Discussions at the National Association of InsuranceCommissioners' fall national meeting highlighted the challengescurrently facing NAIC policymakers. The NAIC has the difficult taskof balancing the demands of the international supervisory communitywith the needs of its own insurance community in the United States.Everyone shares a common objective of convergence—but it appearsthat compromises may be necessary to move forward.

While there are many shared viewpoints in the debate, there aresome clear philosophical differences in supervisory approachbetween U.S. regulators and some of those overseas—in particularregulators from Europe, who are moving toward a consistentregulatory approach throughout the European Union under theEuropean Solvency II Directive.

This difference is often characterized in NAIC discussions as afocus on sophisticated, risk-aligned capital requirements vs. afocus on supervision; in other words, do you focus on the formulasor the supervisors, Pillar 1 or Pillar 2? Europe's planned standardformula and internal models regime will bring a whole new level ofsophistication to capital setting for European insurers. However,the NAIC continues to stand by RBC (NAIC risk-based capital) and isinvesting in its already strong risk-focused examination andanalysis capability.

So, where does this leave the NAIC? One of its principal areasof focus has been to complete the new U.S. Own Risk and SolvencyAssessment (ORSA) proposal, which it is relying on to bridge manyof the current differences between U.S. and internationalstandards. The NAIC adopted guidance for insurers completing theassessment in Washington on Saturday, November 6, and while thereis no formal implementation date as of yet, commissioners workingon the proposal were adamant that it will be fully in place inadvance of the expected U.S. financial solvency assessment processreview in 2014.

The U.S. ORSA is expected to help on several levels: satisfyingan essential requirement of Insurance Core Principle 16 (enterpriserisk management), and also providing a mechanism for U.S.regulators to assess capital adequacy at the insurance group level.As was noted several times in Washington, it is notable that theORSA will not introduce a U.S. group capital requirement to mirrorthe approach in Europe.

Achieving international recognition for the U.S. ORSA will bethe next big step. Regulators in Washington have heard that Europewill provide recognition only if the U.S. supervisory system entersthe Solvency II equivalence process; there are hopes that Europeanregulators will be prepared to meet the U.S. midway. The U.S.continues to have one of the world's most respected regulatorysystems, and the NAIC is firm in its view that there is more toequivalence than identical methods, processes and philosophies—aview many in Europe certainly share. Right now, both industry andstate insurance departments are likely hoping that the ORSA willprovide enough of a link to IAIS-style regulation to achieve atleast what one working group referred to as "minimum harmonization"with Europe.

In our next post, we'll look at the proposal in more detail andwhat implementation could mean for U.S. insurers.

Henry Jupe, Jean Connolly and Mary Ellen Coggins contributedto this article