Insurers are facing revolutionary changes in the regulatory environment–changes that are causing some U.S. insurers to reevaluate business strategies and structure.
“Insurers need to review their business strategies against these unprecedented regulatory changes,” says KPMG's U.S. Head of Insurance Regulatory practice David Sherwood. “Prudential standards are at the forefront of recent developments, while consumer protection has often been the poor relation. Going forward, you can expect a continued focus on risk management, solvency standards and enhancements to consumer protection, followed by increased enforcement where consumer failings or detriment occur.”
In its third annual report, “Evolving Insurance Regulation—A New Dawn,” KPMG provides detailed analysis of international and country-specific regulatory issues, and examines what is driving them.
The report notes that two years since the adoption of the International Association of Insurance Supervisors' (IAIS) Insurance Core Principals (ICPs) regulators on an international level are implementing wide ranging reform packages. They continue their dialogue to improve understanding and cooperation between insurance markets. This is vitally important, the report says, if carriers want to move to a more “harmonized and converged set of regulatory requirements to the benefit of all stakeholders.”
For U.S. insurers with international operations, besides IAIS ICP, they are also dealing with the impact of Solvency II and the Financial Stability Board standards. The concern between U.S. and Europe is regulatory reciprocity and solvency standards. Unlike the U.S., Europe regulates on the federal level, and their discussions focus on the acceptance of home state regulation overseas.
Some insurers in the U.S. need to be concerned with extension of regulatory oversight to the Federal Reserve if deemed Significantly Important Financial Institutions. KPMG also notes the rise of the Federal Insurance Office and its as-of-yet unknown impact on the regulation of carriers.
Touching on corporate governance, U.S. carriers will increasingly need to develop enterprise-wide risk management programs and abandon the silo approach of looking only at the risks of an insurance entity.
KPMG says the measurement of solvency, or risk based capital, is not comprehensive “as a number of key risk factors are absent from the calculations.” Regulators are updating the standards with changes in catastrophe risk and operational risk.
The regulatory reforms on both the international and domestic front are causing some carriers to alter their business models. The restructuring includes sales of banking entities, re-domestication, captive restructuring and acquisition of new lines of business. For some, it has meant increasing merger and acquisition activity.
“2013 will prove to be a transformative year in the insurance industry, driven by the recognition that the rapid, unpredictable, and profound changed we are witnessing in the industry are structural—not cyclical,” says Laura Hay, national leader of KPMG's U.S. insurance practice.
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