McRaith: Insurance Industry ‘Inextricably Connected’ to Global Capital Markets
September 23, 2014 by Jeff Jeffrey
WASHINGTON – Federal Insurance Office Director Michael McRaith pushed back against the oft-cited claim the insurance business does not pose systemic risks to the U.S. financial system and should not be regulated as though it carries that level of risk.
“That connection with capital markets is growing, and we see that in the different types of capital being invested in the reinsurance space,” McRaith said. “There is an increasing nexus between insurance and capital markets, so financial stability conversations have to include the insurance industry.”
McRaith said the U.S. insurance industry accounts for $7.3 trillion in assets. And as global markets become more integrated, McRaith said some of the largest insurance companies in the United States will generate more than 50% of their revenue outside the country.
“That leaves supervisors in those marketplaces wondering how consumers fit into the system of regulation,” McRaith said.
McRaith’s comments took place during a highly anticipated panel focused on federal and international regulatory developments.
He was joined on stage by Missouri Insurance Commissioner John Huff, who until last week was the sole state insurance regulator serving on the Financial Stability Oversight Council. Also participating were National Association of Insurance Commissioners Chief Executive Officer Ben Nelson and Thomas Sullivan, who was recently named the senior adviser for insurance for the Federal Reserve Board.
Much of the panel’s discussion focused on the steps being taken by the FIO, the Fed, the FSOC and state regulators to ensure the United States speaks with one voice when engaging international regulators in negotiations about how to oversee insurers with global footprints.
“It really comes down to good old-fashioned shoe leather,” Sullivan said. “Each of these agencies is speaking to each other on an almost daily basis. There is a genuine effort to work together.”
That coordination is going to be essential to ensuring that whatever regulatory changes that are implemented in the United States do not “layer onto” the regulations already in place, Huff said.
That said, NAMIC President and CEO Chuck Chamness, who moderated the panel, said the insurance industry has concerns about the speed with which the International Association of Insurance Supervisors and the G-20’s Financial Stability Board are moving to implement global capital standards and other international regulatory standards.
“There is a concern among our members about what is seen as us not being in charge of the process,” Chamness said.
McRaith said the international standards were being developed by consensus among international regulators and that no one “can just walk into the room and say this way of doing things is the best because this is how we do it.”
But Huff said the United States should be doing more to push the IAIS to be more open in its process for developing regulators standards.
The IAIS has drawn fire recently for a proposal to limit the number of interested parties who may participate in meetings where standards are crafted. The IAIS has said the aim of the proposed rule is to ensure meetings move ahead without becoming bogged down in debates. Under the rule change proposed by the IAIS, stakeholders would be invited to attend meetings “when necessary” in order to provide comment on specific issues. The IAIS said that would allow the meetings to remain transparent, while becoming more efficient and effective. The rule would go into effect on Jan. 1.
But representatives of the insurance industry argued it will exclude stakeholders from policy discussions and could result in rules that do more harm than good.
This week, the U.S. House and Senate introduced resolutions that would put the country’s lawmakers on record as disapproving of a proposal by the IAIS’s proposed rule change (Best’s News Service, Sept. 19, 2014).
Nelson said the transparency issue is just one area where the United States should be doing more to put pressure on international regulators. He said the capital standards for systemically important insurers being developed by the IAIS should do more to take into account the fact the U.S. state-led regulatory system makes capital less fungible across a group’s entire enterprise because each legal entity is regulated separately.
“That is by design and that system has worked,” Nelson said. “We also need to know that just because we need to be respectful of Solvency II, it doesn’t mean we have to adopt Solvency II. Common results can be achieved through very different systems if they are overseen properly.”
Sullivan said the Fed had no plans to adopt international regulatory systems outright. “Federal Reserve Chairwoman Janet Yellen has made it clear that we will go through the usual rule making process before any changes are implemented. We will publish proposed rule changes, seek comment and then adopt rules consistent with our usual process.”
The panel also discussed the covered agreements being developed by the FIO, the U.S. Trade Representative and international insurance regulators.
Chamness said the industry was interested in the progress toward developing those agreements, given that they can supersede state statutes under the Dodd-Frank financial reform act.
Many of the covered agreements that are being developed have to do with the level of collateral foreign reinsurers must carry in order to do business in the United States.
McRaith said the FIO and USTR would move forward with a covered agreement “only when it is in the best interest of the United States.
More will be said on the covered agreements in the FIO’s soon-to-be-released annual report, he said, noting it would be coming out in the “next few days.”