Friday, November 20, 2009

NCOIL Warned International Changes Will Critically Impact American Companies

By Jim Connolly
New Orleans
State insurance legislators received a sobering assessment of what United States insurers face as new global solvency and accounting initiatives hurdle toward completion over the next several years.

The discussion took place during the annual meeting of the Troy, N.Y.-based National Conference of Insurance Legislators here.

“We are talking about a race of the kind we have never seen before for global capital and reinsurance,” said Dave Snyder, vice president and assistant general counsel with the American Insurance Association, Washington. Snyder framed the critical nature of these global changes during a description of Solvency II and how it will bring Europe up to date with the U.S. and create a European-wide regulatory system.

Consequently, he continued, it is critical that the U.S. ensure effective and efficient regulation to compete internationally in order to bring premium dollars and jobs back to the states. This addresses the ability of American insurers to remain competitive on the global stage, he added.

Snyder said that the reason this issue is important to NCOIL legislators is that insurance regulatory issues are going to be decided outside of U.S. borders. All these efforts “very much underscore a global regulatory environment.”

Ed Stephenson of Barnert Global, representing the Group of North American Insurance Enterprises, both in New York, noted not only the importance of these issues to U.S. insurers but the tight timeline in which they are being developed. The work being done by the Committee of European Insurance and Occupational Pensions Supervisors, Frankfurt, Germany, is targeted for completion in 2010, he noted. “Imagine all of the insurance regulation and everything the NAIC puts forth being completed in 18 months,” he said. Fifty papers have produced 20,000 comments, Stephenson continued.

That urgency to complete work is also evident in accounting work being done by the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London. A joint insurance contracts project is scheduled to have an exposure released by April 2010 so that the new requirements would be implemented by mid-2011. By June of 2011, there will only be 6 board members will remain on the Boards and there is a concern that if there is not something in place, the whole issue may need to be re-deliberated, according to Stephenson.

But differences exist between the approaches of the two boards. The U.S. is tying the issue to its revenue recognition project while the IASB is moving more toward intermediate measurement, he explained.

Stephenson explained that GNAIE members have five major concerns over the treatment of: acquisition costs, discount rates, the treatment of participation features, unbundling the insurance part of the contract from the investment part of the contract; and for property-casualty insurers, post claims reserving would run more than one year. However, the good news for P-C insurers, he continued, is that treatment of short-term contracts would look more like U.S. GAAP.

The potential danger, Stephenson continued, is that the ability to enter the insurance market could be irreparably impaired. If a company didn’t have the book of business to offset the liability upfront, then it would be unable to participate in the market, he added. It could also upend treatment of deferred acquisition costs and change companies’ relationships with agents, Stephenson continued.

Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, who is based in Washington, expressed concern over how work on systemic risk would change how insurers handle insurance groups. And, another issue he urged legislators to watch is the possible overlapping or regulatory requirements and regulatory agencies to whom jurisdictions would have to report.

It is an issue that the National Association of Insurance Commissioners, Kansas City, Mo., is also watching, according to Bob Tomlinson, assistant commissioner with the Kansas insurance department. For instance, he said that one proposal under consideration would require a parent company could be required to maintain solvency collateral and would be required to legally transfer collateral to smaller companies within the group. But, there is a lack of a definition of what a legal requirement is, he added.

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