US state regulators are concerned about pressure to measure up to a standard that has not even been implemented yet, in impending European directive Solvency II. At Reactions’ Risk and Capital Management conference in New York on September 29 panellists said regulators worldwide should work together not “jump through hoops” to be equivalent to Solvency II.
“Our goal should be for an international standard, not foisting a regional model on companies,” said Kevin McCarty, commissioner of the Florida Office of Insurance Regulation. “Solvency II is a theoretical standard – it is not in place yet. It is difficult to say what effect Solvency II would have, because it is not yet implemented whereas we have 130 years of experience. Our system has been ground up through the years.
McCarty added: “We have concerns over the emphasis on ERM and internal models for Solvency II. Perhaps the biggest concern is that it was designed prior to the financial crisis, and involves increasing regulatory deference to financial organisations to set capital levels. There is also the risk of political pressure.”
James Wrynn, New York’s insurance superintendent, stressed the importance of the regulatory changes taking place. He believes that regulators worldwide should be working together more.
“We are in a very important time. What happens now will be in place for a long time, so we need to get it right,” Wrynn said. “Solvency II is not even implemented. We are being asked to do things in anticipation of something that hasn’t even happened. I think that is the wrong approach. We need to work collaboratively to get an international standard in place. I feel it should be an international system, not a regional system because otherwise you will end up with a world of regional systems.”
In June, the US was left off a list of leading candidate jurisdictions for Solvency II equivalency by the Committee of European Insurance and Occupational Pensions (Ceiops), which is overseeing the implementation of Solvency II. The US was left out because of the complexity of state regulation and Ceiops’ strained resources. In September, however, Ceiops shifted its view on the US, leaving open the possibility that the US may gain equivalency after further dialogue and investigation.
Equivalence would allow a country’s companies to trade freely in Europe without having to set up separate companies.
“The ramifications of being found equivalent or not can be profound,” said Wrynn. “But my real objective over the past year has been to get people to step back and say: ‘Let’s put the best system in place.’ Let’s talk and see how far apart we are. The equivalence thing should be secondary. They may focus initially at the group level but at the end of the day we see the same thing. So is the goal to have the exact same system or is the goal to have the same results in the end? If it is the latter I don’t see how the US system doesn’t be seen as equivalent.
He continued: “My intent is not to tell you that the US system is the best and Solvency II is the worst. No, we can be improved and Solvency II has many good things, but let’s talk! This is an extremely important time and we should be working together, not jumping through hoops to see if we are equivalent. If you took the US system and placed it over Europe, it would work perfectly with the EU member states. We have the NAIC; whereas they have Ceiops and down the road Eiopa [the European Insurance and Occupational Pensions Authority, a more powerful body that will replace Ceiops].”
Wrynn conceded that one area the US needs to work on is group supervision. But he pointed out a number of weaknesses in Solvency II.
“There is a lot that is good in Solvency II, but there is an over-reliance on internal modelling. Do we need to go that far? I don’t think so. Doesn’t the over-reliance on internal models complicate the role for regulators? Do they understand it? And people will game it, the Enrons of the world. There is also regulatory forbearance and regulatory capture, where regulators don’t want to upset a certain company, and regulatory error. People miss things. But in the US we have many eyes looking at things.”
US regulators concede they need to do more to make people aware that they have a national state-based system. The National Association of Insurance Commissioners (NAIC) is conducting a solvency modernisation initiative (SMI), which is a self-examination of the insurance solvency framework in the US. It is focusing on five areas: capital requirements, international accounting, insurance valuation, reinsurance and group regulatory issues.
“My message is that regulators and NAIC need to encourage fulsome understanding of the state-based system,” said Elise Liebers, special advisor, insurance markets and international prudential supervision at the NAIC, on the same panel. “We announced the SMI initiative in June 2009 but we approach that from the standpoint that the current system is fundamentally sound.”
Liebers said the US system had many benefits, such as the checks and balances of more than one regulator looking at things. “The NAIC supports a multijurisdictional approach – more eyes is a good thing,” she said.
Source : Reactions Net