The National Association of Insurance Commissioners (NAIC) is advocating for more flexibility for its regulated U.S. insurers to operate both subsidiaries and branches in foreign countries without international supervision favoring the former over the latter.

The NAIC is concerned, for example, that the international regulatory community has stated that the lack of a board of directors at the branch level may limit the host supervisor's ability to manage governance arrangements effectively.

The International Association of Insurance Supervisors (IAIS) recently released an issues paper, Supervision of Cross-border Operations Through Branches, and although the industry feels it is much milder than earlier drafts, both the NAIC and industry still want the paper to reflect a more balanced, flexible approach so branches aren't discredited.

“Although it is true that lack of a board at the branch level can hinder a supervisor's ability to supervise governance, most governance is driven from the ultimate controlling party. Therefore, supervisors can also be limited regarding governance at the legal entity [subsidiary],” the NAIC said in comments addressing the concern about adequate supervision of branches.

“We think the current version of the paper has been improved and we hope it is improved further; we will see when the final draft comes out,” said Connecticut Insurance Commissioner Tom Leonardi on a conference call today.

Pennsylvania Insurance Commissioner Michael F. Consedine said that there have been great improvements since the original anti-branch bias in the first drafts.

Consedine called the matter “a very significant issue,” and said it is something that European counterparts might want to leverage to gain some “fairly significant operational changes” for some of their own companies.

The NAIC recommended that the negative statements about the branch oversight be deleted because it is misleading, “since it only captures that facet from the branch level and not the subsidiary level as well.”

On the call, property casualty and life insurance trade representatives lauded progress of the NAIC input on the branches/subsidiaries white paper. But the group also wants to close the books on the matter once the paper is done, and do not want the IAIS to open up the matter further, possibly leading to a recommendation for one form of affiliate over another.

U.S. insurers and reinsurers strongly favor the ability to open up branches in foreign countries, as well as operating subsidiaries, because they say it gives them a way to get their feet wet in a new market, and also requires less of a capital commitment.

SOme foreign supervisors, for their part, fear that branches are not as stable as subsidiaries and cash could flee their country more easily when an insurer decides to decamp the country due to political or financial stability there, or other reasons.

However, branches are important to insurers as well because of market size perception, one insurance company representative noted.A company does business with a branch of a large alien insurer/reinsurer, that entity's entire capital stands behind its policy and the company has recourse against the branch as well as the entire entity. With a subsidiary, the company only has recourse only against that entity, he said. In the United States, branches have the same capital maintenance requirements (including risk based capital) as a subsidiary.

“U.S. regulators generally regulate and supervise branches the same as they do subsidiaries. We appreciate that the IAIS added language in this paragraph to note that 'Operations through both subsidiaries and branches have advantages and disadvantages,' since it creates a more balanced tone,” the NAIC said.

However, the NAIC is pushing for inclusion of a sentence displaying an openness to flexible structuring, noting that “jurisdictions should allow for flexibility in terms of business structure (whether branches, subsidiaries, etc.) depending on the business and market needs of that particular jurisdiction.”

Special Reports /

NAIC Pushes to Remove Bias Against Foreign Branches

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