Status of the Federal Insurance Office and the Federal Advisory Committee on Insurance

08.03.12

NEW YORK, August 03, 2012 – Michael Nelson, chairman of law firm Nelson Levine de Luca & Hamilton, represents insurers and reinsurers in regulatory matters as well as in complex litigation in multiple jurisdictions throughout the country. His firm publishes a newsletter covering the latest developments at the FIO, and below he addresses pressing questions about the Federal Insurance Office (FIO) and the Federal Advisory Committee on Insurance (FACI).

What should we expect from the upcoming meeting of the FACI?

According to the agenda, FACI members are expected to continue their discussions from the March 30th meeting and to clarify FACI’s assignments going forward. The committee, as a whole, was asked by FIO Director Michael McRaith to study the possible effects of worldwide demographic changes, including the aging of the population, as well how insurers may look to the emerging middle class in developing economies and international markets for growth.

We can expect the subcommittees to report on their progress. Two subcommittees were formed at the initial meeting, the Affordability and Accessibility of Insurance Subcommittee and the International Regulatory Balance Subcommittee. There has been some speculation that the modernization report could be issued prior to the meeting. If so, we would expect the contents of the report to be discussed by the committee.

Do we know what the FACI subcommittee on International Regulatory Balance has been working on?

There is very little publicly available information. What we do know is that Director McRaith is a member of the executive committee of the International Association of Insurance Supervisors and has been working with the IAIS on various issues. His participation in the IAIS could be a topic for discussion.

Recently, the IAIS released several documents that may affect how internationally active insurance groups are regulated. These include a paper that examines the relationship between reinsurance and financial stability, a proposal for a methodology to identify global systemically important insurers and a draft proposal for a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).

What is ComFrame?

The IAIS describes ComFrame as an internationally coherent framework for the supervision of internationally active insurance groups. We call these groups IAIGs. Regulators realized they did not have a way to efficiently supervise these groups across multiple borders. With ComFrame, regulators from different countries can collaborate and coordinate efforts and exchange information about an insurer’s solvency, corporate structure, and governance processes. The goal is to have a more effective, integrated, and efficient way to regulate IAIGs at the group level.

How will ComFrame affect U.S. insurers?

U.S. insurers that are part of an internationally active group may be subject to supervisory colleges involving regulators from foreign countries. This means that in addition to being regulated by their domestic regulators, those U.S. insurers would be subject to coordinated prudential supervision by the regulators of each country in which the group has an insurer. Under ComFrame, regulators will consider groups that have more than $50 billion in assets or $10 billion in gross premium that are active in three countries and write at least 10% of premiums outside of their home jurisdiction. ComFrame also provides a method for international regulators to organize supervisory colleges for smaller insurers.

Are U.S insurance regulators required to participate in ComFrame?

No, not currently, but they have good reason to want to participate in the supervisory colleges. Ever since the financial crisis, insurance regulators have been developing protocols for supervising the insurance industry at the group level. In fact, the NAIC uses the phrase “window and walls.” Regulators want windows to see all entities within a holding company, including non-insurance entities. They want walls to protect the assets of each insurance company. State regulators will participate in ComFrame because it allows them to supervise at the group level even when a group consists of insurance companies domiciled in different countries. Without a framework like ComFrame, it would be very difficult to get regulators of different countries to coordinate their efforts. As regulators focus more and more on group supervision, ComFrame should reduce redundancies in regulation.

To what extent can the FIO be expected to be involved with other international issues?

The FIO's role as an advocate for the U.S. insurance industry internationally is arguably the Office's most important task. Director McRaith has indicated that he has been working with the United States Trade Representative (USTR) to address several concerns of the U.S. insurance industry, and specifically mentioned meeting with the China Insurance Regulatory Commission, the privatization of Japan Postal Insurance Company and the limits on the reinsurance that can be written in Brazil by foreign insurers. The FIO has also been working with the European Insurance and Occupational Pensions Authority (EIOPA) to address conflicts between the U.S. and EU insurance regulatory systems.

Another issue FIO could address is collateral requirements for alien reinsurers to write in the U.S. The NAIC successfully adopted a model law that would reduce those requirements for many reinsurers, but only a handful of states have enacted the necessary laws to make those changes.