Financial Stability Considerations Drive Regulatory Response: Part II, Summary of Recent Developments
In November of 2009 the Financial Services Bill 2009 added the new regulatory objective of ‘financial stability.’ The act imposes a duty on the Financial Services Authority to promote international regulation and supervision. Amendments to the existing financial services legislation apply to all ‘authorized persons” in addition to the previous application to solely the banking institutions. They also include new rules on remuneration. Collective proceedings or class actions are envisaged for financial services claims. Regulations will be introduced for authorized persons to produce a recovery and resolution plan (also known as a ‘living will’) in stressed circumstances such as failure of all or part of a business.
Given the background of the financial crisis and the criticism of traditional payment systems for top managers, the German legislative body tried to introduce a tool that would guide directors and officers’ remuneration. They introduced a compulsory deductible in the D&O cover provided by the companies for board members and members of the supervisory board. “If the company buys insurance against risks the board member will be faced with in connection with his occupational activity for the company, a deductible of min. 10 percent of the claim, max. 1.5 times of the fixed annual salary of the manager must be implemented.” However, insurers developed new insurance products to cover the compulsory deductible, potentially eliminating the impact of the new law on board members.
A package of financial reforms comprising nine bills was passed by the U.S. House of Representatives in December of 2009 including:
- Financial Stability Improvement bill. Applying to large (over USD50Bn in assets) systemically risky firms, the bill is designed to prevent a repeat of the 2008-2010 financial crisis. Aimed principally at banks, it will present a radical change for large insurance companies.
- Federal Insurance Office (Kanjorski) bill. The proposed federal office of insurance would sit within the U.S. Treasury Department. Its goal is to improve government expertise and monitor all aspects of the insurance industry including systemic risks. However critics warned it could become a data collection monster, duplicating the role of state supervisors, and interpose between international agreements and state solvency laws. Industry trade associations contend that a single point of government liaison for the U.S. insurance industry internationally could be a positive feature.
- Restoring American Financial Stability (Dodd) bill. Although a far-reaching piece of legislation that would also create an office of national insurance within the U.S. Treasury, this would be mainly an advisory body with power to issue subpoenas. It incorporates the idea of merging the federal oversight of the banking system from four government agencies into one new agency. However this bill would not allow federal regulation to pre-empt state laws.
- Proposed Consumer Financial Protection Agency. While general insurance is not included in the remit of the new agency there are specific references to credit, title and mortgage insurance.
A Capital Solvency Requirement model is being implemented, although it may be substituted by a suitable model maintained by the regulated entity. Increased monitoring and transparency for Class 4 and Class 3B insurers is under way with the goal of obtaining mutual recognition with regulators in other jurisdictions. During the first half of 2009, some 24 new insurance entities were established in Bermuda and a new class of insurer, the SPI, was introduced.
The Financial Services Agency decided to allow domestic companies to use International Financial Reporting Standards, beginning in March, 2010. It also has ended the option for some companies to submit consolidated financial statements according to US accounting rules. The decision on adoption of International Financial Reporting Standards as mandatory for Japanese companies is scheduled for 2012. However, a move to bring international standards closer to the US-style ‘full fair value’ system could jeopardize the decision to adopt these standards in Japan.
The Australian Prudential Regulatory Authority has proposed financial reporting changes that would align nonlife regulatory reporting with prevailing accounting standards to simplify the regulatory process. Following industry comment and a Quantitative Impact Study, a proposal is anticipated in February 2010, to be finalized by July, with prudential and reporting standards based on statutory accounts, rather than on annual returns. Advantages to the regulator will include a more detailed view of profitability and performance with an unchanged capital framework.
Takaful - Islamic Insurance
The takaful insurance market has grown at approximately twice the rate of conventional insurance in Muslim countries. However, there has been a push-back from sharia scholars who opine that recent financial innovations are bending key religious precepts. For example, some so-called “Islamic bonds” are blatantly imitating conventional interest-paying bonds, which are banned from sharia-compliant practices. Although South East Asian scholars are regarded as more liberal than their Middle East peers, the debate between different factions within regions has led to calls for more regulation and international standardization of sharia-compliant products. One regulator, Bank Negara Malaysia, has commenced public consultation on a concept paper “Guidelines on the Takaful Operational Framework.” However, few territorially specific industry boards command global acceptance.
Statements concerning accounting, legal, regulatory or tax matters should be understood to be general observations based solely on the author’s experience in the reinsurance industry, and may not be relied upon as accounting, legal, regulatory or tax advice which he is not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.