The U.S. insurance regulatory system is in a state of major disrepair, an international body that monitors and makes recommendations about the global financial system said in a new report.

The so-called "peer review" of the U.S. insurance regulatory system by the Financial Stability Board (FSB) said one option the country should strongly consider is "migrating towards a more federal and streamlined structure" as a means of "achieving greater regulatory uniformity."

The report said that U.S. authorities should promote greater regulatory uniformity in the insurance sector by conferring additional powers and resources at the federal level where necessary.

It said the Federal Insurance Office (FIO) should enhance its monitoring of the insurance sector "and be further strengthened to be able to take action to address issues and gaps identified." The report notes FIO is scheduled to come out shortly with a report to Congress and the president will set forth how to modernize and improve the system of insurance regulation in the U.S. and, among other factors, will consider the degree of national uniformity of state insurance regulation.

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

An excerpt from the report:

"The US authorities should carefully consider and provide recommendations to Congress as to whether migration towards a more federal and streamlined structure may be a more effective means of achieving greater regulatory uniformity. Moreover, the FIO's current human resources may need to be augmented to fully address the tasks that it has been mandated under [the Dodd-Frank Act]. The FIO should also enhance its monitoring of the insurance sector through greater use of non-public information that it is able to access, and be given more resources and powers to be able to address issues and gaps that it identifies."

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

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

Lastly, the FSB encouraged state governments to implement changes to those state laws that empower insurance regulators "so regulatory agencies can improve rule making powers and bolster departments of insurance with better funding and staffing."

Given the current political barriers to imposing a more unified system, the report implied that, at the very least, states should implement changes to those state laws that empower insurance regulators so that regulatory agencies can improve rule-making powers and bolster departments of insurance with better funding and staffing.

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

For example, according to the report, no action has been taken on a recommendation that states use quantitative techniques and practices or apply insurance capital requirements to the consolidated insurance group. The recommendation was made by the Financial Sector Assessment Program (FSAP), a unit of the International Monetary Fund.

The report also said that, "While the vesting of regulatory powers in the state insurance commissioner in principle ensures that departments are operationally independent, the ability of the governor in most states to dismiss commissioners at any time, and without a public statement of reasons, continues to expose departments to potential political influences."

It specifically points out gaps in regulation of life insurance companies. It said that as principles-based reserving (PBR) is enacted by the states, the National Association of Insurance Commissioners (NAIC) and state regulators will need strong actuarial expertise and regulatory tools to deal with the complexities of a less-formulaic framework.

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

It said the absence of a target safety level of reserving and an associated target safety level for capital "makes it difficult to make peer comparisons across insurers and against other international insurance regimes, although NAIC is of the view that an overall target safety level is unachievable and unnecessary. The safety level targets for individual risks are in most cases not set out in NAIC models," the report said.

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

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

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

A Treasury Department spokesman said in reaction to the report that, "As a member of the FSB, we welcome the evaluation of our financial sector policies by an independent international body. We agree with the findings that the establishment of the Financial Stability Oversight Council, the Office of Financial Research and the Federal Insurance Office represent important steps to enhance the stability of the financial system."

Special Reports /

FSB: U.S. Regulatory System Constrains Uniformity

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