Tag Archives: National Association of Insurance Commissioners

Immediate Vault

Captive Growth Increases Need for Insurance-Experienced Board

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The current climate for captive insurers is gravitating toward encouraging captives—including single-parent, association and agent-owned—to appoint experienced, independent directors to their boards. Regulators (National Association of Insurance Commissioners and Bermuda Monetary Authority) and rating organizations (A.M. Best and Standard & Poor’s) have all come out in favor of the appointment of independent directors. They believe that independent directors add value by providing independent, experienced guidance to captive owners that is separate and distinct from a captive’s other advisers, including as managers, lawyers and accountants.

Their appointment could also help a company avoid a lawsuit. Independent directors do not have conflicts of interest, can provide experience that is different from others on the board and usually have a broad captive insurance perspective.

Another point worth considering is that some captive managers may have other interests, such as brokerages, reinsurance brokerages, actuarial, claims, asset investments. Some may even provide leads for a possible fee for premium financing. Furthermore, captive owners can mistakenly believe they get all the advice they need from their current advisers.

Independents on the Horizon

In the coming months, expect to see captive owners reaching out to independent directors, both because of their value-added consulting expertise and because regulators and possibly rating agencies will require it. This practice already exists in some overseas jurisdictions, and with Solvency II, it could become more important as it may ultimately apply here in the U.S.

What is often overlooked is the value-added experience independents offer. Here is a partial list of services normally expected of experienced independent directors:

  • Help in selecting the reinsurance interme­diary. They provide an independent per­spective separate from the reinsurance broker or risk manager.
  • Advise on acquisition opportunities of the captive, if any, such as buying a third-party administrator, a licensed admitted insur­ance company, or an investment in a new start-up retail brokerage firm. These sophis­ticated ideas are an expansion of most cap­tives’ business plans and need to be consid­ered carefully given the risks they present. Keep in mind, however, that the captive landscape from the 1970s is littered with the carcasses of captives that ventured ill-advised into such businesses.
  • Help in evaluating a reinsurance program’s structure and economics.
  • Attend and advise on the rating process with outside rating agencies, such as A.M. Best.
  • Attend meetings with insurance regulators, especially if there is a regulatory concern.

Independent directors are also asked to vote on many issues, including:

  • Should the captive change fronting companies?
  • Should the captive make a large dividend payment to the parent corporation, or should it return capital to its owners?
  • Should the captive write direct procure­ment policies for the parent corporation?
  • What law firm should handle uncollectible reinsurance?
  • Should the captive litigate or arbitrate certain claims?
  • Should it change asset investment managers?
  • Should the captive expand into other lines of business, such as writing third-party reinsurance business?
  • Should it move from an offshore domicile to a domestic domicile?
  • How can the captive reduce the cost of its reinsurance program?
  • How does a captive evaluate its various service providers?
  • What are the consequences of executing reinsurance or fronting agreements?

Reactions Mixed to FIO Modernization Report

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On December 12, 2013, the Federal Insurance Office released its report on how to modernize the United States insurance regulatory system. The report had been long awaited by the insurance industry, so it comes as no surprise that many in the industry have responded to the report’s findings. So far, reviews are mixed.

National Association of Insurance Commissioners:

“The Dodd-Frank Act established the Federal Insurance Office (FIO) within the Treasury Department and makes clear that FIO is not a regulatory agency and its authorities do not displace state insurance regulation.  While we appreciate FIO’s suggestions for improvement, the states have the ultimate responsibility for implementing regulatory changes.”

Independent Insurance Agents & Brokers of America, Inc.:

“While we agree with the report’s conclusion that insurance regulation could be improved and modernized in certain areas, we strongly believe that any federal action should be targeted and limited with day-to-day regulation left in the in the hands of state officials. The state-based system of insurance regulation has served consumers and our economy well for decades. The Big ‘I’ strongly supports the continued preservation of this system and is ardently opposed to any direct infringement by the federal government.”

National Association of Professional Insurance Agents:

“As a strong supporter of our successful state-based system of insurance regulation, we are concerned that the FIO report may be driven by assumptions and assertions that do not hold up to scrutiny. Many of FIO’s assumptions appear to have been contradicted by a Government Accountability Office (GAO) report that concluded that the state insurance regulatory system worked well to help mitigate the negative effects of the 2007-2009 financial crisis on the insurance industry.”

American Insurance Association:

“The Report provides a valuable guidepost for collectively working toward improvements that lead to greater regulatory effectiveness, efficiency, and marketplace competition.  The overall objective of modernizing and improving U.S. insurance regulation should be to promote the growth of healthy, competitive private insurance markets at home and abroad that will ultimately benefit and protect insurance consumers while emphasizing safety and soundness.  The FIO Report affirms these essential goals.”

RIMS:

“RIMS strongly supported the creation of the Federal Insurance Office as a first step toward needed federal regulation of the insurance market. There is no question that commercial insurers, producers and policyholders would benefit from more consistency and uniformity in terms and conditions when insurance is purchased from a single insurer.  Opportunities to streamline the insurance purchasing process are a priority for this Society and we’re happy to see the FIO make progress to enhance regulations.”

There is obvious tension between the FIO and many in the industry over what exactly the FIO’s role is and should be going forward. Now that the report has been released, it will be interesting to see what the FIO’s next steps are. Many government issued reports are released and never heard from again. It remains to be seen if the FIO’s report meets that same fate.

FSB Suggests More Federal Oversight of U.S. Insurance System

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On August 27, 2013, the Financial Stability Board (FSB) released an interim update on the progress the United States has made in implementing recommendations made during its 2010 Financial Sector Assessment Program (FSAP).

While the FSB does acknowledge that the United States has taken steps toward meeting recommendations through creation of the Federal Insurance Office (FIO), modernizing of solvency requirements, and increased coordination between U.S. state regulators and federal authorities, it concludes that “significant work is required to fully address the FSAP recommendations” in the area of insurance.

In a press release the FSB states that, “The architecture for insurance supervision in the U.S., characterized by the multiplicity of state regulators, 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.”

Based on its perceived “drawbacks of the current regulatory set-up,” the FSB laid out several recommendations to enhance the U.S. insurance system: (1) further strengthening of the FIO; (2) further enhancement of insurance group supervision by establishing requirements for consolidated financial reporting for all insurance groups and by giving supervisors additional authority to fully assess the entire insurance group’s financial condition; and (3) implementation of FSAP recommendations concerning terms of state insurance commissioner appointments, rule-making powers of state insurance departments, and funding and staffing of insurance departments in order to strengthen specialist skills.

The FSB’s recommendations have been met with pushback from the National Association of Insurance Commissioners (NAIC). In a June 27, 2013 letter in response to an earlier draft of the FSB’s recommendations, the NAIC argued the report “focuses almost exclusively on the perceived cost of having a state-based system, but spends no time examining the benefits of this approach.” The letter goes on to argue that state commissioners are able to “act more quickly and in closer proximity to consumers,” which has led to an industry that is “competitive, profitable, solvent” while consumers “benefit from choice, security, and a local regulatory response that is second to none.”

Ben Nelson, Chief Executive Officer of the NAIC, went further in a September 17 interview with Bloomberg: “There is, I think, a philosophical difference about government here. We come from the Jeffersonian idea of the states.

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” He went on to say that “there is value in regulation that is closest to the people, because New York is different than Nebraska.

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”

The Financial Stability Board was established to coordinate the work of national financial authorities and international standard setting bodies at the international level. FSAP evaluations are conducted every five years and look at how a country’s financial sector compare to accepted regulatory international standards. For insurance, the study is based on the Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS). Recommendations from the FSB are advisory only and each country decides if and how to implement them.

This report was prepared by representatives from Deutche Bundesbank, Swiss National Bank, Japan Financial Services Agency, European Commission, European Systemic Risk Board Secretariat, Bank of Canada and the Insurance Regulatory and Development Authority of India. The FSB secretariat also provided support and contributed to the preparation of the report.

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