FIO Focus, Issue No. 23
EU-U.S. Dialogue Steering Committee Releases Reports of Technical Committees
Devoted to exploring the progress of the modernization of the insurance industry, FIO Focus provides information and insights about the organizations and issues that are driving change and influencing the future of the industry.
EU-U.S. Dialogue Steering Committee Releases Reports of Technical Committees
On September 27, 2012, the Steering Committee of the EU-U.S. Dialogue Project released a compilation of seven reports comparing the insurance supervisory and regulatory systems of the European Union (EU) and United States (U.S.).
A public hearing on the reports will be held in Washington D.C. on October 12, 2012, and in Brussels on October 16, 2012. The Steering Committee has requested comments regarding:
- The accuracy of the reports.
- The completeness of the reports – whether the reports contain all key aspects of the insurance regulatory/supervisory regimes.
- Whether the key aspects identified in the reports are fairly classified as either a commonality or a difference between the regimes.
- Whether the different supervisory regimes for each area of regulation should move towards convergence or improved harmonization. If so, how should that convergence or harmonization occur?
Interested parties will have the opportunity to provide an oral statement at the hearing. Alternatively, interested parties can submit written statements by October 28, 2012.
The EU-U.S. Dialogue Project began in early 2012 as a means to increase a mutual understanding about the respective regulatory systems, specifically Solvency II, and the U.S. state-based system. A Steering Committee made up of three representatives from the U.S. and three representatives from the EU is driving the project. Members of the Steering Committee include:
- Gabriel Bernardino, Chairman of the European Insurance and Occupational Pensions Authority (EIOPA)
- Edward Forshaw, Manager in the Prudential Policy Division, UK Financial Services Authority and EIOPA Equivalence Committee Chair
- Karel Van Hulle, Head of Unit for Insurance and Pensions, Directorate-General Internal Market and Services, European Commission (EC)
- Kevin M. McCarty, Commissioner, Office of Insurance Regulation, State of Florida and President of the National Association of Insurance Commissioners (NAIC)
- Michael McRaith, Director, Federal Insurance Office (FIO), U.S. Department of the Treasury
- Therese M. (Terri) Vaughan, Chief Executive Officer, NAIC
The Steering Committee met several times to guide the EU-U.S. Dialogue Project. Technical committees composed of insurance regulatory experts from the U.S. and EU were formed and tasked with identifying key similarities and differences between the two systems. A separate technical committee was formed to address each of the following topics:
- Group supervision
- Capital and use of internal models
- Reinsurance, including collateral
- Professional secrecy/confidentiality
- Financial reporting, data collection and analysis
- Supervisory peer reviews
- Independent audits, actuarial reports and on-site regulatory examinations
A separate report was prepared for every topic. Each report provides an overview of the U.S. approach and EU approach as well as key commonalities and differences between the two systems.
In May 2012, Director McRaith explained to the House Financial Services Committee that the technical committee reports will drive the discussion regarding “regulatory areas for which increased convergence can be expected, the areas for which enhanced understanding will be the goal and those areas for which convergence or harmonization will not be immediately contemplated.” This sentiment is consistent with the written introduction to the reports.
The reports found significant similarities between the U.S. and EU systems, although some notable differences were also identified. Examples of some of the differences between the U.S. and EU systems identified in the technical committee reports are outlined below.
Professional Secrecy and Confidentiality
In the EU, there is a general presumption that information submitted to the regulator is confidential. In the U.S., the general presumption is that information should be publicly available, subject to certain exceptions.
- Under Solvency II, insurers are regulated at the group level. In the U.S., insurers are regulated primarily at the entity level, although the NAIC’s Insurance Holding Company System Model Act provides a method for U.S. regulators to monitor relevant group activity.
- Solvency II contains explicit group capital requirements. There is no similar requirement in the U.S. system.
- EU requirements for Own Risk Solvency Assessments (ORSA) are more prescriptive than current U.S. ORSA requirements.
- Solvency II requires the reporting of all significant intra-group transactions. In the U.S., only certain transactions that meet certain thresholds need to be reported.
- Group supervisors in the EU, but not in the U.S., have authority over non-regulated entities.
Solvency and Capital Requirements
- The committees found significant differences between the capital requirements and determinations under the two systems. Solvency II includes two independently calculated capital level formulas: Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR). The U.S. system relies on the Risk Based Capital (RBC) calculation that measures the minimum amount of capital, but is not considered an indicator of financial strength.
- The SCR formula includes all quantifiable risks while only material risks are included the RBC formula. Currency risk and catastrophic risk are not currently factors in the RBC.
- Solvency assessment under Solvency II is based upon an economic balance sheet. Regulatory reporting in the U.S. is based on statutory accounting principles.
Reinsurance and Collateral Requirements
- In the EU, reinsurers are generally limited to writing reinsurance and related operations. In the U.S., reinsurers are generally permitted to write insurance on a direct basis.
- In the EU, decisions about third country equivalence will be undertaken by the EC and will be binding on member states. In the U.S., each state may independently evaluate non-U.S. jurisdictions.
- For U.S. ceding companies to take credit for reinsurance from non-admitted reinsurers, collateral is necessary. In the EU, credit for reinsurance will be granted to EU insurers that obtain reinsurance from insurers other countries that have been determined to be equivalent.
Supervisory Reporting, Data Collection and Analysis and Disclosure
- The U.S. system includes an established and rigorous reporting, data collection and analysis function. The EU is in the process of developing uniform systems for prudential reporting and data collection.
- The EU and U.S. systems have different reporting requirements, particularly with respect to governance issues.
- In the EU, insurance groups will file reports that are similar to those required for individual insurance entities. There is not a similar requirement in the U.S.
Supervisory Peer Reviews
- The EU system of reviewing the regulatory systems of member states includes a review of prudential regulation and market conduct issues. The U.S. accreditation program focuses on prudential regulation.
- The U.S. accreditation program is voluntary. EU member states must participate in peer reviews.
Independent Third-Party Review and Supervisory On-Site Inspection
- Under Solvency II, EU insurers must maintain an internal audit function. Not all U.S. insurers are subject to such a requirement.
- Every U.S. insurer is subject to a financial examination at least every five years. The EU does not have a frequency requirement for financial examinations.
- The U.S. provides insurers with the opportunity to review, comment on and appeal the findings of onsite evaluations. Under Solvency II, regulators are not required to share their findings with insurers.