Since the global financial crisis state insurance regulators have been keenly focused on modernizing the U.S. system of solvency regulation, undertaking and implementing major initiatives impacting insurers of all sizes. Those include enhancing insurance holding company supervision, developing group-wide oversight capabilities, and creating regulatory tools and expansive disclosures designed in part to target non-insurance entity risk. While the National Association of Insurance Commissioners has been the driving force behind many of these initiatives, international pressure from institutions such as the Financial Stability Board, the International Association of Insurance Supervisors, and the International Monetary Fund have also influenced the thinking and direction taken in the U.S. More recently, the covered agreements between the U.S. and the European Union and the United Kingdom have added a new motivation for the NAIC to amend its model laws to comport with each of these agreements.

The chief target for many of these initiatives are large, complex insurance holding company systems, recognizing that insurance entities could be exposed to material risk from non-insurance affiliates. Something often repeated in the insurance regulatory community since the crisis were the troubles faced by AIG, most notably the problems within one of its affiliate companies that did not sell insurance. U.S. insurance regulators have voiced concerns that they lack the necessary authority to oversee and intervene when activities of non-insurance affiliates within an insurance holding company system might pose material risks to an insurer, and many of these regulatory responses were designed to respond to this need. Unfortunately, an important element that decision-makers have often overlooked is the notion of tailoring these regulatory tools to the size and complexity of the insurance group. Specifically, the Enterprise Risk Report and the impending Group Capital Calculation are tools that need to be tailored based on the activities of the insurance group; however, the ERR is a required filing for all insurance holding companies and, as of this writing, it is still unknown who will be required to file the GCC. For many IHCS, these tools are duplicative and add unnecessary compliance costs to the system.

The purpose of this paper is to examine recent changes to holding company laws and regulations and consider how the new GCC tool fits in with the existing framework. Several practical questions are worth exploring, particularly as the NAIC, and eventually the states, considers what the next iteration of holding company regulation looks like and how size and complexity of the group will be factored into their decision-making. The paper includes a brief summary of recent holding company changes, followed by a review of the breadth of financial and risk information that lead state regulators already receive as part of their solvency oversight duties. Finally, the paper concludes with a discussion about possible alternatives the NAIC should consider to tailor holding company regulation to the size and complexity of the IHCS, including consideration of exemptions and allowing for regulator discretion for requirements such as the ERR and GCC. The intent of these tools is to assist regulators in addressing the systemic risk created by a few very large and complex insurers engaging in non-insurance activities, but regrettably if nothing is done both tools will apply or continue to apply to holding companies of all sizes and complexity, solely for the sake of maintaining uniformity and appeasing international standard setters.

Resource Details

Publish Date

September 30, 2020

Topics

  • Financial & Accounting Issues