17 December 2013

Risk.net: Federal Insurance Office calls for enhanced role in group supervision

The US federal government should take an expanded role in the supervision of inter-state insurance groups and in international regulatory matters, according to the much-delayed report published by the Federal Insurance Office (FIO).

The report, 'How to Modernize and Improve the System of Insurance Regulation in the United States', which is nearly a year late, outlines 18 areas where state supervisors should improve their regulation of insurers and nine areas where direct federal involvement is necessary. It calls for improved consistency of solvency oversight by state regulators, and recommends the establishment of an independent, third-party review mechanism for the National Association of Insurance Commissioners' (NAIC) scheme for accrediting state regulators.

The FIO also proposes a "uniform and transparent" regime for the supervision of reinsurance captives, and the development of standards for the appropriate use of data for the pricing of personal lines insurance, among others.

In addition, federal bodies should be involved in the supervision of large national and internationally active insurers through supervisory colleges, the development of reinsurance collateral requirements, oversight of the National Association of Registered Agents and Brokers Reform Act, and the direct regulation of mortgage insurers.

The question of whether regulation of the insurance industry should be directed at the state or federal level has obsessed the US industry since the near-collapse of American International Group (AIG) in 2009. The failure of the world's largest insurer at that time underlined the need for there to be a single regulator to take responsibility for understanding and supervising insurance enterprises as a whole. The debate has since raged over whether federal or state authorities should hold this responsibility.

Supporters of increased federal involvement argue that the state-based system lacks uniformity and creates inefficiencies. State regulation can often be duplicative or inconsistent and create opportunities for arbitrage between jurisdictions, the FIO report argues. Per dollar of premium, the cost of the state-based insurance regulatory system is approximately 6.8 times greater for an insurer operating in the US than for an insurer operating in the UK, the report says.

But the report also explains that since the majority of insurance contracts written in the US are local in nature, state regulators are best positioned to respond to consumer complaints and that mechanisms for co-operation between jurisdictions to reduce inefficiencies already exist.

On supervisory colleges, the report argues that the state system has "inherent limitations" restricting any particular state from overseeing a multi-jurisdictional insurance group. As the FIO has a statutory mission to monitor all aspects of the insurance industry, it should have a role in the supervisory colleges established among regulators to oversee this type of group.

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FIO-report

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