The NAIC’s Solvency Modernization Initiative (SMI) was announced
in June 2008. The initiative encompasses projects already underway
at the NAIC and includes study of other financial supervisory modernization
initiatives and solvency proposals in place or under development
in other jurisdictions, including Australia, Canada, Switzerland
and the EU. The
SMI will include articulation of the U.S. solvency framework and
principles in one cohesive document to help convey foundational concepts
underlying the U.S. regulatory system and their interrelationships,
as well as provide a platform for continued development. The
compiled principles will facilitate dialogues with other jurisdictions
and institutions and bring about a constructive reconciliation of
U.S. solvency principles with solvency regimes in other countries.
The consolidated principles would also provide a foundation for the
NAIC to establish clear goals, priorities and long-term modernization
plans that will result in a solvency assessment framework consistent
with regulatory best practices. The initiative places emphasis
on five key focus areas: capital requirements, international accounting,
insurance valuation, reinsurance, and group solvency.
Capital Requirements—Regulators are considering
whether the action and control levels in the Risk-Based
Capital (RBC) are established at appropriate levels,
whether the RBC should be expanded beyond its current determination
of a minimum capital requirement, and whether to require regulatory
reporting of a company’s
economic capital level and information about the development of the
company’s target capital. A company’s target economic
capital amount is an indicator to a regulator of how the company’s
management sees their business, including their level of conservative.
Thus, a regulator could benefit by knowing both how a company calculates,
interprets, and uses an economic capital amount, as well as what
that amount is. In doing so, regulators could learn more about the
risks faced by a company and how those risks interact and change.
Regulators are also discussing whether additional tools could be
useful, such as the use of internal models within or as a replacement
to RBC and the requirement of enterprise risk management (ERM) reporting.
Partial internal modeling already exists for certain products in
the life RBC formula, and the use of internal modeling could be expanded
to develop an explicit property/casualty catastrophe risk charge.
In addition, there is consideration of the use of full internal modeling
by a company, with some restrictions and deterministic elements,
to replace the RBC calculation. For ERM, regulators might consider
requiring insurers to perform their own risk and solvency assessment,
including assessment of their risk management and evaluation of the
potential impact of risks on their solvency position. While the U.S.
does not require companies to implement enterprise risk management
ERM systems, it does require companies to analyze the risks they
face.
International Accounting—For insurance contract accounting,
the U.S. Financial Accounting Standards Board (FASB) entered into a joint project
with the International Accounting Standards Board (IASB). The two groups will
work to establish International Financial Reporting Standards (IFRS), which then
will become U.S. generally accepted accounting principles (GAAP). The insurance
regulators’ accounting system, statutory accounting, requires regulators
to review any changes to GAAP accounting and determine what changes should be
made to statutory accounting. U.S. regulators are already reviewing and commenting
to the IASB on international accounting proposals.
Insurance Valuation—The valuation aspect of this initiative
is mainly focused on life insurance reserves, given that property/casualty reserves
are already principles-based. However, the life insurance principles-based reserving
project could influence property/casualty regulation, especially relating to
governance and actuarial requirements. Because economic conditions
are more volatile now (for both assets and liabilities) than they were decades
ago, a company should hold more capital today to provide the same level of safety
as then. It is also true that variations in individual company risk characteristics
are wider now than in previous decades. Thus, capital requirements today
need to be more company-specific, reflect the interdependence among assets, liabilities,
regulatory capital requirements and capital resources, and ensure that risks
are appropriately recognized.
If international accounting is implemented, numerous valuation issues
would arise for property/casualty insurance, as well. While the U.S.
reports the expected ultimate value of its loss reserves (somewhat
equivalent to discounted reserves with implicit risk margins equal
to the discount), international accounting utilizes discounted reserves
and explicit risk margins.
Now appears to be the time for change, especially as regulators
in the U.S. and around the world learn lessons from the current financial
crisis. Amidst other countries who are improving their systems of
insurance regulation, the U.S. will study and implement change within
the U.S. Solvency Modernization Initiative.
Reinsurance—In 2008, the NAIC adopted
a Reinsurance
Regulatory Modernization Framework Proposal that includes a design
to create a modernized system for the regulation of reinsurance in
the U.S. The NAIC has now begun its work to implement the framework.
The first step is to draft proposed federal legislation to implement
the legal framework. Next will be structural development of a Reinsurance
Supervision Review Department that will assess non-U.S. regulatory
regimes, as well as facilitate the evaluation of states wishing to
become home state or port of entry supervisors.
Group Solvency Issues— At present, the NAIC has
the Holding Company Model Act, which requires disclosure of pertinent
information relating to changes in control of an insurer and disclosure
by an insurer of material transactions and relationships between
the insurer and its affiliates, including certain dividends to shareholders
paid by the insurer. The act also provides standards governing material
transactions between an insurer and its affiliates.
The NAIC has created
the Group Solvency
Issues (EX) Working Group to study potential revisions
to the Holding Company Model Act, the use and potential improvement
of Supervisory Colleges with regulators from around the world, and
group-wide supervision requirements, which may include group-wide
capital requirements. |