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Supervision of Insurance Groups

Last Updated 7/12/2018

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: Lessons about group supervision are lessons insurance supervisors worldwide have learned and are applying through ongoing work domestically and at the International Association of Insurance Supervisors (IAIS). As part of enhancements to international supervisory cooperation and coordination, U.S. insurance regulators are working with IAIS on improving group supervision internationally through three main initiatives:

  1. Standard-setting through ongoing revisions to the IAIS Insurance Core Principles (ICPS);
  2. The Supervisory Forum; and
  3. The Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).

Additionally, U.S. regulators are developing a Group Capital Calculation for use in solvency monitoring activities. The calculation is intended to provide additional analytical information to the lead state for use in assessing group risks and capital adequacy to complement the US's current holding company analysis. Work on this project is being led by the Group Capital Calculation Working Group of the NAIC, and includes significant collaboration with the Federal Reserve and industry representatives. The Working Group has discussed most of the topics that need to be addressed in developing such a calculation. The Working Group is currently focused on further defining the details of the calculation and hope to Beta Test specific approaches that could be utilized in the details of the calculation by the end of 2018. The ultimate goal is for the Group Capital Calculation to be considered the outcome equivalent to the international capital standard currently under development at the IAIS.