Insurance Regulation: International Developments
CRS Report for Congress
Insurance Regulation:
International Developments
Carolyn Cobb
Insurance Consultant
Government and Finance Division
Summary
Events and entities outside the United States are affecting or may affect the
competitive position of U.S. insurers, in two ways. First, supranational organizations
are developing international standards for insurance accounting and for aspects of
supervision, such as reinsurance supervision. Second, U.S. insurers are operating under
a much more fragmented regulatory regime than their competitors in other countries,
such as the U.K., that are consolidating and modernizing their supervision. International
standards and regulatory competition are important parameters on the U.S. industry’s
access to capital and therefore on its ability to provide innovative and traditional risk
financing in the United States. This report was written under the research supervision of
Barbara Miles, Government and Finance Division, and will be updated as events warrant.
Introduction
Economists generally agree that, while capital markets are not perfectly integrated1
internationally, they are far more integrated than was true only 20 years ago. This
integration has created pressures for enhancing transparency in the capital markets and for2
curtailing risks of “contagion.” Several supranational organizations are addressing these
pressures, some specifically with respect to insurance. New international accounting
standards may import new definitions of “insurance,” and new transparency standards for
reinsurers may help buyers shop for risk financing. At the same time, many other
developed countries are synthesizing their supervision of financial services, while in the
United States insurance regulation remains fragmented. These trends will likely affect the
1 CRS Report RL30514, Global Capital Market Integration: Implications for U.S. Economic
Performance, by Craig K. Elwell.
2 Ibid.; CRS Report RL32354, European Union — United States: Financial Services Action
Plan’s Regulatory Reform Issues, by Walter W. Eubanks.
Congressional Research Service ˜ The Library of Congress
competitive positions of U.S. insurers and reinsurers, though it is not clear presently what
the direction and scope of those changes might be.
International Accounting Standards for Insurance
The International Accounting Standards Board3 (IASB) has determined to create
principles-based accounting for insurance contracts in two stages. Phase I was released
on March 31, 2004, as International Financial Reporting Standard 4 (IFRS 4).4 It is
scheduled to become effective in the European Union (EU) on January 1, 2005. European
insurers have objected to Phase I because, among other things, it would require them to
measure derivatives at fair or market value and to show their annual gains and losses on
them. Derivatives do not appear on European balance sheets currently, as they have little
or no initial cost. U.S. insurers that are publicly traded already measure their derivatives
at fair value.5 U.S. insurers objected to several other aspects of IFRS 4.6
Phase II has just begun and will likely be implemented in 2008.7 The U.S. standard-
setter — the Financial Accounting Standards Board (FASB) — has agreed to work with
IASB in converging international and U.S. accounting standards.8 The National
Association of Insurance Commissioners (NAIC) has decided to work closely with the
IASB to incorporate its regulatory perspectives into development of Phase II.9 Several
issues will have significant effect on the capital positions of U.S. insurers. One will be
whether and how to measure insurance liabilities at fair value. Another will be whether
and how to unbundle various kinds of insurance contracts. Insurers are also concerned
about how the IASB will treat reserves for losses and expected investment income and
premium on long-term contracts, among other issues. They fear that the Phase II rules
will lead to greater volatility in their public disclosures, and thus affect their capital
positions — and the market’s perception of their capital positions — unfairly and
3 Further information and background on the Board and its activities are available at
[http://www.iasb.org/], visited April 20, 2004.
4 For a brief discussion of the overall project and the new guidance, see
[ h t t p : / / www.i a sb.or g/ news/ index.asp?showPageContent=no&xml=10_116_25_31032004_31
5 Andrew Parker and Charles Pretzlik, “Take It or Leave It,” Financial Times, March 30, 2004.
6 The comments letters on Phase I of the project may be reviewed at
[ h t t p : / / www.i a sb.or g/ cur r e nt / c omme nt _l et t e r s .asp?showPage C o n t e n t = n o & x ml = 1 6 _46_79_10
7 Sam Gutterman, “International Financial Reporting Standards and Insurance,” Society of
Actuaries: Reinsurance News, no. 53, March 2004, pp. 12-18.
8 Financial Accounting Standards Board, “Convergence with the International Accounting
Standards Board,” available at [http://www.fasb.org/intl/convergence_iasb.shtml], visited April
9 National Association of Insurance Commissioners, “The NAIC Team Approach to IASWG
Technical Support,” International Accounting Update, vol. 3, April 9, 2004, available at
[http://www.naic.org/frs/international_insurance_accounting/newsletters/newsletter.pdf], visited
April 23, 2004.
incorrectly, in their view.10 Whether those fears are justified or appropriate is unclear at
this stage — but it is clear that Phase II of the IASB’s proposals will greatly affect
insurers’ competitive position in the financial services sector.
International Standards for Reinsurance
Rightly or wrongly, insurance has been identified as “the weakest link in the finance-11
industry chain.” Reinsurance has been identified as “occupying a position of systemic
importance to the insurance industry ....”12 Reinsurers lost about $40 billion on September13
11, 2001, and they lost about that much as the equities bubble burst. Financial
supervisors began to regard reinsurance — again, rightly or wrongly — as a systemic14
risk.
In September 2002, the Financial Stability Forum (FSF)15 said that though the
reinsurance industry had performed well, FSF members were concerned about the
opaqueness of the reinsurance market and of individual reinsurers’ disclosures. It charged
the International Association of Insurance Supervisors (IAIS) with producing data on the16
market and with enhancing reinsurers’ disclosures qualitatively and quantitatively. The
IAIS’s task force — known as Task Force Re — submitted its report to the FSF in March17
2004. It described how data on the international reinsurance market will be gathered and
published, noted that the IAIS has drafted a standard on what non-life reinsurers should
disclose about their technical performance, and said that IAIS would be preparing global
reinsurance market reports.18 Data on U.S. reinsurers will be compiled by the NAIC and
10 Gutterman, Reinsurance News, pp. 17-18; David Pilla, “Global Accounting Accord Eludes
Insurers,” BestWire, March 31, 2004.
11 “Poor Cover for a Rainy Day,” The Economist, March 8, 2003, p. 65 (acknowledging, however,
that American insurers are in better condition than European insurers).
12 Udaibir S. Das, Nigel Davies, and Richard Podpiera, “Insurance and Issues in Financial
Soundness,” International Monetary Fund Working Paper No. WP/03/138, p. 16, available at
[http://www.imf.org/external/pubs/ft/wp/2003/wp03138.pdf], visited April 23, 2004.
13 Swiss Re, “World Insurance in 2001: Turbulent Financial Markets and High Claims Burden
Impact Premium Growth,” Sigma No. 6/2002, Oct. 31, 2002, available at
[ h t t p : / / www . s w i s s r e . c o m/ IN T E R N E T / p w s f i l p r . n s f / vwFi l e byIDK E YLu/ SHOR-5 GFJ 8 G/ $FIL
E/sigma6_2002_e.pdf], visited April 23, 2004.
14 International Association of Insurance Supervisors, “Enhancing Transparency and Disclosure
in the Reinsurance Sector: Report Presented to the Financial Stability Forum,” March 2004,
available at [http://www.iaisweb.org/143taskforcerereport5april2004.pdf], visited April 23, 2004
[hereafter “Task Force Re Report”], p. 7.
15 The FSF, an initiative of the G7 Finance Ministers and Central Bank Governors, convened first
in 1999, and is charged with strengthening the international financial system; see
[http://www.fsforum.org/about/what_we_do.html], visited April 23, 2004.
16 Eighth Meeting of the FSF (Sept. 3-4, 2002), Press Releases 2002, available at
[http://www.fsforum.org/press/press_releases_44.html], visited April 23, 2004.
17 Task Force Re Report, supra note 15.
18 Ibid. See Appendices 3 through 5 (pp. 37-50), 9 (pp. 65-68), and 11 (pp. 71-72).
will likely be available to the Treasury, the Federal Reserve Board, and the SEC.19 The
FSF, in receiving the report, urged that “more work be done in this complex area.”20
In October 2003, the IAIS adopted a new standard on supervising reinsurers.21 The
standard addresses reinsurers’ risk management, relations with its ceding insurers,
investments and liquidity, economic capital requirements, and corporate governance. It
also imposes on the home supervisor of an internationally active reinsurer the obligation
to share information about that reinsurer with other (“host”) supervisors. It expressly
contemplates “a global supervisory framework” based on “a system of accreditation of
home supervisors”and this standard.22 Though IAIS has begun a survey of its members’
supervision of reinsurers, it has not fixed a timetable for creating a global regulatory
regime for reinsurers.23
Regulatory Modernization in Other Countries
Some developed nations have unified their own supervisory regimes for financial
services. Comprehensive regulatory reform of financial services began in Australia in
1996. Since then the U.K., Germany, and Japan have also unified their national
supervisory regimes for all financial services sectors. Each country has taken a slightly
different approach. Australia formed one agency to craft and administer consistent and
comparable disclosure requirements for a broad range of products, including deposit
accounts, securities, insurance products, and pensions. It formed another agency to
perform prudential supervision for bank and non-bank financial intermediaries. Germany
unified financial supervision of banks, securities, and insurance into one regulatory
agency to achieve consistent supervision of different sectors and of cross-sectoral issues.
Japan’s new Financial Services Agency, which reports directly to the Prime Minister’s
office, supervises banks, private insurers, securities, and securities markets.24
Perhaps of greatest interest — because it is most accessible — is the U.K.’s
undertaking to unify its supervision of financial services. The unification process began
in 1997, and the new Financial Services Authority (FSA) acquired its full powers in 2001.
It now regulates banking, insurance, pensions, and securities, though the process of
integrating those functions continues.25 The FSA’s enabling legislation gave it four
19 Ibid., Appendix 3, pp. 40-41. NAIC will prepare the data with its special insurance accounting.
20 Eleventh Meeting of the FSF (March 29-30, 2004), Press Releases 2004, available at
[http://www.fsforum.org/press/press_releases_64.html], visited April 23, 2004.
21 International Association of Insurance Supervisors, Supervisory Standard No. 8, Standard on
Supervision of Reinsurers, available at [http://www.iaisweb.org/184reinsurers03.pdf], visited
April 23, 2004.
22 Ibid., p. 3.
23 Edward Ion, “An Idea Whose Time Has Come?” Insurance Day, Oct. 14, 2003.
24 Heidi Mandanis Schooner and Michael Taylor, “United Kingdom and United States Responses
to the Regulatory Challenges of Modern Financial Markets,” Texas International Law Review,
vol. 38, spring 2003 [hereafter “Regulatory Challenges], pp. 317-345.
25 Financial Services Authority, Summary Annual Report 2002/03, pp. 33-37, available at
(continued...)
objectives — maintaining market confidence, promoting public awareness, protecting
consumers, and reducing financial crime. In pursuing those objectives, the FSA is
directed to:
!Use its resources in the most efficient and effective manner;
!Recognize that a firm’s senior management bears ultimate responsibility
for its risk management and internal controls;
!Make sure that burdens imposed on firms and markets are in proportion
to the expected benefits for consumers and the industry;
!Facilitate innovation in the financial services markets;
!Acknowledge the “international character of financial services and
markets and the desirability of maintaining the competitive position of
the United Kingdom;”26
!Minimize regulation’s adverse effects on competition; and
!Promote competition among regulated entities.27
According to the FSA, the “insurance sector is a key part of the UK financial services
industry. It is important, both from an economic and social perspective, that the UK has
an insurance market that operates effectively [and] remains competitive in European and
world markets....”28 According to the FSA, its creation “as a single regulator highlighted
differences between the regulation of insurance and other sectors in respect of similar
types of risks.”29 Accordingly, it has undertaken a major overhaul of insurance regulation
to strengthen it and “to establish a common, risk-based approach to regulation across all
financial sectors.”30
In revising its insurance regulation, the FSA has cooperated closely with and
contributed to both the formulation of EU directives on insurance and reinsurance as well
as IAIS standards. The EU’s Financial Services Action Plan (FSAP), due to be completed
next year, contains directives that will directly affect the relative competitive positions of
U.S. and U.K. insurers including Lloyds.31 In addition, the European Commission (EC)
has proposed a directive on reinsurance that would allow a reinsurer domiciled and
licensed in an EU country, under the new standards, to do business throughout the EU
25 (...continued)
[http://www.fsa.gov.uk/pubs/annual/ar02_03/ar02_03summary.pdf], visited April 25, 2004.
26 Financial Services and Markets Act, 2000, c. 8 (Eng.), Part 1, sec. 1, available at
[http://www.fsa.gov.uk/fsma/data/fsma/act/act_part_i.htm#2], visited April 25, 2004.
27 Ibid.; Financial Services Authority, A New Regulator for the New Millennium, Jan. 2000,
available at [http://www.fsa.gov.uk/pubs/policy/p29.pdf], visited April 25, 2004.
28 Financial Services Authority, The Future Regulation of Insurance, Oct. 2002, p. 7, available
at [http://www.fsa.gov.uk/pubs/policy/bnr_progress3.pdf], visited April 25, 2004.
29 Ibid., p. 3.
30 Financial Services Authority, Annual Report 2002/03, p. 85, available at
[http://www.fsa.gov.uk/pubs/annual/ar02_03/ar02_03sec5.pdf], visited April 25, 2004. Appendix
31 CRS Report RLF32354, European Union — United States: Financial Services Action Plan’s
Regulatory Reform Issues, by Walter W. Eubanks.
without further regulation or collateral. The directive is intended to, among other things,
improve access to foreign markets — particularly the United States.32
Unified supervision of financial services may not be successful. Certainly neither
Australia’s nor the U.K.’s financial supervisory authority has been free from failures. The
efforts are noteworthy, however, for two reasons. One is that their changes may, like the
proposed EU directive on reinsurance, directly affect the competitive positions of U.S.
insurers and reinsurers. The other is their express emphasis on maintaining the
competitiveness of their domestic insurers in a worldwide market.33
Conclusion
Representative Oxley, Chairman of the House Financial Service Committee, has
outlined a road-map to insurance regulatory reform. He and Representative Baker,
Chairman of the Subcommittee on Capital Markets, Insurance and Government-
Sponsored Entities, have proposed achieving uniformity in some aspects of state-based
insurance regulation by imposing federal standards but not federal regulation.34 Chairman
Oxley, in expressing his support for such reforms, said that “(i)nsurers are facing
increasing competition from other financial services sectors which have significantly
lower regulatory costs.... If insurers cannot raise new capital, this marketplace is at risk
for a major collapse. Without change, consumers face a world with fewer options, less35
competition, and less coverage.” At the Subcommittee’s hearing on March 31, 2004,
Representative Kanjorski expressed support for those goals and initial doubt about
whether the proposal as outlined could achieve them. Senator Hollings, Ranking Member
of the Senate Committee on Commerce, Science, and Transportation has introduced S.
As Congress continues its efforts to modernize insurance regulation, entities in other
countries are taking steps that will affect the competitive positions of U.S. insurers. The
NAIC is working closely with Congress to assist in its efforts. It is also working closely
with international entities, particularly the IAIS, to develop new international standards
for insurance regulation. It remains to be seen whether or how all these efforts will
coordinate for the benefit of the United States as a whole.
32 Commission of the European Communities, Proposal for a Directive of the European
Parliament and of the Council, SEC(2004)443, April 21, 2004, available at
[http://e u r o p a . e u . i n t / c o mm/ i n t e r n a l _ ma r ke t/insurance/docs/reinsurance/directive/com-2004_273-
final-en.pdf], visited April 25, 2004. In the U.S., reinsurers that are not licensed in a state must
commit collateral in the U.S. at least equal to the gross amount of their U.S. liabilities. Non-U.S.
reinsurers object to the requirement as a trade barrier, while many U.S. insurers favor the
requirement. See Michael Loney, “The Collateral Battle,” Reactions, Nov. 2003.
33 Schooner and Taylor, Regulatory Challenges, pp. 343-345. See also Kenneth K. Mwenda and
Judith M. Mvula, “A Framework for Unified Financial Services Supervision: Lessons from
Germany and Other European Countries, Journal of International Banking Regulation, vol. 5,
Sept. 2003, pp. 35-56.
34 Chairman Michael G. Oxley, “Road Map to State-based Insurance Regulatory Reform,” speech
to the National Association of Insurance Commissioners, March 14, 2004 (released March 15,
35 Ibid.