Another British Invasion? The New Wave of Insurance Regulation

Nearly 50 years ago, the popularity of British rock groups spread rapidly in the U.S., beginning with the exultant arrival of the Beatles in 1964, and continuing through waves of artistic arrivals from the Rolling Stones and the Kinks through The Who and Pink Floyd. While this cultural influx was considered auditory magic for some, others found it unwelcome, including American blues and R&B artists, nascent surf-rock bands and teen crooners. Today there is much speculation about a new British or European "Invasion." This time around, it's in the area of insurance regulation.

Global supervisory schemes increasingly serve as guideposts for U.S. state and federal market regulation. Over the past several years, the National Association of Insurance Commissioners (NAIC) has been meeting frequently with U.K. and European regulators and members of the International Association of Insurance Supervisors (IAIS), to discuss Solvency II, changes in accounting standards, and other common initiatives.

As a result, the NAIC, has proposed several European-flavored concepts as part of its own Solvency Modernization Initiative (SMI), a critical self-analysis of the U.S.'s insurance regulatory framework. Also, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a Federal Insurance Office (FIO) intended to study and share information about the insurance industry. The FIO is likely to partner with the NAIC to liaise with international counterparts.

Today, not everyone welcomes the rising popularity of overseas regulatory proposals. Historically, insurance regulation in the U.S., U.K. and Europe developed uniquely based on each country's cultural and political philosophies. Significant theoretical and practical differences include the role of internal models, diverse auditing standards, and the degree of disclosure of financial information. Some fear that methods of regulation favored overseas simply can't work here.

However, as the British Invasion ultimately had a lasting impact on American music and culture, the synergy of regulatory reforms in the U.S. and Europe are also aimed at constructive global cooperation, a blending of the "best of both worlds." Benefits on the horizon may include:

- More coordinated accounting standards, providing better visibility into insurer financials;

- Streamlined corporate governance rules for companies operating globally;

- Increased international supervision of multi-national groups, allowing regulators to promptly address potential issues group-wide;

- Stronger insurer capital and solvency rules; and

- Improved stability in financial markets.

Where are the opportunities for synergies? What resources will be needed to comply with more globalized regulation? Leading companies are identifying the common themes behind jurisdiction-specific regulations, to prepare for up-and-coming trends. Of note, whether proposed by the NAIC, or in the context of Solvency II, major proposals have several "common themes," including:

- Increased focus on enterprise risk management (ERM);

- Changing capital, collateralization and reserving requirements from a formulaic basis, to a more flexible risk-based calculation;

- More principles-based, rather than rules-based, examinations and audits;

- Increased attention to holding companies and non-insurance affiliates;

- Changes in accounting standards, reporting, and disclosures.

Throughout the current regulatory proposals, ERM principles are being driven into insurance company culture. Regulators are increasingly expecting companies to make decisions based on in-depth analysis of the company's risk and control profile across the organization.

Insurers worldwide are thus working to strengthen their documentation and tracking of corporate risk, their controls, and the factors supporting key strategic plans. They have to clearly show how risk assessments are used to meet business objectives. Insurers also are looking at ways to beef up sign-offs, attestations and disclosures. More resources are being allocated to IT systems, analytical models, and ERM staff.

Whether the move to more international standards is viewed as good or bad, one thing is for sure - Globalization of insurance regulation is here to stay. Companies who pursue comprehensive ERM strategies today will be "at the top of the charts" in the next wave of international risk-based regulation.

About the Author: Denise Tessier is senior regulatory specialist, Insurance, at Wolters Kluwer Financial Services. For more information, visit https://insurance.wolterskluwerfs.com.