NU Online News Service, Nov. 4, 2:58 p.m.EDT

WASHINGTON—Regulators and others took aim at the idea of usingcapital requirements as a measurement in solvency and insurancefinancial-fitness assessments.

“You can't prevent an AIG by focusing on capital,” saysNational Association of Insurance Commissioners President-ElectKevin McCarty.

McCarty, chair of the NAIC's International Insurance RelationsCommittee and commissioner of the Florida Office of InsuranceRegulation, at the NAIC's Fall National Meeting here, affirmssentiments of many U.S. insurers concerned that international andEuropean standards are forcing a thicket of new requirements on thedomestic industry.

Earlier, at the NAIC opening session Thursday, Sheila Bair,former chair of the FDIC during the financial crisis (June2006-July 2011) urged the NAIC to fight the pressure to useEuropean-capital standards “very strongly.” She was referring tointernal modeling that insurers would use under the EuropeanSolvency II regime. Avoiding Solvency II's bankingcounterpart, BASEL II, “was the only thing that saved our bacon”during the financial crisis Bair says.

Models should never be used to drive minimal capital levels, shesays. “We kept our leverage ratios and fought BASEL II and I am soglad we fought it off,” she says, pointing to the sovereign-debtproblem now in Europe.

The NAIC is currently working on its own version of solvencystandards under the Solvency Modernization Initiative, where manyregulators have chafed under the capital-requirements approach ofSolvency II.

Connecticut Insurance Commissioner Thomas Leonardi says Bair'scomments were “music to the ears” of many regulators assembledthere.

Leonardi has been a vocal opponent of the one-size-fits-allapproach he believes Solvency II is taking. Leonardi andWashington, D.C. Commissioner William White are both now part ofthe Federal Insurance Office's (FIO) advisory circle known as Treasury Department's Federal AdvisoryCommittee on Insurance.

NAIC CEO Terri Vaughan says some learned a hard lesson that whenyou create systems with internal models there are games to beplayed. “At the NAIC, we are looking at the basic leverage ratio,”she says, for strength, with minimums that are clear, beforelooking at more complicated systems.”

The International Association of Insurance Supervisors has begundeveloping a CommonFramework for the Supervision of Internationally Active InsuranceGroups (ComFrame) in July 2010.

McCarty's comments reference concerns about the direction ofComFrame. “We have made our position abundantly clear,” McCartysays in response to concerns voiced by David Snyder, vice presidentand associate general counsel of the American Insurance Associationabout a possible new layer of regulatory oversight andrequirements.

After noting that the U.S. and Europe had different approaches,McCarty says, “We think the focus should be on risk concentration.We don't believe capital is the answer.”

In banking there are issues of insufficient capital. “We don'tthink that is the case in insurance,” he notes.

He adds, “If you spend all this time [and] resources oncapital…you have created a false sense of security.”

Bair, the recent federal banking regulator, also urges the NAICto start getting involved in credit default swaps, and to take alook at any insurance interest, as she believes these derivativescould cause another credit event. Flying out in high volume inunregulated pockets of the globe, she says they are not normallyoverseen by state insurance regulators. She notes CDS were at theheart of the crisis in 2008, not AIG's capital models or lackthereof.