, both for market participants and regulators. The exchange would be regulated by the state. It is unrelated to the Obama administration’s proposals to allow uninsured individuals to buy health coverage through exchanges.

The New York insurance superintendent, James J. Wrynn, said it would be easier for New York to create an insurance exchange than for most other states because it tried to start such an exchange in the 1980s. That attempt failed, but the laws allowing it are still on the books, Mr. Wrynn said.

He said the 1980s effort was doomed because the companies participating were not required to have adequate capital and did not always understand the risks they were taking on. The market was also “soft” then, meaning the participating insurers had a hard time charging large enough premiums to both cover their risks and turn a profit.

Mr. Wrynn said New York had been studying what went wrong with the earlier exchange and would see to it that the mistakes were not repeated. He said the state was about to start working with people from various financial institutions in the private sector to draft the rules and procedures for the exchange. Members of the working groups are to be named on Thursday.

Another crucial difference between the 1980s and now is the rise of hedge funds and other unconventional financial companies, which might want to try insuring catastrophic risks to balance investment portfolios. Such investors would participate directly in insurance syndicates, underwriting risks without having to become licensed insurers.

By forming syndicates, participants would be able to buy into relatively small slices of certain risks. The idea would be that the syndicate as a whole would have the capacity to absorb huge losses that might topple an insurance company working on its own.

In addition to hedge funds, private equity firms, banks and wealthy individuals might want to participate. Licensed insurance companies might also want to participate, officials said. If, for example, a homeowner’s insurance company decided its coverage was too heavily concentrated on the coasts of Florida, it could come to the New York exchange and seek an exchange to assume some of the risks, spreading them over a bigger pool.

Accounting changes plumped up insurers' capital ratios

"Life insurers, whose capital buffers shrank during 2008's downturn, emerged from 2009 with a rebound in capital. The reasons? Regulatory changes and a climbing equities market, according to Moody's Investors Service.

Indeed, most carriers reported improvements in their regulatory and risk-based capital ratios, which is the amount of capital insurers hold relative to their investment risks and operations. The median risked-based capital ratio came in at 429% for 2009, according to Moody's. That's up from 394% in 2008.

Typically, regulators will intercede if an insurer's risk-based capital ratio falls below 200%.

Gains in operating income — which hit $41 billion in 2009, compared with a loss of $9 billion in 2008 — helped bolster capital and surplus levels, which were up 13% from 2008's levels.

Still, regulatory changes were behind a good deal of the improvement. For starters, regulators began using a new method to evaluate the residential-mortgage-backed securities held by carriers. The rejiggering allowed insurance companies to post less capital against the bundled mortgages.

Another change in statutory-accounting rules allowed carriers to apply deferred tax assets toward more of their statutory surplus. Moody's estimates that this change helped boost risk-based capital ratios by 10 to 15 percentage points last year.

Carriers' holdings of commercial real estate and bundled residential mortgages continue to be a worry for Moody's, as the ratings agency noted that investment losses in those assets could still erode insurers' capital levels. The ratings company expects the investment losses to emerge over the space of several years, however, which would allow insurers' operating earnings to soften the blow.

More lenient treatment for "deferred tax assets"

State insurance regulators are moving closer to adopting a proposal that would add at least $11 billion in capital for insurers.

Passage would mark another win for insurers in what is shaping up to be a string of regulatory successes for the year.

The proposal, tied to income-tax accounting, was blessed Tuesday by a key committee of the National Association of Insurance Commissioners and comes up for a final vote next month.

It calls for more-favorable treatment of "deferred tax assets," allowing more of them to be counted as part of insurers' capital cushions. Insurers say this gives a more-accurate picture of their financial position.

But consumer groups, and some regulators, have raised concerns that these tax assets have value only to the extent that a company can generate profits in the future with tax bills for the assets to offset. They fret that liberal use of the assets will make capital cushions look plumper, but won't help pay claims if an insurer hits the skids.

Kermitt Brooks, first deputy insurance superintendent in New York, said "safeguards" added by regulators will protect consumers. Among other things, insurers must meet certain financial standards to use more of the assets than already permitted, regulators say.

Should it clear the full NAIC, the estimated expansion of deferred-tax assets in 2009 would represent about 4% of life insurers' total capital of $263 billion as of Dec. 31, according to the American Council of Life Insurers, a major trade group.

Passage also would mean the industry will have secured about $16 billion of the roughly $28 billion in capital relief it sought from regulators last year.

Amid the financial crisis last fall as life insurers posted losses and capital-raising opportunities were almost nonexistent, the industry began to push regulators to ease up on rules it contended were overly conservative.

As the NAIC geared up to vote, markets were improving, and regulators rejected emergency relief on an industrywide basis. But they proceeded to consider the proposals in their regular review process.

In general, consumer groups maintain it is bad policy to lower solvency requirements with the economy as uncertain as it is.

Also, complains J. Robert Hunter, director of insurance for Consumer Federation of America, "state regulators have worked overtime to provide capital and reserve relief to insurers," while dragging their feet on consumers' own financial-crisis initiative: a proposed moratorium on the use of credit histories in underwriting car, home and health insurance.

An NAIC spokesman said the organization has worked "expeditiously" on the consumer proposal. As for the industry wish list, regulators said they have moved cautiously and approved only items they are convinced are actuarially sound.

Meanwhile, regulators are now turning their attention to another problem area: commercial real estate.

Looking beyond 2009, they are reviewing capital guidelines for mortgages that insurers have directly provided for shopping centers, office buildings, apartments and many other properties.

Last week, the ACLI proposed rules based on the "risk profile of the individual mortgages" rather than the current approach of benchmarking insurers' mortgages to an industry average.

The ACLI estimates that its proposal would have produced slightly lower capital requirement at year-end 2008 had it been in effect, but slightly more for 2009.

Also ahead: jockeying for influence in another change recently approved by the NAIC—doing away with the use of ratings firms to size up risk in life insurers' home-mortgage bonds, for 2009. The NAIC has hired Allianz AG's Pacific Investment Management Co., or Pimco, to crunch the numbers.

The outcome for insurers will depend on assumptions for factors like home-price appreciation. On Monday, regulators are taking public comment on the subject of assumptions.

Consumer activists are expected to push for assumptions that would lead to higher capital requirements. Paul Graham, the ACLI's chief actuary, said the organization likely would provide information "with the hopes of swaying them [regulators] from developing overly bearish assumptions."

Insurers and credit ratings

Insurer regulators may ease capital rules after Pimco analysis

U.S. life insurers may gain a benefit of almost $6 billion after regulators began using analysis from Pacific Investment Management Co. to review the amount of funds the companies need to back claims.

The industry will need about $8.75 billion in capital to cover potential losses tied to residential mortgage-backed securities based on Pimco’s assessment, according to the New York Insurance Department. The figure would have been about $14.5 billion based on a review by ratings firms, said Andy Mais, spokesman for the New York Insurance Department.

The National Association of Insurance Commissioners, a group of state regulators, monitors investments to make sure carriers have enough money to pay claims. The group last year selected Pimco, manager of the world’s largest bond fund, to assess companies’ RMBS portfolios as regulators reduced reliance on ratings firms such as Moody’s Investors Service.

The $8.75 billion sum is a “fair and adequate amount,” said Michael Monahan, director of accounting policy at the American Council of Life Insurers, an industry group that pushed for regulators to change capital requirements. Pimco’s models, which consider home prices and unemployment, are more accurate than credit ratings in determining bond performance, he said.

Life insurers owned more than $145 billion of RMBS without government guarantees in 2008, according to the ACLI. The $8.75 billion figure is an estimate, Mais said, and a more precise figure may be available once regulators have complete industry data from the end of 2009. The Wall Street Journal reported the estimates yesterday.

The Pimco plan was opposed by the Center for Economic Justice, a consumer group, which said fewer funds may be available for policyholders.

“You don’t pick a financial crisis as a time to say, ‘OK let’s relax the capital requirements,’” said Birny Birnbaum, executive director of the center. “That is the time when consumers are most in need of that level of protection that surplus and reserves represent.”

Pimco, with more than $900 billion of managed assets at the end of September, works with financial firms and government entities to evaluate bond and mortgage portfolios. Mark Porterfield, a spokesman for Pimco, didn’t return a call seeking comment.

MetLife Inc., the biggest U.S. life insurer, asked regulators to consider easing capital rules tied to RMBS at a hearing in September. The change in capital rules may give MetLife a benefit of $900 million to $1.2 billion, Colin Devine, an analyst with Citigroup Inc., estimated at a conference in December while asking a question of the insurer’s management.

BlackRock up for role rating risk at insurers

BlackRock Inc., which scored multiple government assignments during the financial crisis, is a contender for another prestigious gig: helping state regulators size up risks in insurers' investments.

The money manager and risk-advisory outfit is among a handful of firms that have talked with officials from the National Association of Insurance Commissioners lately about possibly taking on a slice of work now done by the major ratings firms, according to regulators and an official at the NAIC.

A switch away from the raters -- which a key group of regulators is expected to vote on next week -- would mark yet another power shift on Wall Street in the wake of last fall's market swoon, as regulators and others continue to pinpoint culprits even as times have improved.

The NAIC work entails analyzing risk in bonds backed by residential mortgages that insurers own. The NAIC this year grew disappointed with the ratings agencies after their rapid downgrades of once triple-A-rated mortgage bonds left many insurers holding large amounts of "junk."

NAIC criticizes raters for massive misrating of MBS

National ratings agencies received criticism yesterday at a meeting of the insurance industry for their failure to properly rate residential mortgage-backed securities prior to the crisis.

As part of its fall meeting in Washington this week, the National Association of Insurance Commissioners' ratings agency working group discussed the role of ratings agencies in regulators' evaluation of insurance companies, particularly after securities that were once AAA-rated slumped to below investment-grade quality.

Insurers hold close to $3 trillion in rated bonds, and regulators depend on credit ratings to determine insurers' capital reserves.

State regulators said they would seek input from industry members on how they should use these ratings going forward.

“It is clear the ratings agencies did not know what they were doing when they initially rated the [residential-mortgage-backed securities] issued from 2005 to 2007,” Birny Birnbaum, executive director of the Center for Economic Justice, said yesterday.

Noting that most of those AAA-rated securities are now below investment grade, he asked, “If the rating agencies did not know what they were doing a few years ago, why do we have any confidence that they know what they are doing today?”

Rod Dubitsky, executive vice president of Pimco Advisory, chalked up the ratings agencies' failure to the agencies' reliance on flawed third-party due diligence, the fact that structured finance analysts were too far removed from the business underlying the mortgage loans to detect the coming catastrophe, as well as limited incentives for the ratings agencies to be more conservative.

He suggested that the ratings agencies be required to provide more extensive disclosure of their methodology and be subjected to increased regulatory oversight. An accurate definition of a AAA-rating is also necessary, he said.

Representatives from the major ratings agencies acknowledged the public's poor impression of how structured securities were rated, but they also noted that credit ratings should hardly be used alone as a benchmark for regulators.

“While much of the recent difficulty in these markets has related to the price of these securities — a factor that ratings do not and are not intended to address — defaults and ratings volatility have been much higher with these securities than we anticipated or intended,” said Grace Osborne, managing director and lead analytical manager for North American insurance ratings at Standard and Poor's Ratings Services. “We have been disappointed — and we understand that the market has been disappointed — with the extent of volatility in this area,” she said.

Nevertheless, Ms. Osborne said S&P has made improvements, including establishing an ombudsman to address possible conflicts of interest and implementing “look-back” reviews to confirm the integrity of ratings when analysts leave the firm to work for an issuer.

Moody's says new capital assessments for RMBS could enhance capital adequacy

National Association of Insurance Commissioners’ moves to obtain revised ratings and reassessment of capital requirements for residential-backed mortgage securities (RMBS) could give insurers more financial flexibility, said Moody’s Investors Service.

That assessment in Moody’s Weekly Credit Outlook came after an NAIC committee and task force voted last week to seek a third-party vendor to examine the loss models for RMBS after a life insurers’ trade group argued that nationally recognized rating firms like Moody’s failed to distinguish between securities with a total loss and those projected for minor losses.

American Council of Life Insurers (ACLI) contended the NAIC, in relying on those ratings, has set excessive capital reserve requirements for them.

Moody’s rating agency said some insurers’ reinsurance agreements, bank lines, or other debt instruments may contain covenants based on minimum risk-based capital (RBC) ratios. “Therefore,” Moody’s said, “to the extent that the revised approach for determining RMBS capital charges adds more cushion in its reported RBC ratio, we believe an insurer’s financial flexibility can benefit from this change.”

Last Wednesday, the NAIC’s Valuation Securities Task Force and Financial Conditions Committee voted to solicit third-party loss estimates for insurers’ RMBS investments instead of applying standard loss factors based on credit ratings.

Some in the industry, including the ACLI, have contended that rating agencies only take into account the probability of a default and not the severity of the default, and so sudden downgrades on RMBS by rating agencies have resulted in massive increases in RBC requirements for insurers.

Moody’s said the new proposed approach for RMBS required capital is based upon modeled expected losses—to be performed by an independent modeling firm—for the securities relative to their carrying value on the insurers’ balance sheets. This could help alleviate some of the RBC requirements and thus provide financial flexibility for insurers, the firm advised.

However, Moody’s said the proposal will not have a material rating impact on insurers since there is no real economic effect on capital.

“Although the proposal, if approved, is expected to improve reported RBC, the change will not increase companies’ economic capital. Higher RBC ratios, then, will not lead to upgrades if the increases are due simply to this change in regulatory capital requirements,” according to the rating agency.

Moody’s explained that its analysis of insurers’ capital strength considers RBC ratios as well as economic capital, which is defined as “the cushion available to the insurer to absorb unfavorable deviations in its results.”

Moody’s said it expects required capital for the insurance industry to increase substantially in 2009 due to deterioration in the credit quality of the fixed income sector broadly, but the rating agency acknowledged that proponents of the NAIC proposal believe the RMBS change alone will “noticeably mitigate the increase in capital requirements for the industry.”

The NAIC proposal must still be voted on by the NAIC Executive Committee and Plenary, and implemented by individual states. But Moody’s said the path for approval “seems almost certain.”

Annuities for individual investors

Advisors are finding that interest in investment protection needs has rocketed among clients after so many of them watched the market crush their retirement portfolios last year. The number of advisors saying that clients are asking for help in this area versus previous years is way up. But fewer advisors say clients are asking for estate planning, or long-term-care for the first time. It may be that these are services clients were already well acquainted with.

“Wall Street was not as reliable as we had wanted, and people are looking to rebuild their assets and reconfigure retirement plans,” says Beth Ludden, senior vice president for Long Term Care Product development at Genworth Financial. “Where they might have had the flexiblity to self-insure before, in this current environment every penny is being allocated to income needs and there is an urgency to protect that income flow.”

For clients who don't appear to be able to self-insure, 69 percent of advisors say they recommend purchasing long term care insurance and 42 percent recommend a combination of life and long term care insurance. “Before last fall, long term care insurance was somewhere in back of clients' minds, but healthcare costs and retirement have since moved up front and center,” says Ludden. The survey was conducted by Penton Media, and sponsored by John Hancock.

(Click on article link for a useful graph of data related to this issue.)

History of US insurance regulation

Source: Guy Carpenter's Capital Ideas via Frontiers of Risk Management, August 3, 2009

"Though Benjamin Franklin created the first insurance “company” in the mid-eighteenth century, it took another 100 years for insurance regulation to develop formally. New Hampshire established its state regulator in 1851 … and the U.S. state insurance regulatory system had been born.

Just short of a century later, the U.S. federal government solidified the states’ role in managing insurance business within their borders. The 1945 McCarran-Ferguson Act declared that states should remain the central regulators of the insurance industry. State legislatures were officially granted responsibility for setting broad policy and managing oversight of insurers. Any coordination among states would be conducted through the advisory body of the National Association of Insurance Commissioners (NAIC), which had been established in 1871.

The system worked reasonably well for many years, even though insurers struggled with the administrative burden of complying with the requirements of more than 50 jurisdictions and the resulting patchwork approach to regulation. Eventually, however, as the global financial services industry evolved, regulation needed to change as well. The Financial Modernization Act of 1999 (also known as Gramm-Leach-Bliley) set out to reform the financial services industry by expanding the types of business different institutions could conduct. For example, commercial banks, investment banks, securities firms, and insurance companies were permitted to consolidate. The act also called on state regulators to reform policy so that insurance companies could better compete in the newly integrated financial services marketplace. Although this act left untouched state-level insurance regulation, the federal toe had inched its way under the state regulatory tent.

Over the years, the argument for insurance regulation reform has grown louder and more difficult to ignore. In 2008, then U.S. Treasury Secretary Henry Paulson called for an optional federal charter citing a “clear need for regulatory modernization.” Gradually, movement was being made toward productive federal-level adjustments to the regulatory system to reflect the increased sophistication, worldwide reach, and integration of the insurance marketplace.

But it was not until this year that true change to the traditional U.S. state-based insurance regulatory system seemed imminent. Although the recent White House proposal does not dictate a switch to an optional federal charter, it leaves the option open to Congressional action. The extent of change to the insurance regulatory system remains undetermined, but there seems little doubt that a transformation is in the works and that this year is likely to usher in a new regulatory foundation.

Mutual insurers weathered downturn better

Source: Mutual insurers weathered downturn better than publicly owned peers, Moody’s says Investment News, August 10, 2009

"Mutual life insurance companies fared better than their stockholder-owned counterparts in the recent economic tumult, according to a report from Moody's Investors Service. Mutuals benefited from stronger capitalization, a less-risky business model and fewer disclosure obligations, according to the report titled “Revenge of the Mutuals.”

Additionally, mutuals were subject to fewer downgrades than stock companies, wrote Arthur Fliegelman, vice president and senior credit officer of the New York-based ratings firm.

In terms of product risk, mutual carriers tend to focus on protection products, such as life insurance, which tend to stay in force for lengthy periods and aren't prone to the capital strains that come with equity market fluctuations.

Additionally, many mutuals sell participating, or dividend-paying insurance products, which are less risky to the carrier than products with rich guarantees, according to the report.

On the other hand, stock insurers have focused on annuities — especially variable annuities that offer higher growth rates than plain-vanilla protection products, along with aggressive guarantees, Moody's noted.

Many major VA insurers have faced pressure from the difficult equities market.

But even among those mutuals that handle large amounts of VA business, such as TIAA-CREF, the guarantees aren't as aggressive as the offerings of stock carriers, Moody's noted.

Last year, New York-based TIAA-CREF held the most VA assets: $322 billion, or 28.6% of the market share, according to the ratings agency.

Stock-based carriers MetLife Inc. of New York and Hartford Life Insurance Co. of Simsbury, Conn., followed in second and third place, with $79 billion and $75 billion in VA assets, respectively.

Moody's also noted that though mutuals don't make public their financial reports with the same level of detail that their stock counterparts do, the lack of transparency makes the mutuals less vulnerable to bad press.

Their stock counterparts, on the other hand, have suffered from publicity about unrealized losses and other-than-temporary impairments in their investment portfolios.

Mutuals have also beaten their stock competitors on the ratings front. Just three carriers hold Moody's top insurer financial strength rating, Aaa, and all three are mutuals: TIAA-CREF Group, New York Life Group and Northwestern Mutual Group in Milwaukee."

Bank holding companies had $3 billion income from insurance 1Q09

Source: Investment News, August4, 2009

Bank holding companies had $3.03B in income from insurance brokerage fees in first quarter The amount fell from a year earlier, but rose from the fourth quarter of 2008.

New Calif. law discourages stranger-originated life insurance transactions

"California Gov. Arnold Schwarzenegger yesterday signed into law a bill that discourages stranger-originated life insurance transactions. Senate Bill 98, which was written by state Sen. Ron Calderon, makes clarifications on insurable interest. Specifically, if the beneficiary of a trust or a special purpose entity doesn’t have an insurable interest in an insured individual, then that beneficiary is violating state laws.

The bill also recasts existing law to redefine viatical settlements as life settlements. Additionally, the bill has regulatory provisions on the life settlement contracts, including those that relate to the confidentiality of the policyholder’s medical and financial information.

The bill had passed unanimously with votes of 54-0 in the Assembly and 40-0 in the Senate.

In stranger-originated life insurance transactions, elderly individuals purchase insurance with the intent of selling the policy to an investor on the secondary market. That investor takes on the payments of the insured’s premiums and collects the death benefit upon the insured’s demise.


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