October 7th, 2015

Regulatory Challenges and Opportunities for (Re)insurers, Part II: United States

Posted at 1:00 AM ET

The National Association of Insurance Commissioners (NAIC) has been continuously engaged in the formulation of the regulatory standards that the International Association of Insurance Supervisors is developing, but has expressed several concerns due to the different legal, regulatory and accounting systems that exist. The NAIC does not want the Insurance Capital Standard (ICS), which is to be a consolidated group-wide standard, to undermine the legal entity capital requirements in the United States. As a result, the NAIC is trying to ensure that any ICS be supplemental to jurisdictional capital requirements and include a common methodology by which it achieves comparable (substantially similar) outcomes across jurisdictions. The NAIC is working through the ComFrame Development and Analysis (G) Working Group (CDAWG), which was formed early last year, to provide on-going input with respect to all developments in this regard.

Spearheaded by the Financial Stability Board, the International Accounting Standards Board and the U.S. Financial Accounting Standards Board are moving to converge accounting standards. While the two boards were successful in producing a mostly converged standard on revenue recognition last year (although some work still remains with the Boards continuing to work to amend and clarify the standard), they still have significant differences in several other key areas.

In the United States, the convergence of Own Risk and Solvency Assessment regulatory requirements, which take effect this year, and rating agency A.M. Best’s new emerging risk-based analytics have significant implications in 2015 and beyond. The rating agency is placing greater emphasis on risk-based analytics in its ratings process and will increasingly focus on management’s ability to execute its business plans and reasonably deliver on its financial projections.

Federal involvement in the oversight of the financial services industry is expanding, causing some to question whether this trend will continue and impinge upon the authority of the individual states to regulate insurance. Additionally, large and small U.S. property/casualty insurers will be expected to further develop their financial forecasting, capital modeling and risk tolerance metrics for both capital and earnings. Insurers will need to more tightly link their business plans with both capital and earnings adequacy assessments from a risk-adjusted perspective, to maintain and enhance their Best’s Ratings while complying with new regulatory requirements.

Link to Part I>>

Link to Part III>>

Link to Part IV>>

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