A Year After AIG, Regulators Discuss How To Close Regulatory Gaps

Nearly a year after American International Group, New York, suffered a financial blow related to Wall Street’s financial meltdown; state insurance regulators are looking at ways to close oversight gaps because different regulators had jurisdiction over different parts of a company with insurance entities. Talking points are being raised to see if broader oversight might help regulators keep insurance units financially safe.

These potential action items were discussed during a recent discussion of the National Association of Insurance Commissioners’ Group Solvency Issues working group. The group is part of the Solvency Modernization Initiative (Ex) task force. The discussion is at an initial, high level.

Among the issues that are being bandied about are whether regulators should further investigate developing group wide supervision and capital requirements for all companies in the group rather than just the insurance units.

Related to that discussion was how broad the authority of regulators should be and whether broader surveillance would help insurance regulators understand the impact on the financial condition of an insurer.

While it was generally agreed that it would be appropriate to look at how a holding company would impact an insurance unit, it was less clear how regulators could require a holding company to take a particular action because it was creating a perceived risk for that insurance unit. For instance, regulators participating in the discussion maintained that non-affiliated units should not be within the scope of the working group’s research.

And for example, it was asked by Nebraska Director Ann Frohman whether it would be a government jurisdictional issue. The discussion turned to what powers are inherent to an insurance commissioner and whether federal preemption issues may surface and it might be necessary to work with federal regulators, particularly if it dovetails systemic risk work being looked at on the federal level.
Regulators also considered that risk-based capital at the holding company level will also be retained as a discussion item but that could also involve federal preemption issues.

But Steve Broadie of the Property Casualty Insurers Association of America, Des Plaines, Ill., asked whether the end result might be a higher minimum capital requirement for insurers in a holding company rather than in a single entity. “We would have some issues [with that,]” Broadie added.

Enterprise risk management was another point of discussion with most agreeing that the exercise which involves everything from fiduciary and reporting requirement, but also noting that the working group would need to decide how to effectively use this risk management tool. Morag Fullilove, representing the Group of North American Insurance Enterprises, New York, supported the NAIC’s effort to encourage these programs.

Separately, the issue of ensuring sufficient financial cushion for an insurer also surfaced as regulators, actuaries and industry try to fill in details of the principles-based reserving project.

Donna Claire, who is spearheading an effort by the American Academy of Actuaries, Washington, to work with regulators to put principles-based reserving in place, spoke on Aug. 12 during a joint NAIC call of the Capital Adequacy “E” Task Force and the Life and Health Actuarial Task Force. Claire addressed calibration criteria following a discussion of scenario generators. Scenarios will be run by companies to test the likelihood of different events that could impact a company’s financial strength, and hence, reserves.

Claire pointed out that the calibrations would offer not only a regulatory benefit but also would help companies with business planning. Part of the broader argument for PBR is that it is not only a benefit to regulators but also important to companies as a self-assessment tool.