Andrew N. Mais, Insurance subject matter specialist, Deloitte Services LP, June 8, 2016
When you come to a fork in the road, take it.
There are few issues in life that cannot be resolved through a referral to the wit and wisdom of that greatest of American philosophers, Yogi Berra. My theory is that Yogi, a catcher, like a great consultant was always simultaneously deeply involved in the details of any given play while maintaining the necessary overarching view of the flow of the game to manage the outcome.
I was never much good at baseball, but having sat through the past decade of regulatory change in insurance, both as a regulator and here at Deloitte, I’m starting to understand how Yogi saw things. The play-by-play has been fascinating, especially in the international arena, where the National Association of Insurance Commissioners (NAIC) has periodically adjusted its stance to preserve much that US state regulators see as good in US insurance regulation in the face of often unfavorable headwinds blowing across the Atlantic, abetted by the G-20’s Financial Stability Board (FSB).
The NAIC seemed to be playing a losing game, especially after the entry of the federal players including the Federal Reserve System (Fed). Inside baseball observers expected the feds to largely agree with the judgment of their compatriots on the FSB and sweep aside the concerns of state regulators.
Standing at the podium at the NAIC’s International Insurance Forum recently, Daniel Tarullo, a member of the Board of Governors of the Fed who chairs the Standing Committee on Supervisory and Regulatory Cooperation of the FSB, upended expectations. He unveiled a vision for capital standards that was far closer to that championed by the NAIC than some other feared possibilities.
With Yoshi Kawai, secretary-general of the International Association of Insurance Supervisors (IAIS), and Victoria Saporta, director of Financial Policy at the Prudential Policy Directorate at the Bank of England, who chairs the IAIS Executive Committee, sitting in the audience, Mr. Tarullo unloaded the big guns.
He explicitly said—as the NAIC long has—that traditional insurance activities do not create systemic risk. He also said the IAIS insurance capital standards (ICS) were “insufficiently developed to be an option,”1 and expressed concerns about Solvency II, including that it “may introduce excessive volatility… (and) could be quite pro-cyclical.”2
Now that the Fed Board has approved publishing the proposals Tarullo previewed, it is clear that the worst fears of US insurance companies have not come true. The Fed has stepped in implicitly on the side of state regulators and US insurers against attempts to impose a one-size-fits-all regulatory system from without. One Fed Governor at the Board meeting expressed agreement with the Fed staff’s decision not to follow the approach taken by Europe and Solvency II. One former regulator noted online after the NAIC meeting that this development meant Team USA could finally operate from a position of strength.
That means US insurers may be the beneficiaries of an international regulatory system that more fairly recognizes the strengths of a US regulatory system that serves the world’s largest insurance market, with 36 percent of the world’s premium volume.
But it does not mean it is time for “Mission Accomplished” banners. As Yogi would say, it ain’t over till it’s over. This is at best the seventh inning stretch. The rules of the game are still changing, even if more favorably. US insurers still need to prepare for the certainty of new capital regimes, and these latest actions argue for more intense preparation, not complacency.
Much remains to be done. In particular, there must be concern about the effect of this on the negotiations for a covered agreement and implicitly for equivalency under Solvency II. A trade war is in no one’s best interests, but when has that ever stopped a war?
For US insurers operating multinationally—as more will since emerging markets appear to offer the most growth potential—there is also the concern about having to face conflicting capital and other compliance requirements and associated costs.
What do you think about what’s next? Will the Europeans react by pulling up their drawbridge and trying to impose new rules on US insurers? Will US insurers find themselves caught between a rock and a hard place as the two sets of regulators battle? Or will this lead to an acknowledgement that any international standard has to be flexible enough to accommodate various effective regulatory regimes?
I’ll grab some peanuts and Cracker Jack® while I wait to hear from you.
1Governor Daniel K. Tarullo, “Speech at the National Association of Insurance Commissioner’s International Insurance Forum,” Washington, D.C. on May 20, 2016
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via Quick Look financial services blog