Speech: Group Supervision and the IAIS Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)
Therese M. Vaughan, Ph.D.
Speech: Supervising Internationally Active Insurance Groups
Therese M. Vaughan, Ph.D.
Insurers, Are You Ready? The Own Risk and Solvency Assessment (ORSA) is On Its Way
October 2012, CIPR Newsletter
Supervisory Colleges: A Regulatory Tool for Enhancing Supervisory Cooperation and Coordination
July 2012, CIPR Newsletter
Insurance Group Supervision
April 2012, CIPR Newsletter
ComFrame: Group-Wide Insurance Supervision with an International Flavor
October 2011, CIPR Newsletter
Conference on Transatlantic Insurance Group Supervision
September 7-8, 2011
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Director, Financial Regulatory Services
Life/Health Financial Analysis Manager
Last Updated 7/11/17
Issue: The solvency framework of the U.S. system of state-based Insurance regulation has included a review of the holding company system for decades, with an emphasis placed on each insurance legal entity. In light of the recent financial crisis and the globalization of the insurance business models, U.S. insurance regulators have begun to modify their group supervisory framework and have been increasingly involved in developing an international group supervisory framework.
Overview: Under the national system of state-based insurance regulation in the United States, the need for group supervision was recognized early on with the first NAIC model law adopted in 1969. While changes have been made in the model laws since that time, the general principles of group supervision, as reaffirmed in the 1978 NAIC Proceedings, still remain. The U.S. approach to group supervision adopted in the NAIC model law and regulation on holding companies has been described as a “windows and walls” approach; regulators have “windows” to scrutinize group activity and assess its potential impact on the ability of the insurer to pay its claims and “walls” to protect the capital of the insurer by requiring the insurance commissioner’s approval of material related-party transactions.
During the recent global financial crisis, the U.S. group supervisory framework was tested when American International Group (AIG) faced financial uncertainty. In 2008, AIG financial holding company was comprised of 71 U.S.-based insurance entities and 176 other financial services companies throughout the world. The AIG Financial Products unit based in London, a non-insurance component of the AIG holding company system, was described (by Federal Reserve Chairman Ben Bernanke) as making “huge numbers of irresponsible bets” with risky investments and taking on “huge losses.” The U.S. Office of Thrift Supervision, a federal banking regulator, was charged with supervising the AIG holding company. The national system of state-based insurance regulation in the U.S. protected policyholders during the AIG crisis via the “walls” and provided options to the insurance commissioners when they worked with banking regulators to work through the AIG holding company system’s financial issues.
The contagion effects experienced by U.S. insurers in the AIG holding company system’s near collapse caused U.S. insurance regulators to reevaluate their group supervisory framework. Beginning in 2008, in the NAIC Solvency Modernization Initiative (SMI), U.S. insurance regulators reviewed lessons learned from the financial crisis, and, specifically, studied AIG and the potential impact of non-insurance operations on insurance companies in the same group. Through SMI, U.S. insurance regulators are devising plans for revisions to group supervision, maintaining the “walls” but enhancing the “windows” of the system. The concepts addressed in the enhanced “windows and walls” approach include communication between regulators and supervisory colleges, access to and collection of information from groups, enforcement measures and group capital assessment.
Status: To enhance our systems for group supervision, the NAIC adopted the revised Insurance Holding Company System Regulatory Act (Model #440) and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (Model #450) in 2010. The revisions included the following: expanded ability to evaluate any entity within an insurance holding company system; enhancements to the regulator’s rights to access books and records and compelling production of information; establishment of expectation of funding with regard to regulator participation in supervisory colleges; and enhancements in corporate governance, such as Board of Directors and Senior Management responsibilities. Additionally, regulators adopted an expansion to the Insurance Holding Company System Annual Registration Statement (Form B) to broaden requirements to include financial statements of all affiliates. A new Form F (Enterprise Risk Report) has also been introduced for firms to identify and report their enterprise risk.
In addition to changes to NAIC Model # 440 and NAIC Model #450, U.S. insurance regulators put into effect the international concept of the Own Risk and Solvency Assessment (ORSA) on Jan. 1, 2015. Under Risk Management and Own Risk and Solvency Assessment Model Act (#505), large and medium size U.S. insurers and insurance groups are required to regularly perform an ORSA and file a confidential ORSA Summary Report of the assessment with the regulator of each insurance company upon request, and with the lead state regulator for each insurance group whether or not any request is made. Model #505 provides the requirements for completing an annual ORSA and provides guidance and instructions for filing and ORSA Summary Report.
Global Group Supervision
The lessons about group supervision are lessons insurance supervisors all over the world have learned. It is an element of the European Union’s Solvency II Directive and is being discussed at the International Association of Insurance Supervisors (IAIS). As part of the enhancement to international supervisory cooperation and coordination, U.S. insurance regulators are working with the IAIS on a number of work streams. The IAIS has been focused on improving group supervision internationally through three main initiatives: standard setting, the Supervisory Forum, and ComFrame (Common Framework for the Supervision of Internationally Active Insurance Groups). U.S. regulators have been, and continue to be, actively engaged in all of these initiatives.
The NAIC is focused on continuing to improve its group supervision framework, and in December 2014 the Group Solvency Issues (E) Working Group (GSIWG), the Financial Condition (E) Committee and the Plenary, all adopted changes to the Model Insurance Holding Company Act (#440). The GSIWG supports certain parts of these amendments to be incorporated into the accreditation standards for any state that is the lead state of an IAIG as defined in #440 and any state that is the domestic regulator for any insurer which is part of an IAIG.