The U.S. insurance industry says a subcommittee of the International Association of Insurance Supervisors continues to encourage countries to favor a subsidiary structure—a move the industry claims limits freedom of organization.

The IAIS subcommittee adopted a draft paper on insurance company branches in foreign countries that continues

Industry observers say the latest draft of a paper adopted April 16 by the IAIS subcommittee in Frankfurt is partial to subsidiaries instead of branches, potentially hamstringing U.S. and other global insurance companies at the behest of a few—and against international standards.

“Although slightly changed, [the latest paper] continues to suggest that supervisors consider forcing companies into a subsidiary structure,” says Dave Snyder, international regulatory affairs expert for the Property Casualty Insurers Association of America (PCI). “We think this would harm markets and is in contrast to the global insurance industry's position—both the insurers and the reinsures.”

Snyder and others argue insurers and reinsurers need the flexibility to establish a branch, subsidiary, or joint venture for efficiency reasons as well as for reflecting the different and unique marketplaces in which they operate. He adds that branch-flexibility helped developing nations by encouraging more companies to enter a developing market, and in an interview last week Snyder said choice related to structure-formation is “a right which has been strongly defended in all recent free trade agreements the U.S. has entered,” Snyder said in an interview last week.

Snyder says the industry appreciated the NAIC's advocacy on the issue in opposition to the direction that a supervisor ought to choose the structure of an insurer's entities in other countries.

Stef Zielezienski, American Insurance Association's (AIA) senior vice president and general counsel says, “The bottom line in the discussion of branching and other corporate-organization alternatives is that multiple options should be preserved and available to companies as they consider expansion into new markets.”

“So long as capital is available to support the financial capability of a company to meet its obligations to policyholders, how the company organizes itself should be a matter of preference, not regulatory fiat,” Zielezienski adds.

Issues that other insurance supervisors might have with branches could stem from the 2008 Lehman Brothers situation, where funds reportedly flew out of London to New York on the last weekend before it failed, notes one industry participant. Branches can pack up more quickly and leave quickly without renewing masses of policies, some foreign supervisors worry.

The NAIC is not going to publicly comment as an organization on the IAIS workstream until there is a paper out for consultation. The paper is not available for public review. It will now go to the IAIS Technical Committee, chaired by Michael McRaith at the U.S. Treasury's Federal Insurance Office (FIO), before being exposed for consultation.

However, NAIC staff and staff regulators have expressed concern both in Frankfurt and when previous drafts of the paper were was released for discussion. The topic also came up at the NAIC Spring meeting in Houston earlier this month. According to NAIC minutes, staff are worried that supervisors might consider requiring the foreign insurer to operate in the form of a subsidiary, and suggested a more appropriate step was for supervisors to regulate and supervise foreign branches the same way in which they regulate and supervise foreign subsidiaries.

“There is no basis for the workstream to draw any conclusions about the merits of the branch form relative to other forms of legal entity, including the subsidiary structure, from the operational perspective or the supervisory perspective,” the Global Federation of Insurance Associations (GFIA) said in earlier comments on the previous draft. GFIA reflects 32 member associations, which represents insurers that account for around 87 percent of total insurance premiums worldwide.

GFIA is concerned by occasional indications of bias in the third draft, including several findings which are unsupported or even contradicted by an IAIS survey results, and are a “generally selective and misleading characterization of relevant academic literature.”

“While this workstream has gathered extensive survey results and other information with respect to branches, the record is devoid of any empirical information about subsidiaries and other legal forms and the issues which they pose for supervisors,” GFIA has stated.

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Latest IAIS Paper Continues to Favor Subsidiary Structure for Companies

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