18 June 2012

Insurance Journal: Economic crisis challenges harmonisation of US regulations, EU's Solvency II

The EU's Solvency II regulations get most of the headlines, but there are other regulatory bodies which are trying to modernise and harmonise the regulations for global insurance companies. Their task has been made even more difficult by the prolonged economic crisis.

As the re/insurance industry is more globalised than ever, there is a need for some kind of uniformity, but what form this will take, and how it could be accomplished, remain as issues to be resolved. The International Association of Insurance Supervisors (IAIS) has been working on this aspect of global regulation for some time, and it has had a good deal of success, but globally harmonised insurance regulation is still a long way off.

Any future progress in this area will involve Solvency II. The Director Credit Institutions & Insurance Supervision with the Central Bank of Ireland, Fiona Muldoon, in her keynote speech at the European Insurance Forum called for “a common, agreed approach for insurance supervision". She described the arrival of Solvency II as “altering the insurance landscape”, as it will address the “volatility” inherent in risk assessment, and will “require better assessment of balance sheet risks; more reality and more transparency".

James Wrynn, New York’s former Superintendent of Insurance, now a partner with the law firm of Goldberg Segalla, expressed his view at the Forum in Dublin. He agreed that certain aspects of Solvency II would eventually find their way into US law, but, “it will not become a mirror image of Solvency II; some of it will be adopted, and vice versa”, as US provisions will find their way into global insurance regulation.

Muldoon described the ideal situation as finding “a common, agreed approach for supervision”. How such a consensus can be reached when the economic situation changes almost daily poses a real problem. “Regulations evolve much faster in a financial crisis”, Wrynn said. But he also warned of the danger in trying to act under such circumstances. “There are benefits if we get it right”, he said, “but it could make things worse if we get it wrong".

The appearance of Solvency II and the efforts to bring about greater harmony in insurance regulation have had the additional consequence of putting the US system in a new light. Wrynn described it as the “most comprehensive” in the world, adding that it’s also in many ways the most practical, as it focuses on an “outcomes basis”.

Solvency II is an attempt to do something similar for all of the EU’s insurance industry, a far more comprehensive goal than anything the US has tried. There are needed provisions in it, which to some extent will eventually find their way into US regulations – mainly greater use of risk management on both coverage and enterprise levels, and the need for greater transparency.

Does that mean that the US will seek actual equivalency with Solvency II? No, it won’t, as it would be impossible, even with the full backing of the NAIC, to get all 50 plus one regulatory bodies to reach any meaningful agreement. As Wrynn pointed out, US regulations “aren’t going to become a ‘mirror image’ of Solvency II”, but they will be a source for some regulatory changes over time.

In the end, the US and the EU will most likely reach a ‘modus vivendi’ that both entities can accept. Given the overriding issues posed by the parlous state of their respective economies, neither entity wants or needs a distracting and unnecessary fight over insurance regulation.

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