Publication

“It is the uncertainty that brings me here today.  There are a tremendous number of crosscurrents that do not appear to be converging.”

—Non-executive director 

On January 28, 2013, Tapestry Networks and Ernst & Young convened the fourth meeting of the Insurance Governance Leadership Network (IGLN) in New York. A select group of non-executive directors were joined by Ted Collins, Group Managing Director, Global Insurance & Managed Investments, Moody’s Investors Service and Tom Leonardi, Commissioner, Connecticut State Insurance Department. This meeting, originally scheduled for November and moved in response to Hurricane Sandy, was a companion to the October 10, 2012 IGLN meeting in Amsterdam. Both meetings focused on insurers’ responses to the myriad of changing regulatory, capital, and accounting standards.

Participants observed that change and uncertainty appear to be the new norm in the industry. Insurers view lack of convergence on standards as one of the most prominent industry challenges. Despite differences in products, group structure, and business practices, participating insurers believe the path to progress will involve diverse insurer groups unifying to advance dialogue on this and other challenges.

This issue of ViewPoints synthesizes the ideas and perspectives shared in the meeting on January 28 and in preparatory discussions with directors, executives, supervisors, and regulators. The following key themes emerged:

• Evolving risk-based standards are themselves a potential source of risk. Regulatory regimes in Europe and North America are changing dramatically, and policymakers continue to push back expected completion dates. The ongoing regulatory uncertainty means that insurers are forced to make important investment, product, and other strategic decisions based on incomplete information. Insurers warned that the current regulatory ambiguity and threat of new regulations may motivate insurers to make strategic choices that limit diversity, which may increase systemic risk.

• Consistent cross-border supervision is not yet a reality. For global insurers, clear and consistent cross-border supervision is a top priority. However, insurers and regulators point to a number of challenges inhibiting more effective cross-border supervision, including supervisors’ limited resources, difficulty coordinating supervisory colleges, and the introduction of several new regulatory authorities with as yet undefined roles.

• Differences in international accounting standards introduce complexity into the global market. Non-executive directors remain concerned about the impacts of diverse global accounting standards and the balance sheet implications of fair value reporting. Increased balance sheet volatility, resulting from mark-to-market practices, may be compounded by impending risk-based capital requirements. Insurers reported that they are striving to anticipate and deal with the impacts of these different standards.

• The role of credit rating agencies (CRAs) is shifting. Following the financial crisis, the role of CRAs in the insurance sector is changing, though directors assert that raters remain as important as ever, especially without convergence in accounting or solvency standards. CRAs maintain strong opinions about regulatory and other industry trends, and acknowledge the industry’s frustration over inconsistent global standards. At the same time, they caution against relying on their analysis to bridge these gaps, particularly regulatory gaps. Instead, they argue that ratings should be viewed as one of many complementary analytical tools for investors, counterparties, and policyholders to evaluate relative credit risk.