International regulatory and industry executive panelists discussing the International Association of Insurance Supervisors (IAIS)’s ComFrame (Common Framework) global supervision diverged a great deal on approaches to supervision, what it should look like, who should supervise, and a timetable for implementation.
There are still very distinct views separating the European approach and the U.S. approach on ComFrame said an executive at a large multinational life insurer after the panel.
Other observers noted a lack of cohesion on many elements within Europe, while the U.S. policy remains unclear—the Federal Insurance Office (FIO) director, Michael McRaith, is now chair of the IAIS influential Technical Committee. McRaith mediated the ComFrame discussion at the annual conference in Washington today.
“ComFrame has drifted apart and everybody recognizes that,” said NAIC President and Florida Insurance Commissioner Kevin McCarty, who spoke earlier but was not on the panel.
Connecticut Insurance Commissioner Tom Leonardi was adamant that capital and some other quantitative standards should not be imposed globally and supersede local regulation, which McCarty has said before.
“What if we do it and we get it wrong?” McCarty said in a brief interview afterward—that in itself would be systemically risky.
Leonardi, who sits on nine supervisory colleges, said that “to have a lead regulator that has ultra powers would be detrimental.” Leonardi also said the process should not create an unlevel playing field and have unintended consequences with the IAIGs versus all other entities.
Leonardi said a successful model was the NAIC model holding company act which Connecticut passed in June, which gives the state insurance regulator power to oversee all parts of the group, to participate in supervisory colleges, and to even ask for the financials of any part of the insurer, even if it’s “a railroad company in South Africa” or a company in an unrelated business in Japan and allows for confidentiality of data, which the state financial exams law do not. The model law also allows the regulator to charge the expenses back to the insurer.
Gabriel Bernardino of the European Insurance and Occupational Pensions Authority (EIOPA) emphasized that a common language was needed but cautioned “we need to be clear on what we mean by a common language.”
Bernardino, who said group supervision in Europe has a long history with supervisory colleges, said it was important to make sure “we are capturing the real risks at the group level.”
In response to a question posed by McRaith to panelists on how far should ComFrame push on developing global capital standards, Bernardino said, “here we have an opportunity. We should have a global standard for insurers’ group supervision. It needs to be quantitative and qualitative … with a clear role for the group supervisor. I believe it needs a group capital requirement. Can we achieve it tomorrow? No.”
The NAIC and U.S. insurers joined sovereign nations and other parties weighing in on the supervisory architecture that will have a great deal of impact on the global regulation of anywhere from 50 to 100 IAIGs expected to be identified worldwide. The IAIS released the working draft for comment on July 2, 2012 for a two month public comment period that ended August 31. The 2012 ComFrame Draft marks the completion of the second step in its three-year development phase ending less than a year from now. The FIO did not submit comments to the IAIS on the ComFrame draft.
Philippe Brahin, head of governmental affairs at Swiss Re, noted that a mosaic of regulatory regimes need to be harmonized. “ComFrame is very ambitious and the timeframe is quite short,” he said.
Nicholas D. Latrenta, general counsel of MetLife, said on the panel that “the successful implementation of ComFrame is going to be vital for the smooth functioning of these groups in the future.” What the IAIS is doing (under the charge of the G-20), he said, “is very complex, very critical and very controversial—harmonizing the regulatory thrusts of the major insurance sectors is important but its complexity can’t be undersold. The choices have consequences. Should they be prescriptive or guidelines?”
Latrenta, whose company is likely subject to be designated systemically important and internationally active by domestic and international bodies, stressed that insurance companies are different from banks, and even each other across the different lines from life to property to health, emphasizing that one set of standards certainly won’t suit everyone.
Because capital standards are so challenging, Brahin said, there might be a need to field test this project.”
ComFrame is still in draft form, and won’t be ready until the end of next year. There is still a lot of discussion determining its substance. Most insurers want to focus on cooperation and coordination but don’t want specific metrics to measure them, and are concerned about being identified as internationally active. It was first introduced in the summer of 2010.
You could end up with a huge, unlevel playing field, Brahin, of Swiss Re, said.
“You have Solvency II, the [NAIC’s} Solvency Modernization Initiative developing and so forth, all of these are still underway and there we are trying to develop a global standard—we need a field test to get to the right calibration,” Brahin said.
McCarty noted a previous discussion where it would take, say, five years to develop capital standards and another five years to implement them, but said a robust debate, as is happening now, is what is good for all layers now.
On a subsequent IAIS panel addressing frontline regulators and their roles, Ernst Csiszar, a business professor at University of South Carolina turned the supervision discussion on its head by noting that “we are all fighting the last war.” He said aside from clamping down on risk, which has its own consequences of inhibiting innovation, there is a shift from solvency measurements to a risk management type of system requiring new kinds of tools—not just old metrics and ratios but the experience and judgment of those in the industry. Csiszar said he was fearful of new skills the regulators are going to need, which won’t just be a checklist for risk measurement.