18 March 2013

Risk.net: Group supervision and solvency vex US and EU regulatory talks

The US and Europe are at loggerheads over finding a common regulatory framework for insurers. But as they struggle to come to a resolution the IAIS is looming, with its own approach to global regulation that could undermine them both.

Europeans and Americans have hardly seen eye-to-eye on regulatory reform. In recent years, a flurry of new initiatives has been proposed on both sides of the Atlantic to tackle the issues of solvency and systemic risk. However, neither jurisdiction has warmed to the ideas of the other. When a delegation from the European Insurance and Occupational Pensions Authority (EIOPA) ventured to the US to discuss the issue of US equivalence with Solvency II with the National Association of Insurance Commissioners (NAIC), they were flatly rebuffed. Subsequently, in February 2012, the European Commission admitted that a “different approach” was needed to determine whether the US’s regime was equivalent.

Since then, pressure has grown on both jurisdictions to find some common ground. After all, the NAIC and EIOPA are not the only parties with an interest in the development of international regulation. European insurers have been warning of the commercial implications of the US not being deemed to be equivalent to Solvency II. At the same time, the International Association of Insurance Supervisors (IAIS), based in Basel, Switzerland, has grand designs for the supervision of global systemically important insurers and internationally active insurance groups (IAIGs). Its plans for a common supervisory framework for international insurance groups (ComFrame) are gaining momentum and could have broad ramifications for insurance regulation.

Fortunately, stakeholders in each jurisdiction realise the dangers of being trapped in a deadlock for perpetuity. In an effort to break it, in January 2012 the EU-US Dialogue Project was launched with the noble aim of “enhancing understanding and cooperation for the benefit of insurance consumers, business opportunity and effective supervision”. Throughout the year, a host of organisations from both sides of the Atlantic – including EIOPA and the NAIC – engaged in a fact-finding mission to discover the key similarities and differences between the supervisory regimes in Europe and the US.

Despite the existing tensions over Solvency II, the discussions appear to be bearing fruit. In December, EIOPA published a report on the process entitled The Way Forward, listing seven areas where the project’s stakeholders believed there was potential for greater harmonisation of the two regimes. These were: professional secrecy and confidentiality; group supervision; solvency and capital requirements; reinsurance and collateral requirements; supervisory reporting and data collection; peer review; and third-party review. Technical committees have been exploring these areas, identifying the parts of each regime upon which future agreements could be built, and those areas that pose barriers to progress. A detailed action plan for taking the project forward will be released in the second quarter of 2013.

According to the reports published by the technical committees, progress has been made in a number of areas, especially with regard to a common approach to internal risk governance as embodied in the Own Risk and Solvency Assessment (ORSA). However, major hurdles stand in the way of a common agreement on a number of other supervisory practices, which threaten to keep the ideal of a unified approach to regulation a distant pipe dream. It seems the weight of decades of entrenched practice on both sides of the Atlantic is proving hard to shift.

Solvency requirements is arguably the area where the differences between the EU and US approach to regulation seem unbridgeable. In the US, insurers are not regulated on a ‘no-failures’ basis and state supervisors focus their attention on ensuring those that do fail are sufficiently capitalised to run off without event. While the domestic industry is happy with the status quo, the failure of AIG in 2008 found the system wanting.

Is the EU-US Dialogue Project doomed to failure? On the key issues, common agreement seems out of policy-makers’ reach for now. However, the quest for harmonisation may soon be taken out of EIOPA’s and the NAIC’s hands. The IAIS is steaming ahead with its proposals for ComFrame, and the hot topic of systemic risk could impose a group supervisory framework on US insurers with or without their consent.

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