Florida Insurance Commissioner Kevin McCarty championed flexible state insurance regulation and warned against “one-size-fits-all” bank-like regulation for insurers in recent testimony before the U.S. Senate and House of Representatives in Washington, D.C., on both domestic and international insurance issues.
McCarty spoke on behalf of the National Association of Insurance Commissioners, for which he is a past president, to the U.S. Senate Committee on Banking, Housing, and Urban Affairs, on April 28 and before the U.S. House of Representatives Subcommittee on Housing and Insurance on April 29.
His testimonies before the Senate and House Committees discussed “The State of the Insurance Industry and Insurance Regulation,” and “The Impact of International Regulatory Standards on the Competitiveness of U.S. Insurers,” respectively.
“Insurance is critical to the U.S. economy and plays an equally important role in global markets. The U.S. insurance market is the largest and most competitive in the world, with $1.8 trillion in premium volume and thousands of insurers writing policies,” he said to the committees. “State insurance regulators supervise nearly a third of all global premium, and taken individually, U.S. states make up more than 24 of the world’s 50 largest insurance markets.”
McCarty said his own state of Florida is the 12th largest insurance jurisdiction worldwide by premium volume.
State insurance regulators, who he said work closely together on a regular basis, oppose imposing a “one-size-fits-all bank-centric set of regulations on insurers” and instead look to focus on the importance of company and product specific analysis and examination. While insurer capital requirements are important, McCarty said, such requirements are not a substitute for the other tools that are available to regulators and can even be detrimental to companies and harmful to policyholders if imposed incorrectly. They can also cause insurers to take more risk.
“We are concerned that taking a uniform regulatory approach that treats insurers more like banks may actually encourage new risk-taking in the insurance industry,” he said.
The NAIC and its members are actively working with federal and international counterparts to ensure that the current national state-based system has a “prominent voice” in the development and implementation of domestic and global capital standards and that they are “adaptable to our markets and benefit our consumers,” he said.
McCarty said that the U.S. system’s focus is on protecting policyholders by ensuring the solvency of insurers and their ability to pay insurance claims. The system works because it takes into consideration the differences between insurance companies and other financial institutions, as well as the variability of insurance products, he said.
“The insurance regulatory system is purposely flexible to address the depth and breadth of these differences,” he told the Committees.
McCarty said insurance is not subject to the same risks as banks, such as “run-on-the-bank” scenarios, because of policy loan limitations, surrender/withdrawal penalties, and additional taxes. Insurers also diversify their portfolios so only a portion of a company’s products would be exposed to a small run-risk.
Another critical distinction between banking financial institutions and the insurance industry, McCarty said, is that insurance products do not transform short term liabilities into longer term assets, unlike banking products.
“A key reason many other financial firms suffered during the financial crisis was that the duration of their assets and liabilities were not matched in a way that enabled them to fund their liabilities when they came due,” he said.
McCarty said the differences among financial institutions and their products offered are important and should be considered when designing regulations. He said state insurance regulators want to make sure insurance policyholders’ assets are protected when an insurer operates within a large, diverse financial group. The NAIC supports the Policyholder Protection Act that is currently before the Senate for that reason.
“It is critical that the regulatory walls around legal entity insurers that have protected policyholders for decades remain intact regardless of an insurer’s organizational structure or financial circumstance,” he said.
McCarty also argued that Federal Reserve capital rules should be appropriate for the insurance business model, and urged the Fed to work closely with state insurance regulators to ensure their standards complement regulators’ existing authority. He said there have been constructive discussions with the Fed since the passage of the Insurance Capital Standards Classification Act last year. This law gives flexibility to the Federal Reserve to tailor its capital rules for insurers.
“We are hopeful that the Federal Reserve will utilize this flexibility to apply capital rules to these entities that are consistent with the insurance business model and our legal entity regulation and we are committed to assisting them in this important endeavor,” he said.
In the realm of international regulation, he expressed concern before both committees over the regulatory changes proposed by the International Association of Insurance Supervisors (IAIS). He said the IAIS wans to impose new requirements on internationally active groups that are not deemed “too big to fail,” including many firms based in the U.S. The IAIS is also looking to develop a global insurance capital standard as part of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).
He said state insurance regulators are concerned with the development of international capital standards for the insurance industry, as well as the process and speed with which the IAIS is developing them.
“We have serious concerns about the aggressive timeline of developing a global capital standard given legal, regulatory, and accounting differences around the globe, but are fully engaged in the process to ensure that any development appropriately reflects the risk characteristics of the underlying business and does not undermine legal entity capital requirements in the U.S.,” he said.
McCarty said the Federal Reserve’s implementation of capital rules will be of crucial importance to the international discussions, but insurance regulators have their own responsibilities to the U.S. insurance sector, and will not implement any international standards that are inconsistent with “our time-tested solvency regime that has provided long-standing protection to policyholders and ensured a competitive and stable U.S. insurance marketplace.”
McCarty discussed the E.U.-U.S. Insurance Project before the House Subcommittee. He said there is the ability to enhance the transatlantic insurance markets with this project but acknowledged there are still many questions about how the EU will treat U.S. firms under its new Solvency II oversight regime that becomes effective in 2015.
McCarty wrapped up his testimony before the Senate with comments on the importance of transparency and the opposition the state regulators expressed over the IAIS’ decision to limit stakeholder engagement. He said states are equally as concerned with the lack of transparency at the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system.
“While we appreciate the role of the Federal Reserve, Treasury and the Securities and Exchange Commission as members of the FSB, state insurance regulators supervise 100 percent of the private insurance market in the United States and to date have had only limited access into FSB discussions relevant to our sector,” he said. “Given the role of the FSB in designating three U.S. insurers as globally systemically important insurers, we find the lack of support for our inclusion at the FSB by our federal colleagues troubling and not reflective of the best interests of U.S. insurers and policyholders.”
McCarty serves as chair of the newly-formed ComFrame Development and Analysis Working Group, formed last year by the NAIC to provide ongoing review and technical and strategic input on ComFrame and the international group capital developments. CDAWG is also exploring group capital concepts appropriate for U.S.-based internationally active insurance groups.
McCarty said U.S. insurance regulators have a “strong track record of effective collaboration and supervision” and noted that the NAIC is committed to continue working with its federal and international counterparts to ensure “open, competitive, and stable markets around the world.”
McCarty said consistency in regulation globally is important, but preserving regulatory independence and diversity of thought can also serve as a buffer against contagion or one-size-fits all behaviors by financial firms that can result from one-size-fits-all regulatory approaches. “U.S. state insurance regulation has a strong track record of evolving to meet the challenges posed by dynamic markets, and we continue to believe that well-regulated markets, both here and abroad, make for well-protected policyholders.”
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