The global financial crisis is now seven years behind us and the property/casualty insurance industry and its regulation never faltered before, during or since. Yet, international pressure to restructure and overhaul the substance of insurance regulation continues to intensify, often mimicking global banking regulation. Every insurance company and every aspect of insurance regulation is being affected, or will be soon, by these international developments.
The U.S.-EU Relationship
The current transatlantic (re)insurance market, on which numerous individuals and enterprises rely, has traditionally been wide open to vigorous competition creating one of the strongest world insurance partnerships, despite differences in regulation. After a decade of effort and the expenditure of billions of dollars, Europe is scheduled to begin implementing its new bank-like Solvency II insurance regulatory system on January 1, 2016, even as some EU regulators seek to add even stricter rules. At the same time, the EU is globalizing many of its requirements through standard setting organizations such as the International Association of Insurance Supervisors (IAIS).
Ironically, under Solvency II, the U.S., with the world’s largest, open and competitive insurance market and time-tested regulatory system is being treated as non-equivalent by the EU, potentially subjecting U.S. (re)insurers to either discrimination or the extraterritorial reach of European regulation. The EU has chosen to provide equivalent recognition for the U.S. operations of EU insurers but not so far grant similar recognition for U.S. competitors. At the same time, the EU is calling on the U.S. to eliminate the remaining reinsurance collateral requirements for EU reinsurers. In response, the U.S. has requested to begin negotiations on a covered agreement with the EU to address these issues and avoid a trade war that would undo the well-functioning transatlantic (re)insurance market.
International Regulatory Developments
Meanwhile, the international financial regulatory standard setting apparatus the G-20 put in place in response to the financial crisis continues to operate with little transparency, but with growing scope and impact even on sectors that did not cause or contribute to the financial crisis, such as property casualty insurers. No area of insurance regulation is left out, with principles, papers and guidance on financial, governance and market conduct regulation being issued on everything from licensing to insolvency. These international standards are not automatically binding, but participants including U.S. federal agencies have committed to adopt the standards and international organizations issue compliance assessments that exert significant pressure on U.S. state regulation to the extent it fails to strictly conform. And, although originally intended for a small subset of companies, there is no doubt these global standards will “bleed over” into the regulation of all companies.
The U.S. Congress, state officials, and even some non-U.S. voices, are increasingly questioning the efficacy of some of the proposed global insurance requirements as well as criticizing the lack of transparency in their development. Mounting Congressional oversight in the form of hearings, questions, meetings, letters, and resolutions has led to federal legislation. Among the legislative objectives are improved transparency in the development of international insurance regulatory standards and international recognition of U.S. state-based standards. As part of recently enacted Federal appropriations legislation, report language was included that reaffirms the U.S. state-based insurance regulatory system and reinforces the importance of establishing a domestic capital standard for federally regulated insurers before adoption of international capital standards.
Congress is also focused on cleaning up issues relating to the global and domestic systemic risk designation process, ensuring fair treatment across the financial sectors of systemically risky activities, and in particular requiring a clear de-designation or off-ramp process. In addition, as the form of the “enhanced supervision” of these companies begins to emerge, more problems are being recognized. Bank-like regulation that drives these and other companies to a uniform business model is already creating concerns that the insurance sector could be made systemically risky, when it is not, today. And, current definitions of nontraditional insurance products would unfairly penalize important U.S. insurance products and their consumers.
The most rapidly expanding insurance markets will continue to be the developing countries. U.S. (re)insurers have the financial ability and appetite to expand globally, but are often restricted by protectionism disguised as regulation. These barriers include restrictions on foreign reinsurance, preferred status for state owned enterprises, data localization mandates and lack of transparency and due process. Insurers are very involved in Congressional action on the Trans-Pacific Partnership and will work to finalize an ambitious Trade in Services Agreement, as well as other multilateral and bilateral trade liberalization negotiations.
In 2016, the pace of international insurance regulatory developments will quicken and their impacts will become more obvious. In response, PCI will continue to work on shaping them so as to prevent harm to pro-consumer, competitive and well-functioning insurance systems even as we seek greater international harmony through mutual recognition and cooperation and the further opening of markets for the benefit of all.