US: The Legacy of the Financial Crisis
While Solvency II remains very much on the radar of US insurance and reinsurance companies, another important regulatory initiative – the Neal Bill – may encounter hurdles following the recent political shifts in Washington. This legislation seeks to discourage companies from ceding ‘excessive’ portions of their US premiums to offshore affiliates to lower their tax burden. A revised version of the bill was also incorporated into the Obama Administration’s 2010 budget plan. However, prospects for the full bill’s passage diminished in the 2010 US midterm elections, when the Republican Party took control of the House of Representatives and eroded the Democratic majority in the Senate. As demonstrated by the recent extension of the Bush tax cuts, the Obama Administration has been compelled to compromise on its legislative agenda, and the shift in power could prevent the Neal Bill from passing into law.
This would mark a change in the prevailing regulatory climate in 2010, when the legacy of the recent financial crisis continued to dominate the agenda. The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in July, bringing sweeping changes to financial regulation with the aim of restoring public confidence in the financial system, preventing further crises and detecting future asset bubbles.
Much of the Act’s 2,300 pages focused on the banking industry but there were some significant changes for the US insurance industry as well. The Act established the Federal Insurance Office (FIO), a body that will monitor the insurance industry and identify issues or gaps in insurance regulation. Although the FIO does not have supervisory or regulatory powers, and the industry will continue to be regulated at the state level, it does have the authority to work globally with other countries and pre-empt certain state regulations in specific international insurance matters.
In addition to the FIO, the Dodd-Frank Act enhanced regulation and transparency for credit rating agencies. One key change redefined rating agencies as “experts”, meaning their future assessments are to be treated as such. By repealing Rule 436(g) under the Securities Act of 1933, the Dodd-Frank Act exposes credit rating agencies to “expert” liability if they agree to be named in registration statements and any related prospectuses. This would allow investors to bring private rights of action against the agencies if their ratings are found to be inadequate. However, all the major credit rating agencies have indicated they will not consent to their ratings being used in registration statements and prospectuses, and it remains unclear whether the dispute will affect rating agencies’ assessments of insurers and reinsurers in the future.
In a separate development, state insurance regulators from the National Association of Insurance Commissioners (NAIC) continued to work on the Own Risk and Solvency Assessment (ORSA) for US insurers. The ORSA is a concept borrowed from the Solvency II regime, consisting of internal modeling and stress testing to assess capital adequacy in light of a group’s particular business mix and strategy.
Europe: Regulators Respond to Critics
Regulators in Europe attempted to react to criticisms outlined in the de Larosière Report that was released in early 2009 and reviewed financial supervision and stability in the EU. The report specifically criticized the lack of co-operation among supervisors, inconsistent supervisory powers across EU states, an inadequate macro-prudential supervision framework and ineffective early warnings, prompting the EU to publish draft legislative proposals in September 2009.
These proposals were recently approved by the European Parliament, formally setting up the European Systemic Risk Board, an EU body responsible for the macro-prudential oversight of the financial system within the Union. For micro-prudential supervision, three new European Supervisory Authorities (ESAs) for the banking, securities, insurance and pension sectors are to replace the three existing regulatory bodies; a new European Insurance and Occupational Pensions Authority is to replace CEIOPS. The ESAs will primarily be charged with considering EU interests and ensuring harmonized rules and coordinated responses, being accountable to both the European Council (representing member states) and the European Parliament (representing
the general community).
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US: The Legacy of the Financial Crisis