Follow the rules that aren’t quite written

At a Reactions magazine insurance event, U.S. regulators showed their frustration at having to qualify as Euro-compliant. Quoth FL Commissioner Kevin McCarty:

Solvency II is a theoretical standard – it is not in place yet. It is difficult to say what effect Solvency II would have, because it is not yet implemented, whereas we have 130 years of experience.

The problem: With Solvency II, Europe regulators have leapfrogged U.S. regulators. They are setting cutting edge standards, and the size of the giant European insurers and the openness of the market mean America has to follow. And the Americans aren’t used to that.

This year, the European regulator CEIOPS picked out the countries whose regulatory regimes could be ruled equivalent to the European standard. The U.S. got left off – blame America’s state-based regulation. We have 50 regulators. Europe has one. So the U.S. was too complex and too expensive to evaluate.

Given the pedigree of U.S. insurance regulation, that’s difficult to accept. NY Superintendent James Wrynn:

If you took the U.S. system and placed it over Europe, it would work perfectly with the EU member states.

And U.S. regulators are leery of S-II’s reliance on the company’s own computer models, Wrynn said:

Doesn’t the over-reliance on internal models complicate the role for regulators? Do they understand it? And people will game it, the Enrons of the world.

Meanwhile, U.S. regulators are doing their own update of solvency standards, the Solvency Modernization Initiative. As I’ve reported before, that is likely to keep the current risk-based capital system, but add some modeling for out-of-the-box risks like catastrophe exposure. The initiative will play out over the next couple of years.

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