Vaughan (Crisis) Flashcards
Regulatory forbearance
Failure to take prompt and stringent action in front of struggling firm
Shutting down company is not a pleasant experience; they could pull through
Political connections, a regulator’s failure could affect their reputation
Company may object to regulator demands (costly & time-consuming)
Failure to act in a timely manner can increase ultimate size of deficit upon failure
Regulatory capture
Tendency of regulators to take mindset of an interest group
Played role in ‘08 crisis; federal banking regulators were captured by industry they regulate – led to Consumer Financial Protection Agency (CFPA) creation
Lack of new regulation on rapidly growing financial players
Loosening of existing regulatory restrictions (SEC)
General leniency in oversight of politically popular financial sector activities
Duplication in US system
since the 90s, with the NAIC Accreditation Program, regulators are highly coordinated and integrated for solvency regulation
NAIC designated a lead state regulator for every U.S Insurance Group
Responsible for coordinating with other regulators on exams and analysis, regulatory action when necessary
Similar to supervisory colleges (NAIC SMI)
Examples of peer pressure and peer review
NAIC FAD & FAWG
NAIC Accreditation Program
Regulators feel pressure that other regulator could take action – acts as a counterweight to the pressure on regulators not to act
There needs to be a free-flowing information sharing system between regulators
Diversity of perspective
Need to balance overregulation and underregulation
The search for compromise tends to produce ideal, centrist solutions
Market Discipline & Moral Hazard
Difficulty in accessing federal government bailout funds, decreases moral hazard issues
If states were federally regulated, they would probably be bailed out by federal funds – that would be bad
Main test of regulation’s success is effectiveness in achieving objectives in protecting…
Policyholders
Investors
Economy
Depoisters
nationally significant insurer definition
if GWP > 50m in any past 3 yrs and business in 5 + states or, if P&C exclusively, over 30m GWP and 17+ states
About 85% of insurers are “nationally significant”
FAWG
NAIC Financial Analysis Working Group (FAWG)
16 of most experienced regulators, forum for collaboration and problem-solving, will question primary regulator and invite them in to discuss the company
NAIC Accreditation Program
On-site evaluation every 5 yrs – reviews state laws and regulations, financial analysis and exam functions, and department practices
Off-site reviews are done annually
If state fails the test, letter to the state on how to improve; shared with other states (other states make final decision)
FAD
Centralized function that performs financial analyses on nationally significant insurers, report unusual finds to FAWG
