E.2 Global insurance regulatory issues

Question 1

key trends in the global business of insurance since the financial crisis

Answer 1

• the number and size of globally active insurers has grown since 2008
• growth driven by: demand, tech innovations, market liberalization

steps taken in the US and internationally in response to increased globalization and the financial crisis:

• Dodd frank act
• Financial stability board
• international association of insurance supervisors
• increased supervision of internationally active insurance groups

Question 2

list and describe global insurance regulators and forums

Answer 2

1. financial stability board (FSB) & International association of insurance supervisors (IAIS)
   - FSB was created to promote financial stability and global coordination
   - IAIS is a voluntary association to establish global standards for insurance supervision
2. ComFrame and Internationally Active Insurance Groups (IAIGs)
   - ComFrame = criteria for determining if an insurance group should be an IAIG
3. Globally significant important insurers - insurers that would cause disruption to the global financial system due to size and complexity
4. EU and solvency II
   - harmonize and modernize insurance regulation across the EU and improve consumer protection
   - quantitative: RBC requirements and common methods for valuing insurance assets/liab
   - Governance and supervision
   - reporting and disclosure

Question 3

List and describe US participants in global insurance forums

Answer 3

1. NAIC
   - Voice in GSII assessment methodology but no voice in designating them
   - not represented in the FSB
2. The federal reserve
   - member of both FSB and IAIS
   - oversees FSOC and SIFIs
3. Federal Insurance office FIO
   - treasury appoints the head of the FIO
   - member of the IAIS and exec committee
4. treasury department
   - member of FSB
   - indirectly represented on the IAIS through the FIO

Question 4

Key issues regarding US representation in global insurance regulation

Answer 4

see page 44 in pdf

Question 5

Equivalence under solvency II and covered agreements

Answer 5

• if US is granted equivalence then US based insurers can operate in the EU without complying with all the EU rules

Equivalence is granted by:

1. Group supervision - if insurance group is adequately supervised
2. Group solvency calculation - if insurer is adequately capitalized
3. reinsurance - if country supervision and solvency regime for reinsurance companies is adequate

covered agreements - agreement between the US and at least 1 foreign country that provides similar insurance consumer protection laws

• some US states worry their state does not have enough input-EU wants to remove state level collateral requirements for EU reins operating in the US
• F

Question 6

IAIS insurance capital standards ICS

Answer 6

IAIS proposed ICS to establish min levels of capital for IAIGs and GSII

unresolved ICS issues:

1. Valuation should ideally use the same accounting standards across different jurisdictions
   - problem - US accounting standards are very different from the rest of the world
2. qualifying assets and the capital requirement
   - ICS would be risk based
   - risks covered: insurance, market, credit, operational
3. different approaches to group capital
   - US approach is to Wall of capital
   - international approach is to regulate as a whole group

NAIC proposes 2 alternative approaches to RBC for US-based IAIGs

1. RBC-Plus
   - extend current RBC approach for subsidiaries to the insurance group level
   - would need to account for risks the current RBC does not cover
   - easiest and least expensive
2. Cash Flow
   - Relies on insurers internal asset liability models
   - regulators would need to approve the models

Question 7

FDIC authority under Dodd frank

Answer 7

FDIC authority to resolve SIFI insurers only if:

• the insurer state regulator fails to act
• failure would threaten the US financial stability
• it is not clear how FDIC would resolve large insurers compared to how they deal with banks
• banks can be resolved over the weekend
• insurance liabilities can take decades to unwind