European Insurance Regulation Threatens U.S. System, Connecticut Regulator Warns

August 17, 2011

Adoption of European regulatory changes known as “Solvency II” as currently proposed could weaken U.S. consumer protections and stability of insurers, a state insurance commissioner has warned.

Connecticut Insurance Commissioner Thomas B. Leonardi told fellow regulators and other industry members that it is “unfortunate” that the debate over equivalent standards for insurers in the United States and the European Union has been shaped in the context of a world-wide marketing campaign for the universal adoption of “Solvency II.”

“In reality, Solvency II is a much-needed effort to modernize an admittedly outmoded European regulatory regime, but it has been aggressively marketed by some as the ‘be all and end all’ of insurance regulation,” said Leonardi.

“In my opinion, this creates not only a problem but does a disservice to the broader challenge of achieving true equivalence on an outcomes basis.”

Leonardi said having the U.S. regulatory process recognized as equivalent by its European regulatory counterparts is important if Connecticut is to maintain its strong international competitive presence. In terms of direct written premiums, Connecticut-based insurers account for $156.3 billion, ranking the state eighth in the world on its own if it was ranked as a nation and larger than the written premium from India and Spain combined.

If U.S. state-based regulations are not recognized by European regulators as equal, U.S. insurers would have to put up more capital to cover claims.

Leonardi was appointed insurance commissioner by Gov. Dannel P. Malloy in February, 2011. Prior to his appointment, Leonardi served as chairman and CEO of a Hartford venture capital company that he helped form and launch in 1989.

Leonardi addressed the equivalency issue this week during an online forum hosted by Price Waterhouse Coopers. The discussion focused on three significant changes of insurance group supervision: potential impact of equivalence of Solvency II; supervisory framework and capital requirements of groups.

“Mutual equivalence for both the EU and the U.S. is very important. Not being found equivalent would have a significant impact on how cross-border firms operate and ultimately a significant negative impact on consumers. But one size does not fit all and any equivalence process must respect the different legal and regulatory systems that exist around the globe,” Leonardi said.

According to the National Association of Insurance Commissioners (NAIC), the U.S. represents 33.56 percent of the worldwide insurance market share, followed by Japan with 11.67 percent and the United Kingdom with 6.48 percent. There are 24 U.S. states that are among the top 50 rankings of worldwide premium volume.

“I think U.S. regulators need to stop apologizing for our regulatory system, one that has been in place for more than 140 years and has continually adjusted to meet the changing demands of the insurance marketplace,” Leonard said. “While not perfect, our national, state-based system has worked remarkably well, even in the market downturn of 2001 and the financial crisis of 2008. By contrast, Solvency II currently exists on paper only. It has yet to be implemented or tested in the real world and, in that respect, it is a theory in progress. Whether Solvency II achieves its best intentions—or delivers unintended consequences remains to be seen.”

Instead, he said the focus must be on achieving the objectives of regulation – consumer protection, solvency, liquidity and capital adequacy – and not on specific methods of prescriptive approaches. He said it makes “no sense” to implement regulatory changes without first validating or testing whether they are an appropriate fit.

“It makes more sense for countries to be assessed against international standards and not to have multiple regional equivalence assessments, which could potentially overlap or conflict,” Leonardi said. “I believe in the long-term objective of global regulatory convergence on an outcomes basis, one that protects consumers and promotes stability.”

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