Discussions at the National Association of Insurance Commissioners' fall national meeting highlighted the challenges currently facing NAIC policymakers. The NAIC has the difficult task of balancing the demands of the international supervisory community with the needs of its own insurance community in the United States. Everyone shares a common objective of convergence—but it appears that compromises may be necessary to move forward.
While there are many shared viewpoints in the debate, there are some clear philosophical differences in supervisory approach between U.S. regulators and some of those overseas—in particular regulators from Europe, who are moving toward a consistent regulatory approach throughout the European Union under the European Solvency II Directive.
This difference is often characterized in NAIC discussions as a focus on sophisticated, risk-aligned capital requirements vs. a focus on supervision; in other words, do you focus on the formulas or the supervisors, Pillar 1 or Pillar 2? Europe's planned standard formula and internal models regime will bring a whole new level of sophistication to capital setting for European insurers. However, the NAIC continues to stand by RBC (NAIC risk-based capital) and is investing in its already strong risk-focused examination and analysis capability.
So, where does this leave the NAIC? One of its principal areas of focus has been to complete the new U.S. Own Risk and Solvency Assessment (ORSA) proposal, which it is relying on to bridge many of the current differences between U.S. and international standards. The NAIC adopted guidance for insurers completing the assessment in Washington on Saturday, November 6, and while there is no formal implementation date as of yet, commissioners working on the proposal were adamant that it will be fully in place in advance of the expected U.S. financial solvency assessment process review in 2014.
The U.S. ORSA is expected to help on several levels: satisfying an essential requirement of Insurance Core Principle 16 (enterprise risk management), and also providing a mechanism for U.S. regulators to assess capital adequacy at the insurance group level. As was noted several times in Washington, it is notable that the ORSA will not introduce a U.S. group capital requirement to mirror the approach in Europe.
Achieving international recognition for the U.S. ORSA will be the next big step. Regulators in Washington have heard that Europe will provide recognition only if the U.S. supervisory system enters the Solvency II equivalence process; there are hopes that European regulators will be prepared to meet the U.S. midway. The U.S. continues to have one of the world's most respected regulatory systems, and the NAIC is firm in its view that there is more to equivalence than identical methods, processes and philosophies—a view many in Europe certainly share. Right now, both industry and state insurance departments are likely hoping that the ORSA will provide enough of a link to IAIS-style regulation to achieve at least what one working group referred to as "minimum harmonization" with Europe.
In our next post, we'll look at the proposal in more detail and what implementation could mean for U.S. insurers.
Henry Jupe, Jean Connolly and Mary Ellen Coggins contributed to this article
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