Category Archives: Regulation

Financial Risk Outlook

We head across the pond today, where the U.K. financial regulator has published its annual Financial Risk Outlook. Amid the continuing slowdown in the economy, the FSA’s 2008 report focuses on the risks arising from the events of the second half of 2007 and specifically warns firms and consumers of the risks that could impact them in a less benign economy. Among the risks identified as priority, the FSA notes that tighter economic conditions could increase the incidence or discovery of some types of financial crime or lead to firms’ resources being diverted away from tackling financial crime. An interesting point, given last week’s  revelation concerning a rogue trader who defrauded French bank Socià ©tà © Gà ©nà ©rale of $7.2 billion. Check out  further I.I.I. info on financial  and market  conditions for insurers.

Captive Groups Coordinate IRS Response

Those of you in the alternative risk transfer business may be interested in today’s item. Two prominent captive insurance associations have teamed up to form a coalition to battle a proposed Internal Revenue Service (IRS) rule change that would significantly alter the landscape for captive insurers in the U.S.   Issued September 28, the proposed IRS regulation would eliminate the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business. Instead, they would only be allowed to claim deductions when claims are actually paid. The change would essentially result in treating the transaction as non-insurance for tax purposes. We don’t need to remind you that captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicile– with 1,251 licensed captives – followed by Bermuda with 989. If the IRS proposal goes ahead, it seems likely that it would drive more business offshore. The Coalition for Fairness to Captive Insurers (CFCI) has been formed by the Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA). Those interested in joining the coalition should contact either association. Check out further I.I.I. information on captive insurers.

NY Reinsurance Collateral Proposal

Reinsurance regulation in the U.S. has long been a broad  issue of debate about which different parts of the industry have varying opinions. Last week’s proposal put forward by New York insurance superintendent Eric Dinallo addresses just one area of the debate: collateral requirements. Currently, any U.S. or non-U.S. reinsurance company that is not authorized or accredited to do business in New York must post collateral equal to 100 percent of its share of policyholder claims. Under Superintendent Dinallo’s proposal, well-capitalized non-authorized reinsurers with the highest credit rating doing business in New York would be treated on an equal footing with authorized companies and would no longer be required to post collateral. Companies that are not as strong would still have to post collateral on a sliding scale from 10 to 100 percent. New York is the first state to suggest the change and it remains to be seen how other states may react. Clearly, reinsurance is an international business that enables risks to be spread more widely. It plays a critical role by increasing capacity in the global insurance marketplace and offering catastrophe protection. But from insurers’ perspective concerns have been raised over ceding insurer solvency and reinsurance recoverables. We welcome your comments on this issue.  Check out the NAIC for further information on its reinsurance modernization proposal. Check out  further I.I.I. facts & stats on reinsurance.

Global Insurance Regulators Meet

“A Global Climate for Change: The Future of Insurance Regulation† is the billing for the 2007 annual conference of the International Association of Insurance Supervisors (IAIS) which kicks off in Fort Lauderdale later this week. For a conference that promises global perspectives on future trends in insurance regulation, we note with interest that Florida Governor Charlie Christ is scheduled as one of the keynote speakers. Other keynote speeches will be delivered by: Zhou Yanli, vice chairman, China Insurance Regulatory Commission (CIRC); Dr. Fariborz Ghadar, director of the center for global business studies, Penn State University; and Dr. Evan Mills, staff scientist, Berkeley National Lab, who will speak on insurance and climate change. Additional panel discussions will focus on a range of topics including: emerging markets and regulation; reform of reinsurance regulation in the U.S.; global accounting standards; Solvency II and its impact; and the use of securitization in insurance markets. Check out I.I.I. updates on reinsurance and accounting and  our International Fact Book for further related info.

NY Cat Fund Debate

The availability and affordability of coastal property insurance is an issue that elicits a wide range of viewpoints. Insurers, legislators and regulators face growing challenges in managing this problem because of the escalating values at stake. Even in a hurricane season without a major U.S. landfalling storm, the numbers at play are of grave concern. Let’s revisit some of the figures: total value of insured coastal exposure nationwide is more than $7 trillion and growing; Florida and New York — with more than $1.9 trillion insured coastal property each — have the highest coastal exposure as a share of all insured exposure in their states; coastal populations continue to surge; natural disasters cost insurers $14.5 billion annually in the 20-year period from 1986-2005, and since 2000 the toll has increased to $20 billion annually, mostly due to hurricane damage. To-date many proposals have been put forward to deal with the coastal property insurance problem. The latest solution, unveiled late last week by New York insurance superintendent Eric Dinallo, would require insurers to create a catastrophe reserve fund to help pay claims from hurricanes and other natural disasters. Like many issues in our industry, there  are varied responses to this plan. National Underwriter’s October 9 online article by Daniel Hays “Insurers of Three Minds on N.Y. Cat Fund Proposal† sums up where we are right now. We welcome more feedback on this topic.  

Credit Scoring Benefits

Much has been written about the pros and cons of using a policyholder’s credit history in the underwriting and rating process. While insurers have long held that how well individuals manage their financial affairs is a reliable predictor of insurance risk, others have criticized the use of credit information by auto and home insurers and in particular the impact on low-income and minority groups. Now a Federal Trade Commission (FTC) report has found that credit-based insurance scores are effective predictors of risk under auto policies, both in terms of the number of claims individuals file and the total cost of those claims. As a result, the use of scores is likely to make the price of insurance better match an individual’s risk of loss. On average, higher-risk individuals will pay higher premiums and lower-risk individuals will pay lower premiums, says the FTC. We couldn’t have said it any better. Check out further I.I.I. info on credit-based insurance scores online.  

Solvency II

We’re blogging with a bit of an international bias this week, so apologies to those whose business is confined to the U.S. market. We’ll be moving on to other topics shortly. But Tuesday’s publication by the European Commission of its proposed framework directive on Solvency II, the new risk-based solvency regime for insurers operating in the European Union, is an important development. Essentially Solvency II is the European equivalent of the NAIC risk-based capital (RBC) formula introduced in the U.S. in the early 1990s. Solvency II regulation is expected to be implemented by 2010. The new approach will establish a common solvency system across Europe and result in greater capital efficiency. While Solvency II has been broadly welcomed by European insurers, the question is what are the impacts for U.S. insurers? Are you ready? Check out I.I.I.’s  background info  on U.S. RBC rules and solvency.

Optional Federal Charter

While we’re on the subject of regulation, today we’re responding to a reader’s request to blog about the bill introduced on Capitol Hill last week by Republican Senator John Sununu and Democratic Senator Tim Johnson. The National Insurance Act of 2007 would create an optional federal charter for insurers. The measure is similar to a bill introduced by the two Senators in April 2006. Those of you familiar with I.I.I. will be aware that the Institute does not lobby, leaving that role to our advocacy trade colleagues. The state system of insurance regulation in the U.S. began when the Constitution gave Congress the right to regulate commerce among the states. However, the question of state versus federal regulation has been bubbling ever since. As with many of the issues we tackle, this is one that elicits a range of viewpoints and there are pros and cons of both systems. So, with that in mind we welcome your comments and tip you to the I.I.I.’s online update on modernizing insurance regulation.  

Top 10 Banana Skins

Insurers around the world are slipping on one major banana skin that is costing them dearly, according to the results of a new survey from London-based think tank Centre for the Study of Financial Innovation (CSFI) and PricewaterhouseCoopers. That is: too much regulation. More than 100 respondents to the 2007 survey say that excessive regulation is endangering the industry by loading companies with costs, distracting management and creating barriers to competition and innovation. This finding is linked to concern about growing political interference, particularly in markets where governments regulate insurance products and prices. Apparently the view is widespread, with responses from 21 countries showing it to be a major issue in North America, Europe, South Africa and the Asia pacific region. Other banana skins high on the list for property-casualty insurers include natural catastrophes and climate change. The main risks facing the life industry include growing human longevity and the soundness of assumptions underlying the pricing of life policies. What are your top insurance banana skins in 2007? Check out I.I.I. info on rates and regulation.

Hill Hearings

Availability, affordability and oversight are the watchwords of two separate hearings on Capitol Hill today. Hearing No. 1. before the Senate Committee on Housing, Banking and Urban Affairs will examine the availability and affordability of property casualty insurance in the Gulf coast and other coastal regions. Dr. Robert Hartwig, I.I.I. president and chief economist, will deliver testimony noting how population growth, rising property values and continued development in vulnerable areas are increasing the cost of property damage inflicted by hurricanes. Current regulatory, legislative and litigation-related obstacles are also raising costs and reducing choices for insurance consumers in hurricane exposed areas. The second hearing before the Senate Committee on Commerce, Science and Transportation will focus on oversight of the property and casualty industry. The industry’s limited federal antitrust exemption under the McCarran Ferguson Act is expected to be the topic du jour.