The U.S. insurance regulatory system is in a state of majordisrepair, an international body that monitors and makesrecommendations about the global financial system said ina new report.

The so-called "peer review" of the U.S. insurance regulatorysystem by the Financial Stability Board (FSB) said one option thecountry should strongly consider is "migrating towards a morefederal and streamlined structure" as a means of "achieving greaterregulatory uniformity."

The report said that U.S. authorities should promote greaterregulatory uniformity in the insurance sector by conferringadditional powers and resources at the federal level wherenecessary.

It said the Federal Insurance Office (FIO) should enhance itsmonitoring of the insurance sector "and be further strengthened tobe able to take action to address issues and gaps identified." Thereport notes FIO is scheduled to come out shortly with areport to Congress and the president will set forth how tomodernize and improve the system of insurance regulation in theU.S. and, among other factors, will consider the degree of nationaluniformity of state insurance regulation.

It urges U.S. authorities, both state and federal, to furtherenhance insurance group supervision by introducing requirements forconsolidated financial reporting for all insurance groups and bygiving lead supervisors additional powers to fully assess thefinancial condition of the entire insurance group.

An excerpt from the report:

"The US authorities should carefully consider and providerecommendations to Congress as to whether migration towards a morefederal and streamlined structure may be a more effective means ofachieving greater regulatory uniformity. Moreover, the FIO'scurrent human resources may need to be augmented to fully addressthe tasks that it has been mandated under [the Dodd-Frank Act]. TheFIO should also enhance its monitoring of the insurance sectorthrough greater use of non-public information that it is able toaccess, and be given more resources and powers to be able toaddress issues and gaps that it identifies."

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Summing up the report, Mike Nelson, chairman of insurance lawfirm Nelson Levine, said the FSB report made a number of pointedcomments about shortcomings in the U.S. regulatory landscape,particularly involving insurance issues.

The report said, "The architecture for insurance supervision inthe U.S., characterized by the multiplicity of state regulations,the absence of federal regulatory powers to promote greaterregulatory uniformity and the limited rights to pre-empt state law,constrains the ability of the U.S. to ensure regulatory uniformityin the insurance sector."

Lastly, the FSB encouraged state governments to implementchanges to those state laws that empower insurance regulators "soregulatory agencies can improve rule making powers and bolsterdepartments of insurance with better funding and staffing."

Given the current political barriers to imposing a more unifiedsystem, the report implied that, at the very least, states shouldimplement changes to those state laws that empower insuranceregulators so that regulatory agencies can improve rule-makingpowers and bolster departments of insurance with better funding andstaffing.

Specifically, the report said that governors should allocatemoney to insurance departments so they can hire technicalspecialists able to adequately monitor new regulatory standards,such as principles-based reporting.

For example, according to the report, no action has been takenon a recommendation that states use quantitative techniques andpractices or apply insurance capital requirements to theconsolidated insurance group. The recommendation was made by theFinancial Sector Assessment Program (FSAP), a unit of theInternational Monetary Fund.

The report also said that, "While the vesting of regulatorypowers in the state insurance commissioner in principle ensuresthat departments are operationally independent, the ability of thegovernor in most states to dismiss commissioners at any time, andwithout a public statement of reasons, continues to exposedepartments to potential political influences."

It specifically points out gaps in regulation of life insurancecompanies. It said that as principles-based reserving (PBR) isenacted by the states, the National Association of InsuranceCommissioners (NAIC) and state regulators will need strongactuarial expertise and regulatory tools to deal with thecomplexities of a less-formulaic framework.

"Further work is needed to revise capital requirements in lightof PBR and to evaluate the appropriateness of the capital treatmentof market risks associated with life insurance products," thereport said.

It said the absence of a target safety level of reserving and anassociated target safety level for capital "makes it difficult tomake peer comparisons across insurers and against otherinternational insurance regimes, although NAIC is of the view thatan overall target safety level is unachievable and unnecessary. Thesafety level targets for individual risks are in most cases not setout in NAIC models," the report said.

As Nelson noted in his analysis of the report, it called forgreater regulatory uniformity, noting that the NAIC is not aregulatory authority, "and thus attempts by it to create uniformityis weakened by its lack of authority."

Nelson cited a part of the report that said only 15 states haveadopted the Insurance Company Holding Model laws.

The commentary also noted that FIO should make greater use ofnon-public information to strengthen gaps in the regulatory system,and the United States should enhance group supervision by requiringgreater consolidated financial reporting.

A Treasury Department spokesman said in reaction to the reportthat, "As a member of the FSB, we welcome the evaluation of ourfinancial sector policies by an independent international body. Weagree with the findings that the establishment of the FinancialStability Oversight Council, the Office of Financial Research andthe Federal Insurance Office represent important steps to enhancethe stability of the financial system."