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VI. Principal Regulatory Developments Affecting Insurance Companies
VI. Principal Regulatory Developments Affecting Insurance Companies
A. Overview
Global capital standards and regulatory convergence took center stage in 2015, driven by several factors including the IAIS’s development and testing of capital standards applicable to global systemically important insurers; the U.S. and E.U.’s commitment to negotiate a covered agreement; U.S. efforts to develop an approach to a global insurance capital standard in order to meet the ongoing efforts of the IAIS; and the lead up to the launch of Solvency II on January 1, 2016. Insurance regulators and the industry also prioritized cybersecurity in 2015, particularly in light of significant cyber-attacks. 2015 also saw continued focus on principle-based reserving for life insurers. Finally, the U.S. Department of Labor’s proposed regulations clarifying who would be considered a “fiduciary” of an employee benefit plan under ERISA were of particular interest to the industry and other lawmakers.
B. InfluencesofFederalandInternationalStandardson Insurance Regulation
In 2015, the second Financial Sector Assessment Program (“FSAP”) report on the U.S. system of insurance regulation was issued by the IMF. The report measures a jurisdiction’s regulatory performance against the IAIS’s Insurance Core Principles (“ICPs”). The 2015 FSAP report noted substantial U.S. compliance with the ICPs but also highlighted perceived deficiencies related to the complex system of state regulation, absence of group-wide capital standards and insufficient insurance expertise at the Federal Reserve Board. As discussed in further detail below, the IAIS is actively involved in developing a global capital standard and faces the significant challenge of reconciling differences among international regulatory bodies—most significantly, the E.U. and the U.S.
International developments on global standards and group capital are now being addressed in the U.S. through collaborative efforts of the NAIC, Federal Reserve Board and
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
FIO. In sum, the Federal Reserve Board and FIO generally favor a global capital standard, provided it takes account of U.S. law and is not imposed on the U.S. by international regulatory bodies. Even the U.S. Congress has encouraged federal and state regulators to develop capital standards that will be adopted by the international regulatory community.
Although the concept of group-wide capital is a fundamental aspect of E.U. insurance regulation, it is not a feature of U.S. solvency regulation. Whereas the E.U. applies a consolidated capital standard on the insurance group as well as an entity level capital standard, U.S. state insurance regulators focus on entity-based capital standards. The E.U. standard views capital as potentially fungible and subject to deployment to group members where required. U.S. regulators are uncompromisingly focused on protecting the solvency of the insurance company member of any group. Also, U.S. and E.U. regulatory approaches to group supervision differ significantly. The NAIC favors a less prescriptive approach to group supervision that prioritizes international communication and coordination, whereas the E.U.’s approach is prescriptive, favoring a single group regulator.
Over the last few years the U.S. and E.U. have worked together through the E.U.-U.S. Dialogue Project to develop a better understanding of one another’s regulatory policies and priorities. Their negotiations of a covered agreement in 2016 may well set the stage for mutual recognition, equivalence and potentially a foundation for group supervision. For the U.S., those negotiations will be led by FIO and the USTR, with input from the NAIC. It is too early to tell how the multitude of national and international insurance regulators will address the many aspects of the proposed global convergence of insurance regulation. Actions set in motion during 2015, however, may set the stage for significant international developments in 2016. Although the E.U.-U.S. Dialogue Project focuses on international insurance groups and systemically important groups, developments in global convergence of insurance regulation could have a direct or indirect effect on all insurers and therefore should be followed by all members of the industry.
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