2014 AM Ben Nelson Speech
Remarks by National Association of Insurance Commissioners CEO Ben Nelson at the
American Academy of Actuaries Annual Meeting and Public Policy Forum in Washington, D.C.
November 14, 2014
Hello. Thank you for that kind welcome.
I hope your Annual Meeting and Policy Forum has been a productive gathering, and for those of you with the stamina, I want to thank you in advance for your participation at our national meeting starting this weekend. There are deep ties and important work that binds the actuarial profession and the NAIC, so I truly thank you for your involvement and contributions over the nearly 50-year history of the Academy.
The members of the NAIC—the 56 state and territorial insurance regulators—share a mission of ensuring a stable, competitive, and well-regulated marketplace where consumers are informed and protected. It is the responsibility of the NAIC to support our members in that mission, and as CEO, it is my job to make sure that our staff accomplishes that goal.
As you well know, the work we do, not unlike your own, has far-reaching implications. Complicating matters, as financial entities become more interconnected and insurance markets expand globally, the work just gets harder and the need for collaboration greater. Add to that the increasing sophistication of catastrophe and financial modeling, the growing threat of physical and cyber-attacks, and pressure from international regulatory and standard setting bodies. It is an exciting time—perhaps a little too exciting—to be a part of the regulatory community. The upside is the confidence I have that our insurance sector continues to dependably protect consumers, serve as a reliable source of employment for millions of Americans and provide stability for the broader economy. These challenges also bring opportunity—a chance to step back and see what we can do together to streamline regulation and help make the U.S. industry more efficient and competitive globally.
The U.S. insurance industry continues to grow, and is a vibrant source of financial strength in America. In a recent poll, however, almost three-quarters of Americans think we are still in a recession. I’m not an economist, but that tells me that there is still an underlying lack of confidence and trust in the financial system. That’s why the message of insurance as a source of stability is one that we need to repeat over and over to folks in Washington and internationally who increasingly want to regulate insurance like it’s a short-term, high-risk enterprise. Insurance regulators are – as we like to say – “Protecting the Future” for American consumers and businesses. We’ll leave “predicting the future” to the actuaries.
As many of you know, we have a number of important regulatory issues we’re working on domestically. The Academy and the actuarial profession have been instrumental to this work. From implementation of Own Risk and Solvency Assessment, or ORSA, to refinements to our holding company authority, to our transition to principle-based reserving—our plate is quite full. These activities are going to require your actuarial focus and expertise over the next few years and offer the opportunity for actuaries to provide additional valuable input regarding the solvency of U.S. insurance companies. I’m sure you already are well-read and knowledgeable about these activities, especially given the wealth of actuarial input given by the Academy to the NAIC, but I would nevertheless encourage you to remain engaged and contribute to this work where you can. As ORSA and changes to regulators’ holding company authority go live, the industry will need to rely on its actuaries and experts to look at the risks across the enterprise and peek around the corner to see what lies ahead—a skill actuaries have great experience with. As principle-based reserving comes online, actuaries again will be called on to play a critical role within their firms to make clear and credible determinations on reserving needs that will pass regulatory scrutiny. And, as the NAIC moves forward to address the use of captives for redundant reserves, actuaries will need to stay directly involved. With all that we have to do, you could extend your annual meeting right up through the weekend and just move to the Wardman Park Marriot to get started!
Academy members and staff often do spend more time at NAIC national meetings than even I do and you know firsthand the challenges we are tackling together, so today I’ll take a step back and focus more broadly on what is happening worldwide. Despite a healthy workload of our own choosing, the NAIC and state regulation do not operate in a vacuum, so we have increasingly needed to focus at the federal and international level—arenas of regulatory development that are growing more interconnected. Let’s start with what is going on in Washington.
An issue that is front and center for the NAIC is the reauthorization of Terrorism Risk Insurance Act (TRIA). This priority is both critical and time sensitive—two characteristics that the U.S. Congress has seemed to struggle with of late. The NAIC has supported TRIA since its inception and through its subsequent reauthorizations. Last year we adopted a resolution reiterating our belief that continuation of the program is critical to terrorism insurance availability and major economic development. We prefer a long-term reauthorization and continue to urge prompt congressional action. This important partnership between the private insurance market and the federal government expires at the end of December, so we must urge Congress to move fast. In addition to direct efforts by the NAIC, many of our commissioners have reached out to their congressional delegations, including at the leadership level, to reaffirm what to us is obvious—without TRIA, the market for terrorism as we know it ceases to exist, and the markets that remain—such as workers’ comp—will be dramatically impacted.
There is a serious question whether Congress will extend TRIA before the end of the year, but many predict it will get done during the current lame-duck session. At the risk of having tomatoes thrown at me, I’m going to say, “Don’t be too sure or overconfident about this.” At the very least, take nothing for granted. With the recent election shifting control of the Senate to the Republicans, there is a growing sense that a short-term reauthorization is likely to extend the program into the next Congress when the House and Senate can seek a scaled-back version. I feel like the clergyman who’s not sure whether to comfort the afflicted or afflict the comforted with a call to action. Some in Congress don’t share our enthusiasm for TRIA, so I’m afraid we’ll continue to have to confront this issue from time to time with similarly unnecessary drama and uncertainty.
Cyber security is a somewhat related issue that we are not only monitoring, but actively working on with other financial regulators, Congress and the administration. Together we are identifying specific threats and developing strategies to protect the financial infrastructure of this country. As you know, cyber-attacks can have devastating results for companies, consumers, and in the worst case, the financial system at large. The potential insurance implications are tremendous. As data breaches and cyber-attacks become more common, there are several areas for regulators and companies to consider: the protection of information housed in insurance departments and the NAIC; the supervision of insurers’ efforts to protect customer information that they collect, as well as the regulation of companies writing ever more complex and specialized cyber-liability policies.
Regulators are coordinating through the NAIC to direct our efforts in each of these areas, promote best practices, and most importantly, stay informed in a very quickly evolving landscape. We are members of the Treasury Department’s Financial Banking and Information Infrastructure Committee and of the Executive Branch and Independent Agency Regulatory Cybersecurity Forum, where we work with our federal colleagues to tackle this very difficult issue. There is a unique opportunity here for the insurance sector to innovate and drive best practices—and, yes, make some money—but it is all for naught if we ourselves don’t follow those best practices to ensure the data and trust consumers place in us is protected and secure. Our industry, perhaps more so than any other financial sector, bases its reputation—even its very identity—on providing financial peace of mind. Let’s work together to be market and policy leaders in this critical area.
TRIA and cyber security are clear examples of federal engagement having a direct impact on local insurance markets. Another example of federal involvement in insurance regulation is the Dodd-Frank Act. While Dodd-Frank largely rejected significant changes in insurance regulation and instead focused on oversight of other financial sectors, there are elements of the law that impact insurers and insurance supervision—particularly those areas where insurance intersects with banking and capital markets.
While many Dodd-Frank rulemakings are still in the works, two specific lingering issues loom large for the insurance regulatory world. The first is the Federal Reserve’s setting of capital standards for certain companies. Despite broad and bipartisan support from Congress, regulators, and the industry to the contrary, the Fed continues to contend that it has limited flexibility in setting capital standards for the insurance companies it regulates. This may be the only time in history that a regulator has taken a narrower view of its power than either the lawmakers who gave it to them or the industry they apply it to!
While the Senate and the House each passed legislation to specifically afford the Fed necessary flexibility, the House version was packaged with other pieces of legislation that were dead on arrival in the Senate. I want to be hopeful that the Senate and the House will resolve their differences and pass this common-sense bill before the end of the year. This too could depend on whether the lame-duck session is flat or productive.
Part and parcel with the capital standards issue is the “Source of Strength” doctrine. One of the central tenets of insurance regulation is the state insurance regulator’s ability to wall off an insurance legal entity. This limits contagion from problems elsewhere within a group, with regulatory checks on the fungibility of capital within a group. While the Bank Holding Company Act contains important safeguards and procedural requirements for any movement of capital from an insurer to a bank, it is unclear if policyholders of insurers organized as Thrift Holding Companies would enjoy the same protections. This spring, Congress introduced the bipartisan “Policyholder Protection Act” to address this issue. The legislation would extend the protections of the Bank Holding Company Act to Thrift Holding Companies. We continue to seek support for this legislation and hope that Congress will likewise pass it in short order. This congressional effort ties directly in to international developments on capital I’ll talk about shortly: The scope of holding company capital requirements can rightfully be reduced if the consumers doing business with the legal entity insurers are adequately protected.
FSOC / Federal Reserve
As you know, Dodd-Frank also created the Financial Stability Oversight Council—the FSOC. The FSOC is tasked with identifying and designating Systemically Important Financial Institutions—SIFI’s. One of the consequences of the designation of AIG and Prudential as SIFI’s is that their holding companies are now subject to regulation by the Federal Reserve.
Recently, the NAIC selected NAIC President and North Dakota Insurance Commissioner Adam Hamm to replace Missouri Insurance Director John Huff as the nonvoting State Insurance Commissioner representative on the FSOC. During his term, Director Huff and others, including former Kentucky Commissioner Roy Woodall, raised concerns regarding elements of the rationales supporting the AIG and Prudential designations. The NAIC also remains skeptical about the continuing rationale for the process that MetLife is now facing. Commissioner Hamm has been front and center in many of our discussions directly related to the issues that FSOC is working on, and is every bit as troubled as I am about the potential negative consequences of FSOC’s actions.
Of equal concern is the lack of an “exit ramp” for de-designation of companies. Without a clear understanding of what specific factors caused the systemic designation, there isn’t a clear roadmap for companies to follow to remove the designation—which is the ultimate goal; remove or at least reduce systemic risk. The impact on the insurance consumer is clear. Bank regulators, in their effort to reduce systemic risk, do not sufficiently delineate the difference between bank and insurance business models. As we have seen with FSOC, those regulators with banking expertise and experience are treating large insurers like banks. As the old saying goes, “If all you have is a hammer, everything looks like a nail.” Add to that those regulators are having difficulty moving away from “too big to fail.” These bank regulators need to listen to those with insurance regulatory experience to “get it right.” FSOC would be better served to focus on the products and activities that actually caused the financial crisis, and not use the crisis as an excuse to expand member agencies’ empires and simply try to overlay another regulator. It’s become clear that FSOC’s approach to real or perceived threats to the stability of our economy and financial system is to add regulation, not attempt to reduce risk. Buckling another seat belt over our laps as passengers won’t help if you’re still letting other parts of the financial system drive at 100 miles per hour.
Also created under Dodd-Frank, the Federal Insurance Office is charged with monitoring the insurance sector for the federal government and serves as an adviser to the secretary of the Treasury on major domestic and prudential international insurance matters. FIO also has the authority under the Dodd-Frank Act to jointly negotiate along with the United States Trade Representative, what are called “covered agreements” with foreign authorities.
Recently the FIO has called for a covered agreement on reinsurance collateral based on the NAIC model. We have had preliminary discussions with FIO and USTR but there is still too little information about the need, scope, and timing of the agreement. Given the fact that the NAIC model reinsurance collateral act has been adopted in 23 states with 60% of the U.S. market and a number of additional states are on track to bring that closer to 80% by the end of 2015, the NAIC questions the need for such a covered agreement. We anticipate further discussions with Treasury and the USTR as this concept develops to determine whether the pursuit of an agreement is in the best interest of American policyholders and insurers.
International Activities and Relationships
Let me turn now to another area of focus for the NAIC that has been consuming a lot of time and jet fuel—international standard setting. I noticed the session before my remarks today was titled, “What In the World Is Going on Internationally Today?” If your distinguished panelists came up with any answers to that question, I’m all ears.
The international discussion of insurance supervision has intensified and we have seen increased cross-border and cross-sector cooperation among supervisors as a result. When we talk about the insurance industry in a global context, it’s easy to think of the U.S. as just another seat at the table. But that limited view belies our strength, size, and experience. U.S. states make up more than 24 of the world’s 50 largest insurance markets. Collectively, we have nearly a third of the global market share of premium volume. U.S. consumers pay more than $1.8 trillion per year on insurance.
When it comes to global collaboration on insurance oversight, the International Association of Insurance Supervisors is a forum for building consensus around best practices worldwide, much like the role of the NAIC here at home. As a founding member of the IAIS, the NAIC and state insurance commissioners remain committed to promoting more effective and consistent standards to help protect policyholders and maintain stable markets.
Oversight between jurisdictions should be coordinated in a common framework that provides the necessary checks and balances for effective cross-border supervision—much like how coordinated regulation is a cornerstone of the state-based system in the U.S. However, we oppose adding unwarranted layers of regulation that might stifle innovation or create unnecessary burdens on your companies—an added cost that would ultimately be borne by consumers. Additionally, we believe unnecessary capital costs will disrupt our vibrant and innovative U.S. market for many products. The push for market-consistent valuation accounting as an international standard will most certainly have a negative impact on the U.S. market to the detriment of American insurance consumers. This kind of homogenous approach of treating insurers like banks may actually encourage new risk-taking in the insurance industry. Instead, NAIC members continue to take the lead in crafting common-sense regulation that allows companies to operate according to actuarially sound principles that promote competition and innovation.
The IAIS is simultaneously developing multiple capital proposals to address both systemic firms and internationally active groups. We have an obligation to engage in that process to seek outcomes that will work for the American market and regulatory system. As the IAIS work progresses, we will continue to consider whether, and to what degree, to implement changes to our solvency standards here at home. Throughout we will remain engaged with our federal colleagues, industry, and consumers. The reality is that our system is different from the model being pursued in other countries, where frankly, insurance is viewed almost as an extension of the banking industry. That difference leads to fundamental disagreements on how to approach issues like capital. We are striving to craft international standards that recognize our strong system. However, if we are unsuccessful, we will continue to fight to ensure that those standards inappropriate to our market do not move forward for U.S. firms.
Where Europe’s new solvency regime, Solvency II, is concerned, we do not anticipate adopting those standards or pursuing equivalence. Instead, the NAIC continues to make enhancements to its regulatory system through the Solvency Modernization Initiative and otherwise taking into consideration international and regional developments. Along the way, we will incorporate changes that make sense for our system and share best practices with our colleagues around the world.
But there is a bottom line here. In our efforts to seek satisfactory solutions with our federal and international colleagues, will we permit the walled-off assets of insurers to become fungible, negating 140 years of solid policyholder protection? Will we concede the statutory accounting system designed to protect policyholders to the more volatile bank and investor-focused market valuation approach and forever change the dynamic U.S. market?
Or, will we persuade our colleagues that simply because insurers assume risks, that doesn’t equate to risky? And certainly not systemic risk?
As you can see, there is a tremendous amount of activity at the international level that, at a minimum, could influence some of our work here domestically. Given the close cooperation between the NAIC and the Academy, this presents a number of challenges and opportunities for your profession. The fixation of international standard setters on capital as a buffer—if not THE buffer—to mitigate risks suggests the actuarial profession’s voice is now more critical than ever. For years, we have worked side by side to build risk-based capital and a solvency framework that is tailored to our regulatory approach and the U.S. market. We now collectively face a threat to that work, should bank-like regulation bleed into the insurance space. The solvency framework we built over the last two decades served insurance policyholders—and I would argue the financial system and economy at large—extremely well during the financial crisis when literally hundreds of banks failed. We must be very careful, in pursuing any changes to our system, to not undermine the very things that make it work so well. Again, we need the actuarial profession and the Academy to weigh in and make your important voices heard.
While the efforts I have mentioned today are far from an exhaustive list, NAIC is giving a considerable amount of time and energy to these projects. As always, we welcome your full engagement as we contemplate next steps on any front. I want to commend the Academy members and its exceptional staff for working directly with NAIC—your efforts have made a huge difference.
Insurance and insurance regulation is complex and at times seems arcane, but as we speak, we are seeing the consequences if the public and policymakers don’t understand how our sector works and how it serves other parts of the economy. We’ve got a lot more work to do, but I’m confident our collective efforts will be successful. Thank you for your time and attention today.