Insurance regulators may go back to college

Well, I’ve overstated a little, to intro this Reuters piece about a European college of supervisors for banking.

Bank supervisors from countries that oversee a cross-border bank would liaise with each other and more directly and regularly with banks on key issues such as risk management.

The aim is to spot problems before they get out of hand.

In banking, the idea is to allow regulators to coordinate across borders to make sure any issues get handled in the best interest of the bank, not the best interest of one nation’s regulators.

At this week’s Casualty Loss Reserving Seminar, regulators suggested to the actuaries that a college of supervisors could be a way to handle one of the stickier regulatory problems – regulation of insurance groups.

For the nonsophisticate: what most people think of as an insurance company (GEICO, CNA, State Farm) is actually a group of companies. State Farm, for example, includes among other companies:

  • State Farm Mutual Auto Insurance
  • State Farm Fire & Casualty
  • State Farm Lloyds
  • State Farm Indemnity
  • State Farm General Insurance
  • State Farm Florida Insurance

There are lots of reasons for this. Once, insurers couldn’t legally charge different rates within one company, a practice known as tiering. So the best risks would be overcharged and the worst risks would be undercharged. To get around the law, insurance groups formed more companies, with each charging a different rate. Most states allow tiering of rates within a company, but the companies formed this way are still around.

And sometimes a separate company is used to insulate the group’s exposures. I’ve seen this in New Jersey – until recently a notorious state to write auto insurance. I wouldn’t be surprised if State Farm’s Florida company was formed for the same reason.

There were also tax advantages, or the company gave the group access to a new market.

Anyhow, each group has several companies. And – the key here – they weren’t formed in the same state, and financial stability is regulated by the state of domicile.

Suppose you have a group with 10 companies, each domiciled in a different state. Each state can regulate its own company, but how do you regulate the entire group?

This has always been an issue, but recently, issues like enterprise risk management have brought it to the forefront. A group will have its own risk management plan, covering all those companies. Should the regulators require it to have 10 more plans, one for each company? Who will regulate the group plan?

That, in a roundabout way, shows why insurance regulators are warm to a college of supervisors. This is all in relatively early stages, I gather, but the college would – like the banking example – monitor at a high level, keeping the interests of the individual companies in mind.

Solvency II embraces the approach; details here. (Scroll down to Section 3.2.)

Sounds grand, like all plans, but there would need to be details, which to my knowledge are spare this early on.

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