|September 24, 2013|
Previously published on September 23, 2013
The National Association of Insurance Commissioners ("NAIC") 2013 Summer National Meeting, which was held in late August, saw a continuation of the debate over major insurance regulatory reforms. The first of these reforms involves supervision (regulation) of insurance and non-insurance entities that operate in global insurance groups. The NAIC, along with much of the domestic insurance industry, continues to support regulation of insurance groups through the NAIC Model Holding Company Act, which indirectly regulates groups by requiring advance approval of transactions between locally domiciled insurance entities and their affiliates. On the other hand, many international regulatory bodies, such as the Financial Stability Board ("FSB") and the International Association of Insurance Supervisors ("IAIS"), advocate group-wide supervision. Group-wide supervision involves direct regulatory power over holding companies and other non-regulated entities, and can result in enhanced capital requirements for the group. Another supervisory tool, supervisory colleges, are favored by both domestic and international regulators. The differing philosophies of the U.S. and international regulatory communities make it challenging, however, to foresee the ultimate success of international supervisory colleges.
A further complication is the move toward regulation by federal banking authorities of insurers that fall into the "too big to fail" category. In this regard, on September 20, 2013, the U.S. Treasury Department's Financial Stability Oversight Council ("FSOC") added Prudential Financial, Inc. ("Prudential") to the list of non-bank "systemically important financial institutions" ("SIFIs"). Prudential joins American International Group, Inc. ("AIG") and General Electric Capital Corporation on the list of SIFIs; the group may also be expanded to include MetLife, Inc. According to the FSOC's announcement of its action, designation as a SIFI subjects a company to supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve"), and to enhanced prudential standards and supervision on a consolidated, enterprise-wide basis. FSOC members with a background in the insurance industry voted against designating Prudential as a SIFI. More generally, both the domestic insurance regulatory community and the insurance industry are fearful of broader application of "bank-centric" regulation and capital standards to insurance companies.
Another controversial issue for the NAIC is the adoption of Principle-Based Reserving ("PBR") requirements for life insurance companies. As we reported in prior Duane Morris Alerts, the NAIC had a contentious vote at the winter meeting with New York, California and Texas opposed to PBR, notwithstanding the support by a great majority of the other states. Shortly following the August NAIC meeting, New York announced its intention to drop out of an NAIC agreement to adopt a limited form of PBR, and to continue its opposition to PBR generally. In the view of New York regulators, the new PBR framework does not work, and will result in dramatically reduced reserves. New York also stated that it continues to question the use of reinsurance by life insurers with captive reinsurers in order to address reserve issues. New York requested other states to join it in a moratorium on captive authorizations. The NAIC responded strongly that this request was not embraced by the membership, although the NAIC has established a working group that continues to study the use of captives by life insurers.
What follows is a detailed Alert on these regulatory activities, which are anticipated to continue to have both national and global impact.
Group Supervision in the Insurance Sector
In light of the events of 2007-2008, the international financial services regulatory community, represented by the FSB, advocates supervision of banking and insurance enterprises and financial conglomerates on a group-wide basis. The FSB has focused on the "importance of supervising the whole group, taking into account all risks from all entities within the group which may impact the financial position of the group," in order to "avoid gaps in regulation and supervision and/or potential for regulatory arbitrage."
The FSB's viewpoint on the risks posed by insurance groups is derived from the AIG case, in which a London-based non-insurance subsidiary, AIG Financial Products ("AIGFP"), was used to write credit default swaps. AIGFP was able to operate outside of any effective regulation for two reasons: First, as it was not an insurer, it was not directly subject to insurance regulation. Second, because the AIG group as a whole came under the oversight of the U.S. Office of Thrift Supervision, which had no practical ability to regulate entities other than banks in the United States, AIGFP was free of any other effective supervision. The FSB is determined to prevent a replication of this type of regulatory arbitrage, particularly for "global systemically important financial institutions" ("G-SIFIs") and "global systemically important insurers" ("G-SIIs").
The responses to the views of the FSB of the International Association of Insurance Supervisors (the "IAIS") are set out in the Guidance Paper on the Treatment of Non-Regulated Entities in Group-Wide Supervision, dated April 12, 2010. The IAIS will act to "encourage the establishment, within the supervisory regime of a jurisdiction, of sufficient supervisory power and authority to ensure that supervision has proper regard to all entities which may affect the overall risk profile and/or financial position of the group as a whole and/or the individual entities within the group," and to "promote greater consistency between jurisdictions." Specifically, ICP 23, one of the IAIS's "Insurance Core Principles" ("ICPs," which are intended to provide a global framework for the supervision of the insurance sector) addresses "group-wide supervision." ICP 23 sets out principles applicable to supervision of a group that includes insurance companies; operating and non-operating holding companies; other regulated entities, such as banks; non-regulated entities; and special purpose entities.
ICP 23 is a key component of the Common Framework for the Supervision of Internationally Active Insurance Groups ("ComFrame"). ComFrame is intended to set out a comprehensive range of qualitative and quantitative requirements for the regulation of internationally active insurance groups ("IAIGs") by "customizing supervisory requirements and processes," which will provide a basis for regulatory comparability across the range of IAIGs, so as to foster commonality, and reduce compliance and reporting demands on IAIGs. The IAIS proposes to begin "field testing" ComFrame later this year. (General NAIC views on ComFrame are expressed in a paper entitled U.S. Insurance Regulators’ Views: IAIS Common Framework for the Supervision of Internationally Active Insurance Groups "ComFrame," dated August 2013.)
Interestingly, ICP 23 is in the process of being revised in order to further accommodate the goals of the FSB and the Joint Forum (an organization of international banking, securities and insurance regulators) with respect to group supervision. A spokesperson for the NAIC stated that ICP 23 is being "de-linked" from ComFrame in order to allow field testing to commence. Industry commentators wondered about how ComFrame can be field tested if such an essential component is being separately developed.
The IAIS was tasked by the FSB with setting forth the factors used to designate an insurance company as a G-SII. The factors were released by the IAIS in July, just hours before the FSB named nine international insurance groups, including American International Group, Inc., MetLife, Inc. and Prudential Financial, Inc., as G-SIIs. The FSB will require higher capital requirements and enhanced supervision at the group level. This enhanced supervision of the designated companies by the FSB commenced immediately after G-SII designation.
A significant concern among U.S. regulators is that the FSB appears to be intruding on the ComFrame process, and that the IAIS is essentially acting at the direction of the FSB, rather than acting as an independent standard-setting organization. Officials of the NAIC have stated a fear that the actions of the FSB will result in the loss by insurance regulators of control over standard-setting for the insurance sector. The American Council of Life Insurers (the "ACLI") raised two more detailed concerns: IAIGs could be subject to higher capital requirements than other insurers, which can lead to competitive imbalances within the insurance industry; and bank-centric rules on investments do not take into account the vital asset/liability matching requirements of life insurers. John Huff, the Missouri Director of Insurance, Financial Institutions, and Professional Registration, who is a non-voting member of the U.S. Treasury Department's Financial Stability Oversight Council ("FSOC"), expressed similar concerns.
Regulators also expressed the view that the action of the FSB, naming three U.S. insurance groups as G-SIIs before FSOC had completed its procedure to determine which U.S. insurance groups are non-bank SIFIs (systemically significant financial institutions), was "premature." Regulators also questioned whether the failure of any insurance group would truly give rise to a significant dislocation in the global financial system; one question that has been raised is whether the riskiest insurance group is as much a threat to the system as the least risky banking group (of course, one may want to keep AIG in mind when raising these questions). The President of the NAIC went so far as to say that the FSB is engaged in an "end-run" around the insurance regulatory community. There is often a reluctance in the U.S. regulatory community to cede control over the insurance industry, either to Washington, or to international bodies. This concern is likely to be heightened by the recent report of the FSB, discussed below.
Designation of Prudential as a SIFI
The determination that a particular insurance company poses systemic risk must be made by a 2/3 vote of the Federal Reserve, with the approval of FIO, in consultation with the Federal Deposit Insurance Corporation (the "FDIC"). When an insurance group is designated as a non-bank SIFI, the Federal Reserve will become its ultimate regulator, and can impose enhanced prudential standards that would require the company to: meet higher liquidity and capital standards; undergo periodic stress tests; adopt enhanced risk management processes; submit a resolution plan in order to deal with material financial distress or failure; and provide for early remediation of financial distress. An insurance SIFI remains subject to state insolvency laws, not the federal Bankruptcy Code, but if the state insurance regulator in the insurer's state of domicile does not take appropriate action, the FDIC can be appointed receiver.
It is noteworthy that when MetLife, Inc., itself in phase III of the FSOC SIFI designation process, presented an alternative capital scheme at the NAIC, questioning by the regulators disclosed that the Federal Reserve felt duty-bound to follow the FSB's lead on capital issues for SIFIs. This Federal Reserve response increased the concern of state regulators and the industry that global regulation may be moving to a more bank-centric approach.
NAIC Views on Group Supervision
The IAIS's Guidance Paper on Group Supervision describes three forms of group supervision: direct, indirect and hybrid. Direct supervision would entail licensing and regulation of holding companies, non-insurance operating companies and insurers. Indirect supervision focuses on regulating the relationships among regulated insurers with other members of the group. Hybrid systems combine both. ICP 23.0.3 specifically countenances both direct and indirect supervision within a group, as long as supervision of the group as a whole is effective.
NAIC views are summarized in a White Paper entitled The U.S. National State-Based System of Insurance Financial Regulation, prepared by the NAIC's Solvency Modernization Initiative (E) Task Force, dated August 14, 2013, states:
U.S. state insurance holding company system supervision (group supervision) is largely built on an indirect approach to supervision, meaning the regulators have influence and power at the legal entity insurer that can result in action taken by the group. Given the powers include required prior approval of material transactions, the power is significant.
The NAIC's indirect regulatory system is referred to as a "windows and walls" approach: Regulators have unrestricted access to information in possession of insurers, the parent and other members of the holding company system (the "windows"), and have the ability to review and approve or disapprove significant transactions between an insurer and other members of the system (the "walls"). The "walls" are based on the principle that regulated insurance companies are "ring-fenced": First, each insurer's solvency is tested independently; and second, U.S. bankruptcy laws and insurance insolvency laws keep insurance entities separate from both other insurance entities and from non-insurance entities from a legal liability perspective (impaired insurance companies are subject to state insurance laws only, while non-insurance companies are subject to federal and state bankruptcy laws).
The White Paper on state-based regulation states that the "windows" will be made clearer by requiring a group capital assessment as part of the new requirements for Own Risk and Solvency Assessments ("ORSA") for insurance groups, which "should allow earlier detection of potential financial and reputational contagion on insurance entities within the group or to the group as a whole." The White Paper notes, however, that "The assessment [required as part of ORSA] does not establish a group capital requirement in the same sense as the legal-entity RBC [risk-based capital] requirement." The White Paper also states that "The U.S. state insurance regulators welcome the concept of supervisory colleges as a useful platform to improve supervisory cooperation and coordination between international regulators to discuss insurance companies operating internationally." The U.S. insurance regulatory community already uses a supervisory college approach, under a "lead regulator"; it is thought that international supervisory colleges for IAIGs will "improve supervisory cooperation and coordination between international regulators."
The typical form taken by insurance groups involves a holding company that owns, directly or indirectly, insurance entities and non-insurance entities. When a holding company is formed in one state, and the insurance entities are domiciled in other states or countries, it is not always apparent that a regulator of the insurance entities has regulatory jurisdiction over the holding company. ICP 23.3 states only the "The supervisor does not narrow the identified scope of the group due to lack of legal authority and/or supervisory power over particular entities," although ICP 23.3.1 notes that "In some jurisdictions, the supervisor may not be granted legal authority or supervisory power for the supervision of some entities within the identified scope of the group." Although indirect supervision is possible (by limiting the activities of the regulated entities), direct regulation may not be possible. How does a European regulator deal with a group when the holding company (or intermediary holding company) is in the United States? Moreover, what if there is already a supervisory college of U.S. regulators, with a lead regulator appointed?
The discussion of international supervisory colleges may also run into a fact of corporate life in the United States. Many insurance company groups operate through a holding company formed under the laws of Delaware, but relatively few operating insurers are domiciled there. One practical approach might be for Delaware to adopt a version of a law currently in effect in Pennsylvania (40 P.S. section 1406.2, providing for "Group-wide supervision for International Insurance Groups"), which gives the insurance commissioner statutory authority to act as lead regulator of international insurance groups when the "ultimate controlling person" (i.e., the top-tier holding company) is domiciled in the state. The Delaware Insurance Commissioner has submitted a bill similar to Pennsylvania's to the Governor. The bill is deeply opposed by the American Insurance Association, on the grounds that this could result in regulatory arbitrage. Were a similar statute to be adopted in Delaware, regulators of individual entities within an IAIG that is under a Delaware holding company could form supervisory colleges with Delaware as the group-wide coordinator. There could be, however, a number of objections to arrangements of this nature, the most significant being that some insurance groups with Delaware holding companies already have supervisory colleges with a "lead regulator" under existing NAIC procedures. It is not definitive that regulators of major U.S. insurance companies domiciled in their states would defer to Delaware.
Some of these concerns with respect to supervisory colleges appear to trouble the FSOC. In its explanation of why Prudential was designated a SIFI, the FSOC stated that "Supervisory colleges are a tool available to state regulators concerning group supervision, but they do not provide regulators with the same authorities to which nonbank financial companies would be subject if the [FSOC] determines that such nonbank financial companies shall be subject to supervision by the [Federal Reserve] including consolidated, enterprise-wide supervision." In other words, the views of the FSOC seem to be more in accordance with the regulatory philosophy of the FSB and the IAIS than with the current philosophy of the NAIC. Although the FSOC's current brief is limited to SIFIs, these developments provide insights into the future of insurance regulation.
FSB Peer Review Report
On August 27, 2013, shortly after the release of the NAIC White Paper on the U.S. regulatory system, the FSB released its Peer Review of the United States Review Report. This report examines issues raised by the International Monetary Fund's 2010 Financial Sector Assessment Program ("FSAP") with respect to the progress of the United States in implementing reforms needed to avoid a repeat of the financial crisis of 2008. In the report, the FSB notes responses to the FSAP recommendations on the insurance sector that have been made to date:
- the Federal Insurance Office (the "FIO") was established under the Dodd-Frank Act;
- the FSOC recently designated an insurance company as a non-bank SIFI, which will be subject to enhanced regulation and supervision by the Federal Reserve Board;
- information sharing and coordination between U.S. state regulators and federal authorities have increased; and
- state authorities have taken useful steps to improve insurance group supervision, modernize solvency requirements and improve disclosures required for securities lending operations by insurance companies.
On the negative side, the FSB's Peer Review Report notes that the multiplicity of state regulators, the absence of federal regulatory powers to promote greater regulatory uniformity and the limited rights to preempt state law constrain the ability of the United States to ensure regulatory uniformity in the insurance sector. Given these drawbacks, the report sets out several recommendations to enhance the effectiveness of insurance supervision, including:
- U.S. authorities should promote greater regulatory uniformity in the insurance sector, including by conferring additional powers and resources at the federal level where necessary.
- The FIO should enhance its monitoring of the sector through increased use of non-public information, and should be further strengthened to be able to take action to address issues and gaps identified.
- U.S. authorities should further enhance insurance group supervision by introducing requirements for consolidated financial reporting for all insurance groups. Lead supervisors should be given additional powers to fully assess the financial condition of the entire insurance group, such as having direct powers over holding companies.
- State authorities should continue to modernize solvency requirements through enacting PBR into state law and the NAIC should take measures to clarify the safety level targets for individual risks and the overall effect of reserving and capital requirements in its model laws.
- State authorities should implement the FSAP recommendation concerning the terms of state Commissioners' appointments, the rulemaking powers of state insurance departments, and their funding and staffing to bolster specialist skills.
The fundamental differences between the views of the NAIC, on the one hand, and the international regulatory community, on the other, can be seen by comparing the White Paper on state-based regulation with the FSB Report. The FSB does not appear to view the U.S. state-based regulatory system with favor. For example, the FSB Report seems critical of the state holding company laws, and of the absence of any group capital requirements for groups that are not designated as non-bank SIFIs. More generally, the view of the FSB is that greater centralization is needed, as is direct regulation of insurance and holding company members of insurance groups, along with some degree of supervisory control over other members of the group.
From the U.S. perspective, there has long been a sentiment among NAIC members that the U.S. state regulation system has been effective-they believe that the ability of the U.S. insurance sector to weather the storms of 2008 and thereafter indicates that the current system works. The NAIC has continued to act to strengthen U.S. regulations. For example, the Insurance Holding Company System Regulatory Act and the Insurance Holding Company System Model Regulation have been amended to include greatly expanded enterprise risk reporting by insurers and insurance groups. The revised law and regulation are already in effect in a number of states, and are now part of the NAIC accreditation requirements; states must adopt the revised law and regulation by 2016 in order to maintain their accreditation.
Connecticut Insurance Commissioner Thomas Leonardi, NAIC International Insurance Relations Committee Chair, responded to the Peer Review Report with the following statement:
The authors of the recent FSB peer review acknowledge that the U.S. insurance regulatory system is effective at providing policyholder protection and ensuring the solvency of individual insurance companies. We can think of no more important and fundamental responsibilities for insurance regulators. However, the authors' opinion that a more federal approach to insurance regulation is necessary fails to identify any credible problem such a shift would solve and offers little factual basis for its conclusions.
More generally, there is a marked reluctance among NAIC members to give the FIO, or international organizations such as the FSB and the IAIS, power to regulate U.S. insurance institutions. The "windows and walls" approach of the NAIC seems more consistent with the "low regulation" political/economic philosophy that is current in the United States. Whether the differing approaches to regulation will foster international regulatory compatibility remains to be seen. As is stated by the NAIC in the paper on ComFrame: "The purpose of fostering global convergence should be to arrive at a common degree of regulatory effectiveness and understanding for IAIGs without necessarily creating a need for identical rules," and that "ComFrame must be a dynamic and flexible framework focused on regulatory collaboration."
Captives and SPVs
As we have reported in prior Duane Morris Alerts, the use of captive insurance companies or special purpose vehicles ("SPVs") to finance certain reserves required of life insurers with respect to certain lines of life insurance business (commonly referred to as "XXX reserves" and "AXXX reserves") has generated a considerable amount of attention. The NAIC exposed a draft White Paper entitled Captives and Special Purpose Vehicles White Paper at the December 2012 and March 2013 meetings. This process showed that there are varying views on the use of captives and SPVs amongst the membership of the NAIC, but the tone of the White Paper was generally disapproving of their use. In June 2013, the New York State Department of Financial Services (the "DFS") issued a paper on the use of captives and SPVs entitled Shining a Light on Shadow Insurance, which called for a moratorium on the use of captives until investigations into their use and effects have been completed. The White Paper on captives and SPVs was then adopted by the Executive Committee of the NAIC on July 26, 2013. (It is important to note that references to a "shadow insurance industry" had been eliminated from the White Paper prior to adoption.)
Certain of the recommendations made in the White Paper were referred to the newly-formed Captives (EX) Working Group within the PBR [Principle-Based Reserving] Implementation (EX) Task Force. The first recommendation to the Working Group is to develop possible solutions for remaining XXX and AXXX perceived redundancies prior to the effective date of PBR, thus eliminating the need for captives or SPVs. According to the recommendation, the redundancies should be addressed directly, through such things as disclosed prescribed or permitted accounting practices. In addition, implementing modifications to the statutory accounting framework be implemented is recommended, such as allowing "Tier 2" type assets to support specific situations (e.g., less likely to develop liabilities).
In its formal charge to the Captives Working Group, the PBR Task Force directed that the Working Group "Address any remaining XXX and AXXX problems without encouraging formation of significant legal structures utilizing captives to cede business." The Delaware Insurance Department challenged this charge, noting that Delaware law encouraged the creation of captives, and that this law could be seen as being inconsistent with that law.
The second set of recommendations relate to confidentiality, disclosure and transparency. These recommendations are to study the issue of confidentiality related to commercially-owned captives and SPVs; to consider enhanced disclosure in ceding company financial statements regarding transactions with SPVs on the financial position of the insurer; and to develop guidance in the Financial Analysts Handbook relating to the review of transactions involving captives and SPVs when reviewing the insurance holding company, from the perspective of the ceding company's state, the captive's state and the lead regulator. The PBR Task Force's charge to the Working Group reiterated these recommendations.
Other recommendations in the White Paper were referred to the Reinsurance Task Force. They related to: access to alternative markets, which includes updating the NAIC Model Special Purpose Reinsurance Vehicle Model Act; monitoring IAIS standards on captives; and giving further consideration to credit for reinsurance issues that have arisen in the SPV context, such as the use of letters of credit that do not fully conform to existing credit for reinsurance standards.
In related developments, the FIO has indicated that it will study the use of captives and SPVs. According to press reports, FIO Director Michael McRaith told the NAIC that the subject of captives showed a "gap" in state insurance regulation. The FIO's stated intent to study the use of captives has raised objections by some at the NAIC, on the basis that the NAIC is already adequately addressing the issue; and thus, the FIO's involvement is duplicative. Also, Moody's Investor Service has issued a report on captives, stating that the use of captives by life insurers and reinsurers "can lead to complex corporate structures and reduced financial transparency, both credit negatives," and that these uses of captives "undermine the conservatism U.S. regulators have embedded in their reserving and capital regimes."
The NAIC has not embraced the DFS's moratorium position, although the NAIC President stated that the DFS was correct in raising the issue. The NAIC has contracted with a consulting firm to assist in studying the use of captives and SPVs. Notwithstanding these developments, states have continued to approve transactions using captives and SPVs to address reserve issues, and additional states have enacted legislation intended to foster the development of captives and SPVs. It is commonly understood that implementation of PBR will reduce, but not eliminate, reserve redundancies; thus, there is a continuing need to generate the capital to back these reserves. It will be interesting to see what permitted statutory accounting practices or Tier 2 assets can be developed as a way to deal with reserve redundancies. There appears to be consensus that more transparency with the use of captives and SPVs is needed.
New York Department of Financial Services and Principle-Based Reserves
On September 11, 2013, Benjamin Lawsky, the Superintendent of the DFS, released a letter to fellow insurance commissioners that expresses serious concerns about the development of PBR. In the letter, Superintendent Lawsky maintains that the current PBR-type approach to a subset of life insurance business, universal life insurance with secondary guarantees-which is subject to Actuarial Guideline 38 ("AG 38") for reserving purposes-has resulted in smaller reserves than had been expected, in part because life insurers will "game" the system. He further contends that adopting PBR generally, which will allow insurers to substitute their own models for the existing "formulaic" reserve models, as has been done for banks under the Basel II agreement, is a "recipe for disaster."
Superintendent Lawsky's letter should come as no surprise. First, the DFS questioned the advisability of moving to PBR at previous NAIC meetings. Second, the letter is consistent with the DFS's statements about how the "shadow insurance industry" has been used by life insurers to reduce reserves. The response by the NAIC should also not come as a surprise. According to press reports, the NAIC will continue moving toward full adoption of PBR, regardless of the position of the DFS, and of other state regulators, such as the California Insurance Commissioner, who is of the view that many states do not have the expertise to properly review reserves done under PBR, and that PBR will tax the capabilities of many smaller insurers.
The Reinsurance (E) Task Force and the Financial Condition (E) Committee completed its review of the Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions, which was adopted by the NAIC Executive Committee at the Summer meeting. This process is called for by the revised NAIC Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation, which allow reduced collateral requirements for assuming reinsurers that are not otherwise licensed or accredited in a state, but have been "certified" as reinsurers by the state. A certified reinsurer is one domiciled in a "qualified jurisdiction" and that meets other criteria relating to capital and surplus, financial strength ratings and other matters. Foreign jurisdictions will be treated as qualified jurisdictions if they meet standards as to "appropriateness and effectiveness" of the reinsurance supervisory system of the jurisdiction. Individual states must designate each qualified jurisdiction. At the present time, 18 states have adopted the Model Law and Model Regulation, and three states, Connecticut, Florida and New York, had approved Bermuda, Germany, Switzerland and the United Kingdom for this purpose.
The Reinsurance Task Force was charged with developing a list of jurisdictions recommended for recognition by the states as qualified jurisdictions. The NAIC list must be taken into account by a state in designating a qualified jurisdiction, although the list is not binding on any state. The next step in the process will be to begin the expedited review of the four jurisdictions that have previously been approved by individual states: Bermuda, Germany, Switzerland and the United Kingdom. This process is expected to be completed on a conditional basis by the end of the year. Also, the NAIC will review reinsurers that have been certified by the three states.
Finally, the NAIC Capital Adequacy (E) Task Force heard a presentation by Canadian insurance regulators concerning reinsurance with unauthorized ("unregistered") reinsurers. It was noted that unlike Canadian rules, which require risk-based capital benefits to be collateralized when reinsurance is ceded to an unregistered reinsurer, the current U.S. credit for reinsurance rules require collateral for reserves ceded to unauthorized reinsurers, but do not require collateralization of RBC benefits. New York then proposed the following concept:
Risk ceded to an unauthorized reinsurer may reduce RBC only to the extent collateral is established in the same proportion as collateral for reserves is required. For example, if risk is ceded to an unauthorized reinsurer which is also not certified, collateral equal to 100% of the reduction in RBC must be established.
The global and national insurance regulatory communities remain in turmoil as they try to adopt rules and measures to avoid another global financial meltdown. We will continue to monitor developments at the various organizations with a role in insurance regulation: the FSB and the IAIS internationally, the FSOC, the Federal Reserve and the FIO at the federal level and the NAIC at the individual state level. Although there is concern that the regulatory approach of the FSB to the international banking industry may be the harbinger of what is to come in insurance regulation for large global insurance groups.