dodd-frank, RRG&captives, rating agencies Flashcards
Dodd-Frank was
most expansive intervention into insurance regulation by the federal government
-created as a result of the 2008 financial crisis. Its application to insurance is controversial, as the financial crisis was really driven and felt by the banking industry, whereas the insurers, for the most part, were not as affected
dodd-frank established & provided
- act provided the Federal Reserve System (Fed) limited regulatory authority
- Act established the Federal Insurance Office (FIO), part of the US Treasury, to monitor the insurance industry
- allows the Fed & FIO to influence/ be influenced by the International Association of Insurance Supervisors (IAIS)
The Fed is only authorized to regulate two types of insurers
Systematically Important Financial Institutions (SIFIs): institutions that could cause a national systemic economic disruption if they fail. There are 3 insurers currently in this list: 2 P&C (AIG & MetLife) and one life (Prudential) & Insurance holding companies that own banks or thrifts
FIO aggregates
insurance information from various sources (including the Information Insurance Institute (III) & NAIC) in one place. The FIO has the power of subpoena to attain this information from insurers
FIO monitors
the insurance industry: Identifies insurance activities that could contribute to a financial systemic crisis, Develops federal policy about nationally or internationally important insurance issues, Consults state government on insurance matters
-FIO needs to monitor the availability and affordability of insurance
Insurance Capital Standards Clarification Act
-Insurers are concerned that they will need to follow banking-influenced regulations, even though they do not have the same business model. The Insurance Capital Standards Clarification Act (2014) actually addressed this concern: it removed the Dodd-Frank mandate that the regulated insurers maintain the same capital standards as banks
D-F Authorizes the federal government to negotiate
(or pre-empt state laws which conflict with) international insurance agreements
D-F Legislates several changes in the non-admitted market
Requires that only home state of insured party may impose a premium tax, Compels states to adopt uniform rules and procedures, Requires that placement in non-admitted market be regulated only by the insureds’ home state, Exempts brokers and large commercial purchasers from doing full due diligence on whether insurance could be placed with an admitted carrier
D-F Legislates several changes in the handling of reinsurance arrangements
Requires states to allow reinsurance credit for a ceding company if the ceding company’s domiciliary state allows it and is accredited, Gives reinsurer’s domiciliary state sole responsibility for regulating its financial solvency, Preempts extraterritorial application of credit for reinsurance laws by states other than the domiciliary state, Permits states to proceed with reinsurance collateral reforms if they are accredited, Establishes the FIO which is authorized to require insurers to submit data/information (OR establishes insurance expertise at the federal level), Insurers/Reinsurers that use derivatives could be subjected to central clearing/trading requirements
RRG
group of similar businesses create an insurer to insure their risk
- provide commercial liability coverage to its owners who may have been unable to find available or affordable coverage in admitted markets
- RRG allows affordable and available liability coverage. Pool members will obtain tailored coverage, have incentive to control cost and have adequate pricing/reserves due to lack of guaranty funds and will avoid paying profit loads and other expenses to third party insurers
Captives
are formed by single or groups of companies looking to self-insure
-Pure captives insure a single parent; Group captives insure a group of companies
- Group captives do not need to insure similar risks (unlike RRGs)
- Captives are able to provide property coverage (unlike RRGs)
similarities between RRG & captives
- Regulation not as stringent as traditional insurers (less regulatory restrictions)
- Lower capital requirements than private insurance companies.
- Both must be licensed in a domiciliary state; captives and RRG’s are domiciled in 1 state and regulated by that state
- Both are intended to provide insurance coverage difficult to obtain at affordable levels in traditional markets
P&C insures value being rated by rating agencies
- Some lines of business like, homeowners insurance are sometimes mandated by lenders to be purchased from highly rated insurers. Also, insurers who write surety business may be required to maintain a certain rating to write business in certain states
- Ratings are important for insurers when selecting reinsurers to which to cede their business in order to ensure they select financially stable reinsurers who will not default
- Agents are cautious of non-rated insurers
- Rating agencies are efficient at providing ratings, this saves insurers time, resources and significant expenses rather than them having to try to prove their own financial strength
- Investors rely on the ratings for their investment decisions
- Consumers don’t have the knowledge to evaluate insurers. They need the help of the rating to select financially strong companies
interactive rating
Insurer’s senior management has an interactive meeting with rating analysts, so analysts can understand the company’s business strategy, experience with adverse conditions and integrity. Insurer also submits proprietary info to rating analysts. Analysts determine rating based on findings from meeting, background research and proprietary info
Interactive ratings vs public ratings
- Both of them are evaluating financial strength, both use public financial statement information, Both result in public disclosure of financial strength ratings, Both use a capital model, In both situations the final ratings are determined by a rating committee instead of a rating analyst, Both assign a “grade” to the insurer for comparison within the market, They both affect the image of the company (affects business and investors), Both done by rating agencies, Both ratings are based on the same scale
- Differences: -Interactive is much more costly and time consuming for the firm than public ratings -An insurer presents additional proprietary data to a rating agency in an interactive rating and a public rating only uses public data -Interactive requires participation of insurer, public does not
