Top Insurance Regulatory Trends for 2015
May 6, 2015 by Deloitte Insights
The regulatory landscape for insurance will likely continue to be challenging and uncertain in 2015. As was the case in 2014, the insurance industry can expect to face new rules and modified requirements that could significantly affect how companies operate. “Regulatory bodies in the U.S. and abroad have been significantly expanding their compliance oversight and enforcement activities in recent years,” says Tom Rollauer, executive director, Center for Regulatory Strategies, Deloitte & Touche LLP. “This is a trend which is expected to accelerate and add to rulemaking and overlapping of regulatory roles.”
Further, the Federal Reserve is staffing up and is expected to issue new rules governing non-bank Systemically Important Financial Institutions (non-bank SIFIs). This is relevant for existing non-bank SIFIs and for companies being considered for the designation as well as applying the Federal Reserve’s regulatory compliance standards to insurers who own thrifts. “Global systemically important insurers and internationally active insurance groups likely will begin to feel the impact of new global capital standards,” says Timothy Cercelle, director, Deloitte & Touche LLP. “Meanwhile, here at home, U.S. groups can expect to face increasing pressure for more direct supervision at the holding company level,” adds Mr. Cercelle.
Increases in both the scope and pace of regulatory change will continue to drive up the demand for experienced professionals for the risk and regulatory functions in the insurance business. “A company wishing to position itself to cope effectively with these shifts may want to start by looking inwards, examining its current risk and regulatory functions and how they might be restructured to cope with the new regulatory paradigm,” observes George Hanley, director, Deloitte & Touche LLP. “Such a transformation could help a company better anticipate the future, enabling it to adapt to changes that are still beyond the horizon in a nimble and profitable manner,” he adds.
Following are several regulatory trends for the insurance industry in 2015:
Dual regulation at the state and federal level. The states have primarily been responsible for the regulation of the insurance industry since the mid-19th century. But now emerging is an evolving hybrid model of dual state and federal regulation. The Federal Insurance Office (FIO), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, has broad responsibility for monitoring the insurance industry, although technically speaking it does not have formal regulatory authority over insurance companies. The Federal Reserve also has a growing role in insurance regulation, with responsibility for overseeing insurance companies that operate banks or thrifts, as well as those designated as non-bank SIFIs by the Financial Stability Oversight Counsel (FSOC). What’s more, international bodies such as the Financial Stability Board (FSB) and International Monetary Fund (IMF) are seeking a central supervisory point for U.S. insurance, which is the norm in most other countries.
The exact roles of state and federal actors—including the FIO, FSOC, as well as the Federal Reserve and IMF—are still being debated. At some point, things may converge into a clear and consistent set of requirements across both the state and federal levels; for now insurance companies must learn to operate effectively in a regulatory environment where uncertainty and inconsistency are the norm.
Convergence of U.S. and international regulatory principles. The U.S. insurance industry faces increasing pressure to follow international regulatory standards. International standards for insurance regulation have been evolving for two decades and are now being adopted by more than 120 countries. The International Association of Insurance Supervisors (IAIS) is pushing to make its regulatory framework a global reality and recently has seemed to become less receptive to new input from insurance companies and industry associations. The U.S, a founding member of the IAIS, is represented there by state regulators, the Federal Reserve and the FIO. However, as harmonized globally accepted insurance supervisory standards are agreed upon, state regulators are under growing pressure to conform with the way insurance is regulated in other parts of the world.
Own risk and solvency assessment (ORSA). The ORSA model developed by the National Association of Insurance Commissioners (NAIC) went into effect on January 1, 2015. ORSA will evolve over the next several years as regulators receive initial filings and provide feedback to industry. Under ORSA, certain U.S. insurers and insurance groups are required to subject themselves—at least once a year—to a confidential internal assessment of material and relevant risks (as identified by the insurer) associated with its current business plan, and sufficiency of capital resources to support those risks. Affected companies must submit their initial summary findings within the year. However, regulators are strongly encouraging organizations to get in touch early for an informal discussion so there are no surprises about the agreed ORSA reporting expectations.
Corporate governance. In 2014, the NAIC approved a framework for corporate governance, requiring the annual collection of information about an insurer’s corporate governance practices. The framework would require every insurer to file an annual report about its corporate governance practices, including its governance framework, management policies and practices, and the policies and practices of its board of directors and committees. States, which are considering adopting the framework, may use it as a foundation, layering on additional requirements as they see fit. During this process, privacy issues are likely to be at the center of the debate.
Use of captives. The debate rages on over how to prevent insurers from using affiliated captives in ways that might enable them to evade accounting rules and reserve requirements. While regulators in New York and California remain opposed, the NAIC recently accepted the recommendations of its consultant in the modified Rector Report. Some opponents expressed concerns about reserves and nontransparent risks. However, supporters argued that the use of affiliated captives to address the gap between statutory and economic reserves benefits consumers by allowing insurers to price products in a reasonable way that reflects actual risk.
Principle-based reserving (PBR). Uncertainty continues over the best way to determine reserve requirements for life insurance—with no resolution in sight. Insurers argue that the traditional formula-based approach is outdated and produces reserve requirements that are excessively high. In their view, a principle-based approach is more reasonable and fair, especially now that companies have access to better systems and data that enable greater accuracy and personalization. The NAIC agrees and has approved the shift to principle-based reserving. However, the change can’t take effect without approval from a supermajority of states representing 75% of membership and of the life premium—and at the moment that goal is still in the distance. PBR could enable companies to profitably offer a different mix of products. However, at this point, no one knows how the debate will play out.
Cybersecurity threats. Insurance companies are an increasingly appealing target for hackers and cybertheft and need to shore up their cyber defenses before they are seriously compromised. As insurers expand their footprint to mobile devices and the Internet—and as the value of customer data continues to rise—regulators have begun to recognize the serious and rising risks of cyberthreats in the industry and the fact that many insurers are unprepared. In response, regulators are starting to raise the bar on cybersecurity. As an example, the NAIC has established a Cyber Security Task Force reporting to its executive committee.
Focus on annuities. Regulators are continuing to scrutinize annuity products, which are growing in the marketplace. Annuities tend to be more complex than other insurance products, increasing the potential for misunderstandings and misrepresentation. In addition, there is a strong possibility that interest rates will remain historically low for the foreseeable future, which could make it difficult for insurance companies to deliver anticipated payment streams without having to pass along to policyholders premium increases. Insurers need to closely examine their annuity products to address the risk of misunderstandings and misrepresentation.
“Insurers should consider taking corrective action now, before regulators start clamping down and to avoid a major industry crisis such as the life insurance abuses of the 1980s,” says Mr. Hanley.
