The Other “Heavy Lifting” Project

Denver
There are two “major heavy lifting” projects that the National Association of Insurance Commissioners, Kansas City, Mo., faces this year, according to Susan Voss, Iowa insurance commissioner and NAIC president-elect. One is implementing health care, she said during the spring NAIC meeting this past week. The other is the regulatory modernization effort, Voss added.

Part of that regulatory modernization, is focusing on solvency modernization including potential changes to risk-based capital calculations, supervising insurance companies in groups and the type of accounting that insurers will be required to perform.

The effort is being driven by a variety of factors including efforts to more efficiently regulate companies in the aftermath of New York-based American International Group’s seizure; convergence of accounting standards currently being worked on by the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London, and ongoing solvency efforts.

Much of the work is being done by the NAIC Solvency Modernization Initiative Task Force chaired by Christina Urias, Arizona Director of Insurance.

One of the key areas of concern for many interviewed during the spring meeting was how accounting changes would be implemented. If regulators decide to use GAAP accounting, mutual companies would be introduced to accounting that they previously did not have to adhere to. If the accounting requirements are blended using the current GAAP and statutory accounting, and IFRS, companies will have multiple reporting responsibilities. Is it possible to use GAAP and then for certain select information require statutory reporting? These are just some of the questions that regulators will attempt to answer in the coming year.

Insurers recognize the need for modernization but a number of companies are saying that the way it is done will be key to whether it ultimately benefits the U.S. market or not. Changes have to be done in a coordinated method so that “we don’t have a layer cake method of regulation” in which multiple regulatory requirements are made of companies, says Steve Broadie, vice president-financial legislatin and regulation with the Property Casualty Insurers Association of America, Des Plaines, Ill.

Broadie also expressed reservations about the discussions over risk management and how corporate governance will be treated. He said that the property casualty industry has been able to function well, citing how the industry paid claims during Hurricane Ike at the same time that Lehman Brothers was melting down.

Jim Olsen, the PCI’s senior director-insurance accounting and investment, said that regulators are trying to make sense which system of accounting should be used by insurers and the costs involved in maintaining those systems. The change could impact the way all ratios are done as well as RBC calculations. “It is a massive change,” he noted.

And, Dave Snyder, vice president and assistant general counsel with the American Insurance Association, Washington, said that the AIA is pleased that the NAIC is looking at modernization and as part of that modernization regulators should be looking at streamlining business in the states with processes such as the “use and file” approach to introducing products to the market. He says that the AIA is not suggesting reducing capital requirements.