Posted on 20 May 2009
Haunted by the near-collapse of American International Group Inc. in late 2008, U.S. insurance regulators plan to assert their authority over non-insurance business entities owned by insurance holding companies.
Working through a recently created Solvency Modernization Initiative Task Force, the National Association of Insurance Commissioners (NAIC) will review international accounting issues, group solvency issues, reinsurance and related challenges. Commissioners and staff discussed their work at an NAIC international insurance forum.
Group supervision includes regulation of areas not previously regulated or not regulated well -- like AIG's Financial Products Division, said Joseph Fritsch, director of insurance accounting for the New York Department of Insurance. That division, which came under the authority of the U.S. Office of Thrift Supervision, was behind AIG's credit default swap problems.
While insurance holding companies like AIG may also operate non-insurance entities, these operations are not subject to oversight by state regulators. However, if they develop problems the regulated companies could be subjected to "contagion risk," Fritsch said. "Nobody wants to see an unregulated entity at the holding company level," he said.
Nebraska Insurance Director Ann Frohman co-chairs the NAIC's Group Solvency Issues Working Group, which operates under the SMI Task Force. The NAIC is not seeking the authority to regulate noninsurance entities, but it is asserting the right to review them in the name of early detection of any problems and halting any risk contagion, she said.
"I don't think we need to seek it. I think we have it," Frohman said in an interview after the panel. "We have the obligation to act and we need to be told."
Frohman said details are in development. "We're so early on. We're not there yet." she said.
Ingrid Klauer, head of regulatory affairs for Zurich Financial Services, gave a presentation which highlighted group supervision procedures and cooperation between the European Union and Zurich's home domicile of Switzerland. The need for cooperation is acute since while Switzerland is not an EU member, it is surrounded by EU member states.
The international context for this authority stems from the discussion of group support in negotiations over the European Union's Solvency II project. Group support would recognize the financial linkages within insurance or reinsurance groups and the ability of policyholders to benefit from the solvency position of such entities in relation to their parts, taking group diversification effects into account (BestWire, April 13, 2009). Group support was cut from the final draft, but was woven into discussions over international regulatory initiatives on the first day of the NAIC's two-day international insurance forum.
The Council of Europe and the European Parliament recently approved Solvency II, a uniform solvency standard for insurers and reinsurers in the 27-member European Union (BestWire, May 6, 2009). The EU timetable for Solvency II calls for the Committee of European Insurance and Occupational Pensions Supervisors to present advice on implementing its provisions later this year, with adoption in 2010 and formal enactment in 2012 (BestWire, April 22, 2009).
Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.