Why Should In-House Counsel Care About Regulatory Overreach?

Transcription

1 Why Should In-House Counsel Care About Regulatory Overreach? The Ritz-Carlton, Petite Ballroom Philadelphia, Pennsylvania September 19, 2016, 1:45 2:45 pm 1

2 Panel Moderator: Barry Weissman, Carlton Fields Randi Cigelnik, PCI José Ramón González, QBE North America Ed Kelley, Transatlantic Re Maxine Verne, SCOR Group 2

3 In the Beginning. There was State regulation and the companies were confused and the policyholders were protected. Woe and confusion stalked the boardrooms. Directors gnashed their teeth and CEO s fretted how can we be expected to coordinate our business around each state and territory having its own rules and laws. This has to be the worst regulatory nightmare known to man, perhaps we need an option for a Federal-based regulator 3

4 And it came to Pass From a swirling vortex of political hot air, in the wake of a financial crisis a Federal Champion (or three) emerged. Like the New Deal before it Dodd-Frank created an alphabet soup of bureaucratic leavening to ensure no CEO s stomach was left un-turned 4

5 Pre-Financial Crisis States were the primary regulators Federal involvement was rare and tended to be issue specific International Association of Insurance Supervisors (IAIS) was established as a kind of global NAIC, but its work seemed remote and not likely to affect U.S. regulation Debates over who would regulate insurance were won by the states Then as now, the property and casualty insurance sector was highly competitive, comprehensively regulated and financially strong See, for example, the latest IAIS Global Insurance Market Report (GIMAR) on the insurance sector Then as now, our sector plays a vital social role in risk assessment, risk reduction, compensation for loss and investment in infrastructure 5

6 Post-Financial Crisis The financial crisis changed all of that U.S. response was Dodd-Frank revalidated the states as the primary regulators, but also gave enhanced roles to federal agencies, by creating Treasury s Federal Insurance Office (FIO) adding powers to the Federal Reserve Board (Fed) and creating the Financial Stability Oversight Council (FSOC) 6

7 Post-Financial Crisis Internationally, the global finance ministers through the G20 seized the initiative, created the central bank dominated Financial Stability Board (FSB) with broad authority to oversee all financial services, including insurance the U.S. delegation being the Fed, Treasury and SEC, not state regulators IAIS and its work became more visible The European Union (EU) approved a new regulatory system Solvency II 7

8 Post-Financial Crisis It did not take long for the federal agencies to begin exercising their new authority Internationally, Treasury s FIO joined IAIS and became the chair of the Technical Committee the second most powerful position Domestically, FIO issued a 2013 report with more than 2 dozen recommendations for changes in state regulation and supported a federal-state hybrid regulatory structure 8

9 Post-Financial Crisis Fed has staffed up Fed joined IAIS and with the Treasury participated at FSB to designate some U.S. companies as Global Systemically Important Insurers (G-SIIs) and followed up with similar votes domestically at the FSOC FSB and more recently, the IMF issued reports calling for more federal insurance regulation in the U.S. 9

10 The IAIS and ComFrame The ICP s are intended to be a Global Standard for supervision of insurance marketplaces Through the FSAP Process a nation s conformity to the ICP s is measured The development of the ICP s tracks closely with development of Solvency II ComFrame is intended to allow supervisors to coordinate the supervision of Internationally active groups (of a certain size) in accord with the ICP s and additional standards that will apply only to IAIG s. To ensure conformity with the ICP s the NAIC commenced the Solvency Modernization Initiative. 10

11 U.S. and International Insurance Regulatory Bodies & Key Initiatives AIG (G-SII) METLIFE (G-SII) FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC) Develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies. Determines which banks and insurers are systemically important or a GSII. U.S. FEDERAL GOVERNMENT FEDERAL INSURANCE OFFICE Monitors all aspects of the insurance sector and represents the U.S. on international insurance matters. INSURANCE CORE PRINCIPALS (ICPs) Globally accepted criteria for judging insurance regulatory systems. Used by the IMF in the FSAP process and with the World Bank. PRUDENTIAL (G-SII) G-20 Charged Financial Stability Board (FSB) with looking at systemic risk issues related to financial services entities, including insurers. FEDERAL RESERVE BOARD Expected to join the IAIS in October, 2014 FINANCIAL STABILITY BOARD (FSB) Coordinates work of national financial standard-setting bodies. Charged IAIS with recommending how to determine whether, and which, insurers poise global systemic risk. member INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (IAIS) Voluntary organization of insurance regulators with more than 140 nations represented. members COMMON FRAMEWORK (COMFRAME) Global, group-wide system for supervising Internationally Active Insurance Groups (IAIGs). Goal is to holistically address multinational risks, based on Insurance Core Principals (ICPs) 140+ COUNTRIES Governance & Risk Management Capital Requirements Reinsurance SOLVENCY MODERNIZATION INITIATIVES U.S. state regulation improvements in light of global developments Group Supervision STATE LEGISLATORS Pass laws regulating insurance, including laws required for states to be accredited and holding company rules U.S. STATE-BASED REGULATION Statutory Accounting & Financial Reporting NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) Standard-setting association of commissioners which develop model laws STATE INSURANCE DEPARTMENTS Implement and Enforce laws regulating insurance. Recommend laws and regulation to insurers. NATIONAL COUNCIL OF INSURANCE LEGISLATORS (NCOIL) Legislator organization focused on insurance law. dialogue EU COMMISSION NON-EU SYSTEMS DEEMED EQUIVALENT Bermuda, Japan, Switzerland with caveats. U.S., others TBD. EU COUNCIL SOLVENCY II DIRECTIVE New insurance solvency regime for the 27 EU-member countries PILLAR I Capital Requirements PILLAR II Governance & Supervision (Includes ORSA) EUROPEAN REGULATION EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY (EIOPA) EU PARLIAMENT PILLAR III Supervisory Reporting & Public Disclosure 11

12 Equivalence v. Mutual Recognition US (Re)Insurance Companies are caught in the middle of a tug of war between domestic and international supervisors. Even domestics that do not operate internationally will feel the pinch. Lack of mutual recognition will have dire consequences for US companies that are internationally active. 12

13 Equivalence v. Mutual Recognition NAIC/State actions to maintain relevancy and keep the Federal Government out of insurance regulation will result in changes to domestic insurer supervision. The Fed s are looking to the FSB as justification. The latest FSAP recommends a central supervisor for the US Insurance Market We already have ORSA, Governance and Group Supervision. Can Fit and Proper and Group Capital Standards be far behind? Non-Executive directors? Compensation limits? Ombudsman? 13

14 Regulatory overreach PCI definition: PCI defines regulatory overreach as policymaker action not within a regulators' own legal authority or core mission, balancing consumer protection (solvency and market conduct) with effective/efficient regulation. PCI policy PCI prioritizes resistance based on PCI's mission and core values; PCI's strategic goals (protecting product certainty, improving cost drivers/availability, promoting sound supervision); legal analysis; member guidance; and reputational risk considerations. 14