Insurance Governance Leadership Network, April 2015
The great financial crisis brought to a head the growing mismatch between the structures of complex insurers and the remit of their supervisors. Historically, insurance has been largely a domestic affair, with local policyholders protected by local supervisors and solvency regimes; however, in the last several decades, strategy changes and merger and acquisition activity have created numerous international insurance groups. Yet despite this internationalization, many products are still created for specific markets and fully capitalized local subsidiaries are overseen by local supervisors. The crisis revealed that this local supervisory structure did not provide meaningful regulation at the holding-company level, and that non-insurance subsidiaries could create significant harm for companies and the financial system as a whole.
To correct these problems, policymakers have introduced stronger consolidated group supervision and risk management, new solvency regimes, and new regulatory and supervisory authorities and powers, among other changes. According to one insurance executive, “In some ways, regulatory environments are catching up with the evolution of the industry. Regulation grew out of assumptions that insurance was a local business. The laws were codified to reflect that.” Today, insurers must be responsive to an increasing number of regulators, each with somewhat unique objectives that are not always aligned.
For supervisors to work together effectively, they must create a common language and standards through which to understand insurers’ vast operations. Developing this common language is an arduous process that, in the words of one director, “highlights areas where supervisors are not aligned.” These points of tension come to the fore in discussion of local and global capital standards and recovery and resolution planning. Each of these topics tests ambiguity in the existing regulatory frameworks and requires meaningful consensus within, and across, the public and private sectors.
On March 5, 2015, global insurers, along with key policymakers and supervisors, convened in New York to discuss and advance mutual understanding of these challenges. In the process, the group identified additional supervisory priorities that could help foster cross-sector dialogue and improve alignment between public and private sector participants. This ViewPoints explores the following themes:
Numerous initiatives seek to strengthen and unify supervision of global groups
Capital standards could become the “common language,” but adopting them has proven challenging
Recovery and resolution planning requires careful design and global harmonization
Despite differences, regulators and insurers agree on a number of issues that can serve as a model for cooperation