 From a European perspective, insurance regulatory change seems to be all about Solvency II. Indeed, it seems to have been all about Solvency II for the best part of a decade. One aspect of Solvency II that occasionally hits headlines is the matter of “equivalence” with non-EU countries. So, for a long time, the European view of the US approach to regulation has been one of whether “Solvency II equivalence” will be achieved.
Any view of US regulation that is seen simply through the lens of “Solvency II equivalence” is dangerously narrow. After all, insurance regulatory change is a global phenomenon.
Regulators in Asia, South America, South Africa, Australia and Canada – as well as the EU and the US – are all considering change to their regulatory framework. Indeed, perhaps the only thing that is permanent about regulation is that it is forever changing, most often through natural evolution, and sometimes as a response to critical problems. Arguably one of the reasons why Solvency II is taking so long to adopt in the EU is because it requires a degree of revolution.
Solvency II might have been more influential, or even deterministic, in the development of other regulatory regimes if it had not been delayed so many times. Instead, there is a degree of international convergence being achieved through recognition and application of the core principles of the International Association of Insurance Supervisors (IAIS). This is reinforced by the IAIS’s common framework (“ComFrame”) approach to the supervision of international active insurance groups. Basing changes on a set of agreed principles might appear to be a cop-out, but it is an essential approach due to different cultures, political systems and insurance industries.
ComFrame aims to establish a method for supervisors to address group-wide activities and risks, and also sets out how supervisory cooperation can be improved. This in turn will lead to global convergence of regulatory and supervisory measures and approaches. It is not a set of rules – it is outcome-focused, and recognises that supervisory principles, as implemented by different jurisdictions, can follow quite different approaches that, in the end, achieve similar outcomes.
So, with US and EU following IAIS core principles and ComFrame provisions, there is already and increasingly a platform for improved understanding.
We should accept, though, that neither the US nor the EU are subject to fully centralised, top-down insurance supervision.
• In the EU, insurance supervision is still primarily at national level, though EIOPA is beginning to influence not just the regulatory agenda, but also the supervision of major groups.
• In the US, insurance supervision is State-based, though the establishment of the Federal Insurance Office (FIO) is likely to lead to increased cooperation between States, and perhaps gradually to some convergence.
It is an open question as to how far convergence needs to go for outcomes to be achieved, and it is quite possible that, for some time to come there may remain differences between the US and the EU.
Meantime, in the US, the emergent Federal Insurance Office (FIO) has several responsibilities that, in Europe, are increasingly within EIOPA’s remit. These include the identification of regulatory gaps that may expose the financial system to systemic risk, developing federal policy on international insurance matters, and involvement in the identification of systemically important insurers to be supervised by the Federal Reserve. In addition, its remit includes proposals for modernising insurance regulation, increasing insurance penetration and consulting with States on national and international insurance matters.
Meanwhile, there are several areas where regulatory developments are taking place in the US. These include the Model Holding Act, which introduces change to group supervision. This introduces assessment and reporting of enterprise risk within an insurance group, including therefore non-insurance affiliates. In addition, the ORSA Act and Governance Act set out requirements that have many similarities to the emerging Solvency II ORSA and governance provisions.
All of this appears to be good news for those insurance groups who operate cross-Atlantic. Greater consistency in the regulatory regimes will allow consistent processes to be followed and organisational efficiencies to be achieved. For example, an early evaluation of the US and EU ORSA provisions demonstrate that it would not be difficult for a US-led or EU-led group to adopt a common ORSA policy, many shared processes and harmonised reports. From a governance and management perspective, this is a very positive development, as it will make it easier to identify, manage and mitigate the various risks at both group and solo levels.
By Tim Edwards, Director, PwC Insurance and Investment Management
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