The National Association of Insurance Commissioners (NAIC) held its annual International Insurance Forum this week in Washington, D.C., May 13 and 14.  Alan Levin and Robert Kasinow attended on behalf of Locke Lord LLP.  The conference gathers U.S. and international regulators and industry stakeholders to discuss and share ideas and viewpoints on insurance matters with global implications.

Highlights of the two day event included a keynote address by U.S. Treasury Secretary Steven Mnuchin. Separate panel discussions included an insurance executive discussion on industry opportunities and challenges, and separate panels on the growing cyber insurance market, innovation in the insurance industry embracing InsurTech as a path for transformation and evaluating systemic risk from an activities based approach.

During his speech, Mnuchin stated his support for the U.S. system of state based insurance regulation.  He emphasized the need for a coordinated approach among Team USA (Federal Insurance Office, Federal Reserve, state regulators) as they collaborate with the International Association of Insurance Supervisors (IAIS) on the development of a global Insurance Capital Standard (ICS).  Mnuchin’s position is the necessity of an outcome based approach to achieve comparability of non-U.S. and U.S. regulatory regimes.  “If these standards are adopted by foreign jurisdictions, they could have significant implications for U.S. insurers operating overseas, and potentially for our domestic insurance sector and regulatory regime.  As U.S. insurers expand into foreign markets, they will have to navigate the supervisory regimes of other jurisdictions that may be influenced by international standards being developed at the IAIS”, Mnuchin said.  The Treasury Department and state regulators preference is for an activities based versus a legal entity/size based approach.

Digital transformation and innovation panels generated much discussion on the benefits and challenges of InsurTech with few, if any, drawbacks in using technology in insurance.  International and U.S. stakeholders see technology resulting in lower premiums, better customer experience, expanding customer data base and efficient and timely claim settlements. Also the current paradigm lends itself to innovation in areas such as back office operations, on-boarding and human resources.

A common obstacle to innovation in the U.S. and other countries are anti-rebating laws that prohibit giving incentives to encourage participation in the market. Also both industry and regulators have staffing challenges to keep up with technological advances.  Supervisors especially need capacity to handle IT issues.  A change in supervisory mindset will not only protect policyholders but also enable regulators to use technology to benefit consumers.

Finally, the last session focused on a holistic systemic risk framework.  The holistic framework under consideration would capture both activities and exposures across financial sectors or risks concentrated in an entity causing failure. The overall consensus of the panel being that a regulatory framework not well designed introduces risk to the system.  Too overly principled based fails on comparability.

The final version of the systemic risk framework is planned for adoption at the November 2019 IAIS meeting.  Implementation and monitoring will take place during 2020. The Financial Stability Board (FSB) will review the initial implementation in 2022. A time period is required to review unintended consequences and arrive at comparable outcomes.  The objective is to present to the (FSB) a credible systemic risk framework and request the FSB to suspend the Global Systemically Important Insurers (GSII) designation.  Note that the GSII designation has not gone away nor is it suspended, just that no list was published in 2018.

Related and worth noting is this past week two former Treasury Secretaries warned that the relaxing of the Financial Stability Oversight Council (FSOC) designation for non-bank financial firms and focusing on activities based risk could pose a threat to the U.S. financial system.  Four non-banks were initially designated but all have been rescinded.