The Future of Insurance Regulation
By Henry Siegel, American Academy of Actuaries Vice President, Risk Management and Financial Reporting
When it comes to the future, there are three kinds of people:
1. those who let it happen,
2. those who make it happen, and
3. those who wonder what happened.
—John M. Richardson Jr., Professor of International Development, American University
Recent developments in insurance regulation have shown again the importance of actuaries being counted in the second of those categories. Insurance regulation is undergoing a transformation unprecedented since the first reserves were required. That transformation will impact nearly every aspect of our work and the business of our employers and customers. Without actuarial involvement and input those changes would have the potential to wreak havoc on our lives, our careers, and our profession.
The coming transformation can be summarized as a move from national regulation to international regulation. The chart below illustrates this:
By now, most people know that the International Accounting Standards Board (IASB) has published an exposure draft of a revised accounting standard for insurance contracts and for financial instruments. Together, these standards, if adopted, would provide new accounting guidance for almost the entire balance sheet and income statement of publicly traded and many private insurance companies. Furthermore, in 2011 the Securities and Exchange Commission (SEC) will take another serious look at adopting (or permitting use of) International Financial Reporting Standards (IFRS) for all U.S. companies. While the Financial Accounting Standards Board (FASB) is considering whether to agree with the IASB on how to handle certain accounting standards (most importantly for short-term P&C contracts and claims), the reality is that the IASB, which only came into existence in 2001, is now the predominant accounting standard setter for nearly everywhere in the world.
Actuaries interact with the IASB in several ways. The most important is through the International Actuarial Association (IAA). The Insurance Accounting Committee of the IAA, made up of actuaries representing countries worldwide, comments on exposure documents published by the IASB. The United States has representative on this committee from each of the five U.S.-based actuarial organizations and additional U.S. actuaries attend meetings and contribute as observers. The committee meets twice a year at different venues around the world and has additional meetings by phone or in person as required.
Solvency and Governance
Until very recently, the U.S. paid little attention to the International Association of Insurance Supervisors (IAIS). Lacking any regulatory authority, the IAIS primarily produced papers of use by countries that lacked a robust existing regulatory authority. This changed, however, when the G20 declared that the insurance regulation of all countries would be measured against the International Core Principles (ICPs) of the IAIS. In 2009 the NAIC was indeed the subject of a review by the International Monetary Fund to determine if U.S. regulation was in accord with the ICPs. The verdict was largely positive with shortfalls in only three of 28 areas, none of them very material.
Unfortunately, the IAIS is in the process of revising all its ICPs plus the standards and guidance that go with each of them; it’s not clear the U.S. will do as well the next time without changes to the U.S. system.
What this means, therefore, is that suddenly the ICPs are important and the NAIC needs to be careful that the IAIS doesn’t include provisions in the revision that would be difficult for the U.S. to follow. For instance, a requirement that regulatory accounting adopt some features of IFRS could cause significant issues for U.S. regulators and companies.
Again, the IAA has committees that monitor developments at the IAIS and comment on draft ICPs, standards, and guidance. Like the accounting committee, the solvency and related committees meet twice a year in person and schedule additional meetings as needed.
By now, it’s obvious that the IAA is a primary interface between actuaries and the international regulatory authorities. The IAA, like the IAIS in some ways, was not originally established for that purpose. It has taken on that role because of the growth in importance of the IASB and IAIS. The IAIS and IASB are unlikely to contact the actuarial organizations of each separate country for input; instead they prefer to approach the IAA as representative of the entire profession. While the Academy and its counterparts in other countries have contributed comments to both the IAIS and IASB on their exposure documents, and the Academy has provided comments and advice to the NAIC representatives at the IAIS, it is still the IAA to whom the international organizations look.
In addition to the advice and comment the IAA provides, there is also a movement underway to create international actuarial standards of practice. The IAA has for some time had in place a process for creating standards of practice but until now it has produced nothing more than the equivalent of practice notes. With the creation of an IFRS for insurance contracts, however, it is possible that the IAA will produce standards of practice that could have an impact on actuaries worldwide. While the IAA has no authority to impose its standards, it could require members to adopt them. At the least, actuaries being examined in court may find their work being measured against those standards unless contrary standards exist in the countries they are practicing in. Again, no such standards have been produced but work is beginning on them in anticipation of a final IFRS for insurance contracts. The Accounting Committee of the IAA will largely be responsible for producing whatever standards are produced on IFRS. There is not, as yet, any international equivalent of the Actuarial Standards Board.
At the same time, a small IAA task force is beginning to discuss the possibility of converging actuarial standards worldwide. This is likely to take a very long time and, since many people oppose the concept, may never actually happen. The fact that it is being considered, however, means that there is still more for U.S. actuaries to keep an eye on.
Implications for U.S. Actuaries
The American Academy of Actuaries is responsible for coordinating the U.S. response to IAA proposals, drafts, and actions. Normally, those comments are prepared by the Solvency Committee, its ERM Subcommittee, or the Financial Reporting Committee of the Academy’s Risk Management and Financial Reporting Council with the help of their counterparts in other practice areas. It is significant that the IASB and IAIS rarely deal with life insurance separately from P&C insurance (and rarely considers health insurance at all!). Instead they require a consolidated response dealing with insurance as a single industry.
If U.S. actuaries want to have a strong voice in international developments that affect us in the U.S., if we want to be those who make the future happen rather than those who wonder what happened, it is essential that we volunteer to help on the Academy committees that work internationally. As Academy Vice President for Risk Management and Financial Reporting, I particularly suggest that P&C actuaries need to become more involved in the work of the Risk Management and Financial Reporting Council. Right now, this work is being done only by a relatively small group of P&C actuaries. We need more. If you are interested, contact Tina Getachew at Getachew@actuary.org.
“My interest is in the future because I am going to spend the rest of my life there.” —Charles F. Kettering (American engineer, inventor of the electric starter, 1876-1958)
Henry Siegel, FSA, MAAA, is Vice President and Actuary for New York Life.