Recent performance

11. Overall, the insurance sector, and the property and casualty companies in particular, has been resilient through the financial crisis. Capital and surplus, the key measure of the buffer available in case insurance company reserves prove inadequate to ensure that policyholder claims can be paid, has fallen by 6.7 percent in life and 8.5 percent in property and casualty between end-2007 and mid-2009. Companies whose capital adequacy, measured by the regulators’ risk-based capital (RBC) requirements, fell to regulatory intervention levels ⁵ accounted for only 3 percent of the total in 2008. While there have been several firms placed in receivership, only one company has been subject to receivership for causes and with a timing directly related to the financial crisis. ⁶ The property and casualty sector suffered from investment market falls, but losses from natural catastrophes so far in 2009 have not been as high as in some recent years. As Table 1 shows, while absolute dollar amounts of capital have fallen, so has the required risk-based capital, leading to capital coverage ratios in the sectors falling more slowly. Actual capital in each of the sectors is many times greater than required RBC levels and, on average, about two to three times the capital levels at which regulatory intervention would occur.

12. However, there have also been significant stresses in the insurance sector in the last two years. Writers of financial guaranty business (the monoline insurers) lost the previously high ratings on which much of their business depended after serious losses on business related to impaired structured finance products. The American International Group (AIG) was supported by the federal authorities after major losses at its capital markets affiliate. Two other insurance groups with federally regulated banking or thrift subsidiaries were granted federal government capital support under the Troubled Asset Relief Program (TARP) (others had applied for funds). Insurers also benefited from Federal Reserve programs, particularly the Term Asset-Backed Securities Loan Facility (TALF) that supported liquidity in the markets in which they had invested.

Table 1.

United States: U.S. Insurance Companies—Capital Adequacy

Table 1.

United States: U.S. Insurance Companies—Capital Adequacy

Year End	2008	2007	2006	2005	2004
Life
Total adjusted capital (US$ billions)	337.9	382.6	363.5	344.4	340.2
RBC requirement (US$ billions)	44.6	47.7	44.8	42.3	43.9
Industry aggregate RBC ratio (TAC as % of RBC)	758%	802%	811%	814%	775%
Median RBC ratio of insurers (TAC as % of RBC)	910%	1009%	996%	975%	940%
Number of companies in action levels	23	13	13	11	17
Percentage of companies in action levels	2.7%	1.5%	1.4%	1.1%	1.7%
Property and Casualty
Total adjusted capital (US$ billions)	578.9	640.7	599.3	523.8	484.8
RBC requirement (US$ billions)	96.8	102.7	98.6	94.2	93.6
Industry aggregate RBC ratio (TAC as % of RBC)	598%	624%	608%	556%	518%
Median RBC ratio of insurers (TAC as % of RBC)	992%	977%	935%	877%	828%
Number of companies in action levels	79	71	75	86	108
Percentage of companies in action levels	3.0%	2.7%	2.9%	3.4%	4.3%
Health
Total adjusted capital (US$ billions)	75.2	79.9	72.2	61.6	46.8
RBC requirement (US$ billions)	12.7	12.2	10.9	9.6	8.1
Industry aggregate RBC ratio (TAC as % of RBC)	592%	655%	662%	642%	578%
Median RBC ratio of insurers (TAC as % of RBC)	545%	589%	582%	574%	548%

View Table

Table 1.

United States: U.S. Insurance Companies—Capital Adequacy

Year End	2008	2007	2006	2005	2004
Life
Total adjusted capital (US$ billions)	337.9	382.6	363.5	344.4	340.2
RBC requirement (US$ billions)	44.6	47.7	44.8	42.3	43.9
Industry aggregate RBC ratio (TAC as % of RBC)	758%	802%	811%	814%	775%
Median RBC ratio of insurers (TAC as % of RBC)	910%	1009%	996%	975%	940%
Number of companies in action levels	23	13	13	11	17
Percentage of companies in action levels	2.7%	1.5%	1.4%	1.1%	1.7%
Property and Casualty
Total adjusted capital (US$ billions)	578.9	640.7	599.3	523.8	484.8
RBC requirement (US$ billions)	96.8	102.7	98.6	94.2	93.6
Industry aggregate RBC ratio (TAC as % of RBC)	598%	624%	608%	556%	518%
Median RBC ratio of insurers (TAC as % of RBC)	992%	977%	935%	877%	828%
Number of companies in action levels	79	71	75	86	108
Percentage of companies in action levels	3.0%	2.7%	2.9%	3.4%	4.3%
Health
Total adjusted capital (US$ billions)	75.2	79.9	72.2	61.6	46.8
RBC requirement (US$ billions)	12.7	12.2	10.9	9.6	8.1
Industry aggregate RBC ratio (TAC as % of RBC)	592%	655%	662%	642%	578%
Median RBC ratio of insurers (TAC as % of RBC)	545%	589%	582%	574%	548%

13. Life insurance has been particularly affected. In addition to large unrealized investment losses, some companies experienced downward pressure on regulatory capital ratios that raised concerns over possible widespread ratings downgrades. Regulators were approached for relief and firms were granted some individual modification (“permitted practices”). The strains were related to recent strong growth in non-traditional savings products such as variable annuities (Box 1), many of which contain generous guarantees. Life insurers were also affected by the illiquidity in asset markets, including pressures in securities lending (cash collateral had been reinvested by some firms in illiquid instruments, causing liquidity strains when the collateral was recalled). New business volumes have been falling sharply.

14. While pressures have eased, there remain challenges. The recovery in many markets since March 2009 has brought relief to the insurance sector. However, risks remain.

• Life companies in particular remain significantly exposed to possible further problems if economic downturn continues. Their commercial property exposure is high, both in loans and investments, as is exposure to banks. A prolonged low interest rate environment would exacerbate strains. However, as life companies have shifted to savings products, their insurance risks (mortality and longevity) have become less significant.

• Health insurers are subject to significant uncertainty arising from the proposed federal government reforms to health insurance.

• Property and casualty risks are more dispersed. While the United States is exposed to major natural catastrophes, their impact is regional; and while some companies are heavily exposed to particular events, national companies have diversified risks and the largest catastrophe risks are carried by reinsurers outside the United States.

Regulatory arrangements

15. Insurance is a predominantly state-regulated activity in the United States. While the foundation for state responsibility goes back to 1851, a key event was the legislative reaction to a Supreme Court decision in 1944. The court declared that insurance was interstate commerce and, hence, under the U.S. constitution, subject to federal regulation, including federal laws such as the Sherman Act and other antitrust laws. This prompted calls on Congress to override the decision and the 1945 enactment of the McCarran-Ferguson Act, which reinstated the regulatory authority of the states “on matters of the business of insurance” and exempted the “business of insurance” as regulated by the states from federal anti-trust laws. A key consequence of this exemption is that insurance companies are able to pool data for use in underwriting risks.

16. There are also some federal government responsibilities. While state regulation has not been substantially challenged since 1945, the federal government has enacted various measures affecting insurance. The 1974 Employee Retirement Income Security Act (ERISA) imposed federal reporting requirements and enforcement powers for employer-sponsored retirement plans and other related benefits. The Gramm-Leach-Bliley Act of 1999 preserved state regulation by reaffirming the McCarran-Ferguson Act, but pressed the states to achieve licensing reciprocity in insurance intermediary licensing or accede to federal intervention. The 2002 U.S.A. PATRIOT Act extended aspects of the Federal Bank Secrecy Act to insurance and gave examination powers in relation to anti-money laundering and certain specified insurance business to federal authorities.

17. States carry out insurance regulatory functions within the state administration. The insurance departments or similar units within state administrations carry out licensing and oversight work for insurance companies and intermediaries under powers set out in state legislation and in accordance with state budgets. A commissioner heads the department and exercises all formal powers. Some commissioners are elected, but most are appointed by the state governor. While arrangements vary among states, funding is usually raised from the insurance markets via fees and levies. (Fees are usually for specific activities, such as licensing and examinations, and are generally paid directly to the insurance department. Levies usually form part of state government revenue and are either dedicated to funding the insurance department or flow to general revenue with insurance department budgets subject to normal state budgeting processes). Insurance departments also collect premium taxes for the states, a significant part of state governments’ total revenues.

18. Businesses must obtain a license in each state where they are writing risks. An insurance company is said to be “domiciled” in the state that issued its primary license; it is “domestic” in that state. Once licensed in one state, it may seek licenses in other states as a “foreign” insurer. An insurer incorporated in a foreign country is called an “alien” insurer in the U.S. states in which it is licensed. “Multistate companies” (the vast majority by premium income) are those that write business in more than one state. The extent of mutual recognition (known as reciprocity) varies by state and requirement, but financial regulation is mostly carried out by the state where the insurer is domiciled.

19. State insurance departments carry out both financial and market conduct regulation. States set reserving and capital requirements—the rules and associated reporting frameworks are complex and details are set out in an appendix to this assessment. States carry out financial analysis and onsite examinations—which are required by law every five years at minimum (or three years in some states). Most states have some review or approval authority over policy forms and, in the case of property and casualty insurers, they also often regulate premium rates. In respect to rates, the objective is to ensure that they are not inadequate, excessive, or unfairly discriminatory. Departments also respond directly to consumers’ complaints and requests for information. They license and oversee insurance intermediaries. States have extensive powers to enforce their financial and market conduct requirements.

20. The NAIC plays an important coordinating role for state regulators. The NAIC is the vehicle through which the state insurance commissioners act as a group. The commissioners have established a not-for-profit organization to assist them in respect of their regulatory responsibilities, by centralizing some functions to achieve economies and greater uniformity, to pool resources and to obtain and share expertise. The objective is to enable the states to develop regulation in ways they could not achieve by acting individually. The NAIC itself employs some 430 staff, which compares with nearly 12,000 employed by the states. Key functions of the NAIC, in relation to this assessment, are:

• processes and procedures to develop and agree model laws and regulations, which now total over 200. States contribute to the development of these laws via NAIC working groups. While states are not obliged to implement model laws and regulations in state law, the process creates an expectation that state legislation will broadly mirror the requirements agreed by commissioners at NAIC meetings. In practice, states often implement the models with variations, which are particularly significant in market conduct and producer licensing;

• the Financial Regulation Standards and Accreditation Program (referred to in this report as “the accreditation program”). This is an extensive process aimed at ensuring that states meet certain minimum standards in respect to financial regulation. It covers, in relation to financial issues, laws and regulations (including 18 of the NAIC model laws) and key provisions on accounting and solvency; regulatory practices, including offsite and onsite supervision; and organizational and staffing practices. Standards on insurance company licensing will be added in 2012. In order to achieve and retain accreditation, states undergo a detailed review by independent examiners (many are accountants or retired senior regulators) once every five years; interim annual reviews are also required. Final decisions on accreditation are taken by a committee of commissioners. All 50 states and the District of Columbia are accredited. Formally, the effect of accreditation is to enable states to accept examinations undertaken by the domestic state rather than carrying out their own, although individual states may still impose additional standards on “foreign” companies (i.e., accreditation does not guarantee reciprocity). There are also reputational implications; and

• the centralized process of financial analysis operated through the mechanism of the NAIC’s Financial Analysis Working Group (FAWG). This is a group of 18 senior financial experts who meet to discuss reports from NAIC staff covering all “nationally significant companies” (around 1,600 companies representing 85 percent of the market) based on annual and quarterly statements and other information. The objective is to challenge domestic state regulators, who retain responsibility for any action, on their analysis of companies and their regulatory response. A similar process is being developed for market conduct regulation.

State regulators, through the NAIC, maintain a number of databases covering financial information (most companies submit statements direct to the NAIC), data on producers, etc.

21. As they are the most likely to be fully and effectively implemented by states, this assessment highlights measures subject to accreditation program. The assessors have relied heavily on the accreditation program, because it is widely seen as assuring that minimum standards are met in all accredited states. In assessing statewide compliance with other NAIC model laws and other measures, the assessment distinguishes between those implemented in most, many and some states. However, as mentioned above, states have not been assessed individually and there is therefore a degree of uncertainty about the assessment of compliance across the country in these cases.

22. State regulators, through NAIC coordination mechanisms, have been taking initiatives to modernize key aspects of their approach, although progress has been mixed. In addition to continuing development of their requirements, state regulators have been engaged since 2000 on a broad-based regulatory modernization plan. This includes shifting from predominantly compliance/audit examinations of insurers to more forward-looking assessments of risk. This important change will be formally part of the accreditation program from January 1, 2010. Many of the objectives of the wider modernization plan have been met, but others, such as those relating to greater uniformity in producer licensing, have not been fully met.

23. The mixed progress reflects structural features of the regulatory framework:

• In a state-based system, state administrations and legislatures are not bound to implement NAIC model laws and regulations; while local variations are often appropriate given the varying market conditions, it can be hard to achieve uniformity where it is necessary or desirable (in particular to reflect the essentially national reach of many large insurance companies and some intermediaries).

• While the NAIC processes appear to be thorough and to deliver appropriate change, the need to involve many stakeholders and achieve consensus significantly slows the delivery of change, except where it is particularly urgent.

• Regulatory requirements are heavily rules-based, which, while it has advantages in making requirements clear and comprehensive, increases the time required to make regulatory changes; the heavy use of rules also risks creating a tendency for regulators to engage in micro-management of insurers as each issue or problem that arises is addressed by adding even more rules.

24. A major new review, the Solvency Modernization Initiative (SMI), is now under way. In 2008, the NAIC launched the SMI as a review of financial requirements. This will include a study of solvency regimes and developments in other countries and the EU. The aim is to deliver a framework consistent with best practices and, if possible, more closely aligned with regimes in other countries and with accounting standards. The SMI is wide-ranging, covering:

• capital requirements, including reviewing the design and calibration of current requirements and considering whether to require regulatory reporting of companies’ economic capital levels and information about the development of the companies’ target capital;

• international accounting, particularly the implications of the joint project on insurance contract accounting of the U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB); insurance regulators are required to review all changes to GAAP accounting and to determine what changes should be made to their own system of statutory accounting;

• insurance valuation, including a project to move toward more principles-based reserving in life insurance; and consideration of making capital requirements reflect individual company risk characteristics more;

• reinsurance—implementing a modernization framework developed in 2008, once pending federal legislation is in place; a new Reinsurance Supervision Review Department will be charged with assessing non-U.S. regulatory regimes under a mutual recognition framework; and

• group solvency issues—considering potential revisions to the current approach to supervision of groups, the use and potential improvement of supervisory colleges with regulators from around the world, and group-wide supervision requirements, which may include group-wide capital requirements.

Consideration will also be given to the development of corporate governance principles for insurance companies and the establishment of risk management requirements. These are all major initiatives that have the potential to transform U.S. insurance regulation in the future.

25. Other reforms will address issues highlighted by the financial crisis, and insurance will be included in the scope of future system wide regulatory reforms. Reforms are pending to the requirements applying to bond insurers (monolines) and to securities lending, to take account of crisis events. Action has already been taken and more is under consideration to reduce the former reliance on ratings of the major credit rating agencies. Congress and the administration are working on regulatory reform in response to the crisis and proposals to date include certain reforms affecting insurance regulation. The details of these wider reforms were under discussion at the time of this assessment.

Guaranty funds (policyholder compensation arrangements)

26. Insurance policyholders are protected against the insolvency of insurance companies by guaranty associations in each state. All U.S. insurance companies are required to be members of associations covering life and health insurance and, through separate organizations, property and casualty. These associations are established by state laws (there are NAIC models). Payments are triggered by the insolvency of an insurer, although, in practice, associations seek to obtain continuity of coverage by transferring policies to other companies. Laws differ on the extent of coverage and maximum amount payable per policyholder. Associations rely on assessments of other insurers writing the same class of business, i.e., they are not pre-funded. State laws set limits on assessment—typically, for life insurance, 2 percent of each insurer’s prior year premium income in the state per year.

Recommended action plan

Table 3.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

Table 3.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

Principle	Recommended Action
ICP 1 Conditions for effective insurance supervision	The authorities should (i) increase information-sharing and coordination between state regulators and federal authorities, including representation of state regulators in national bodies with responsibilities for system wide oversight and financial stability; (ii) agree policies and procedures for the regulation of systemically important institutions, markets and instruments, where assessed to exist in the insurance sector; and (iii) make new arrangements to increase the authority of federal authorities in relation to the implementation of international agreements.
ICP 2 - Supervisory objectives	Insurance departments, the NAIC and state legislatures should develop a clear, joint statement of the objectives of insurance regulation, taking into account good practice internationally, and align the objectives of individual state departments with these objectives. This work should address whether there are potential conflicts between existing objectives and how to manage them and the need to balance the objectives of achieving financial safety and soundness and consumer protection with the desirability of fostering market efficiency and competitiveness.
ICP 3 - Supervisory authority	The NAIC and state legislatures should make reforms including (i) providing for fixed terms to be standard for commissioner appointments, with dismissal mid-term to be possible only for prescribed causes and with publication of reasons; (ii) making departments fully self-funding, subject to continued accountability to and oversight by state legislatures, while allowing them greater flexibility to hire staff with specialist skills and reduce reliance on external experts; and (iii) extending the rule-making powers of departments to a wider range of technical issues (for example valuation and risk-based capital), and subject to appropriate consultation and requirements for due process.
	State laws should be changed, where this has not already been done, to extend the protection of information received from other government agencies to foreign agencies, which is essential to support the widest scope of information-sharing internationally. The NAIC and state legislatures should consider extending the protection of confidentiality, to the extent consistent with the wider legal environment, to all relevant information which is received by departments, rather than limiting protection according to the source of the information, as at present.
ICP 4 - Supervisory process	To further improve the transparency of its work, the NAIC should: (i) make publicly available some information that is currently available only on payment of a fee or by subscription (for example the NAIC model laws and material on how states have adopted them); (ii) publish summary information on their assessment of states’ compliance with accreditation standards (even if scores remain private); and (iii) commit to publication on a regular basis (maybe every two years) of their self-assessment of compliance with IAIS Insurance Core Principles. These measures would help to foster improved understanding of state regulation and the role of the NAIC. In addition, the NAIC could also consider developing its approach to regulatory impact analysis and making such work a routine part of its analysis of proposed new or changed requirements.
ICP 5 - Supervisory cooperation and information sharing	The states and NAIC should continue to develop the network of MoUs. As mentioned in connection with ICP3, all state insurance departments should ensure that laws are updated to enable them to protect information received from foreign regulators. This will ensure that overseas regulators are not deterred from sharing information freely.
ICP 7 - Suitability of persons	Specific requirements in relation to individuals’ fitness and propriety should be adopted. Gaps in the requirements of departments should be filled—companies should have to notify the department of concerns about the fitness and propriety of key individuals and departments should be able to disallow functionaries from holding two positions that could result in material conflict.
ICP 9 - Corporate Governance	As examiners gain experience, the NAIC and/or departments should consider issuing more guidance on good and bad practices in corporate governance for insurers. This would help examiners and firms to develop a clearer expectation of what constitutes effective governance for insurance business, including for groups.
ICP 10 - Internal controls	As examiners gain experience, the NAIC and/or departments should consider the scope for issuing guidance on good and bad practices in internal control. They should also make it a formal requirement for insurers to have an internal audit function. Such a function is now widely considered as an important part of a good control framework—similarly to audit committees, where there are now extensive requirements of all but the smaller insurers.
ICP 11 - Market analysis	Regulators should collect more complete group-wide consolidated data for insurance groups and broader financial conglomerates. They should develop further their analysis of developments outside the U.S. markets.
ICP 12 - Reporting to supervisors and off-site monitoring	Collection of group-wide consolidated data for insurance groups and broader financial conglomerate groups should be introduced.
ICP 15 - Enforcement or sanctions	The insurance laws should be changed to provide the supervisory authority with powers to fine individual directors and senior managers of insurers, and to bar them from acting in responsible capacities in the future.
ICP 17 - Group-wide supervision	U.S. supervisors should (i) include fuller assessment of the financial condition of the whole group of which a licensed insurance company is a member; this may involve quantitative techniques and practices in use internationally; (ii) extend the risk-focused approach to examinations of solo insurance companies to groups, again starting with U.S. groups—in effect extending the lead regulator and college of regulators arrangements already in widespread use for such groups within the framework developed by the NAIC; (iii) ensure that colleges of supervisors for the U.S. groups with major international operations are established and functioning effectively—and led by U.S. regulators with appropriate insurance expertise. It may also be desirable for insurance regulators to be given additional powers, such as clear authority to license insurance holding companies, apply insurance capital requirements to the consolidated insurance group and direct the insurance holding company to make changes at the group level to rectify any shortcomings.
ICP 18 -Risk assessment and management	The relevant laws, regulations or standards should be changed to include a requirement that an insurer have in place comprehensive risk management policies and systems capable of promptly identifying, measuring, assessing, reporting and controlling their risks.
ICP 19 - Insurance activity	The relevant laws or regulation should explicitly provide that an insurer must have in place strategic underwriting and pricing policies approved and reviewed regularly by the Board.
ICP 23 - Capital adequacy and solvency	For general transparency and for comparison, it is recommended that consideration be given to specifying a target safety level for reserving and an associated target safety level for capital. This should assist not only with peer comparisons of reserving and capital across insurers, but also comparisons against other insurance regimes internationally. Requirements to address inflation of capital through multiple gearing (i.e., holding company debt raisings injected as equity into insurance subsidiaries) should be included in the law, regulation or rules. Further development of stress testing could be considered, using the experience gained from exercises undertaken during the financial crisis.
ICP 24 - Intermediaries	Some strengthening of the approach to producer regulation is recommended: (i) to extend broker trust fund arrangements across states (where not already in place) to ensure that client funds are fully protected; (ii) to develop a uniform approach to the regulation of major brokers which reflects the important role which large brokers play in the commercial lines market; and (iii) to complete the current work on a consistent approach to the regulation of commission disclosure. In addition, producers should be required to make disclosures to customers of the status under which they are doing business, including which insurance companies have appointed them.
ICP 28 - Anti-money-laundering, combating the financing of terrorism	It is recommended that a timetable is set for the agreement and implementation of new arrangements between state insurance departments and federal authorities that will deliver greater resourcing of supervisory activities as well as necessary information exchange.

View Table

Table 3.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

Principle	Recommended Action
ICP 1 Conditions for effective insurance supervision	The authorities should (i) increase information-sharing and coordination between state regulators and federal authorities, including representation of state regulators in national bodies with responsibilities for system wide oversight and financial stability; (ii) agree policies and procedures for the regulation of systemically important institutions, markets and instruments, where assessed to exist in the insurance sector; and (iii) make new arrangements to increase the authority of federal authorities in relation to the implementation of international agreements.
ICP 2 - Supervisory objectives	Insurance departments, the NAIC and state legislatures should develop a clear, joint statement of the objectives of insurance regulation, taking into account good practice internationally, and align the objectives of individual state departments with these objectives. This work should address whether there are potential conflicts between existing objectives and how to manage them and the need to balance the objectives of achieving financial safety and soundness and consumer protection with the desirability of fostering market efficiency and competitiveness.
ICP 3 - Supervisory authority	The NAIC and state legislatures should make reforms including (i) providing for fixed terms to be standard for commissioner appointments, with dismissal mid-term to be possible only for prescribed causes and with publication of reasons; (ii) making departments fully self-funding, subject to continued accountability to and oversight by state legislatures, while allowing them greater flexibility to hire staff with specialist skills and reduce reliance on external experts; and (iii) extending the rule-making powers of departments to a wider range of technical issues (for example valuation and risk-based capital), and subject to appropriate consultation and requirements for due process.
	State laws should be changed, where this has not already been done, to extend the protection of information received from other government agencies to foreign agencies, which is essential to support the widest scope of information-sharing internationally. The NAIC and state legislatures should consider extending the protection of confidentiality, to the extent consistent with the wider legal environment, to all relevant information which is received by departments, rather than limiting protection according to the source of the information, as at present.
ICP 4 - Supervisory process	To further improve the transparency of its work, the NAIC should: (i) make publicly available some information that is currently available only on payment of a fee or by subscription (for example the NAIC model laws and material on how states have adopted them); (ii) publish summary information on their assessment of states’ compliance with accreditation standards (even if scores remain private); and (iii) commit to publication on a regular basis (maybe every two years) of their self-assessment of compliance with IAIS Insurance Core Principles. These measures would help to foster improved understanding of state regulation and the role of the NAIC. In addition, the NAIC could also consider developing its approach to regulatory impact analysis and making such work a routine part of its analysis of proposed new or changed requirements.
ICP 5 - Supervisory cooperation and information sharing	The states and NAIC should continue to develop the network of MoUs. As mentioned in connection with ICP3, all state insurance departments should ensure that laws are updated to enable them to protect information received from foreign regulators. This will ensure that overseas regulators are not deterred from sharing information freely.
ICP 7 - Suitability of persons	Specific requirements in relation to individuals’ fitness and propriety should be adopted. Gaps in the requirements of departments should be filled—companies should have to notify the department of concerns about the fitness and propriety of key individuals and departments should be able to disallow functionaries from holding two positions that could result in material conflict.
ICP 9 - Corporate Governance	As examiners gain experience, the NAIC and/or departments should consider issuing more guidance on good and bad practices in corporate governance for insurers. This would help examiners and firms to develop a clearer expectation of what constitutes effective governance for insurance business, including for groups.
ICP 10 - Internal controls	As examiners gain experience, the NAIC and/or departments should consider the scope for issuing guidance on good and bad practices in internal control. They should also make it a formal requirement for insurers to have an internal audit function. Such a function is now widely considered as an important part of a good control framework—similarly to audit committees, where there are now extensive requirements of all but the smaller insurers.
ICP 11 - Market analysis	Regulators should collect more complete group-wide consolidated data for insurance groups and broader financial conglomerates. They should develop further their analysis of developments outside the U.S. markets.
ICP 12 - Reporting to supervisors and off-site monitoring	Collection of group-wide consolidated data for insurance groups and broader financial conglomerate groups should be introduced.
ICP 15 - Enforcement or sanctions	The insurance laws should be changed to provide the supervisory authority with powers to fine individual directors and senior managers of insurers, and to bar them from acting in responsible capacities in the future.
ICP 17 - Group-wide supervision	U.S. supervisors should (i) include fuller assessment of the financial condition of the whole group of which a licensed insurance company is a member; this may involve quantitative techniques and practices in use internationally; (ii) extend the risk-focused approach to examinations of solo insurance companies to groups, again starting with U.S. groups—in effect extending the lead regulator and college of regulators arrangements already in widespread use for such groups within the framework developed by the NAIC; (iii) ensure that colleges of supervisors for the U.S. groups with major international operations are established and functioning effectively—and led by U.S. regulators with appropriate insurance expertise. It may also be desirable for insurance regulators to be given additional powers, such as clear authority to license insurance holding companies, apply insurance capital requirements to the consolidated insurance group and direct the insurance holding company to make changes at the group level to rectify any shortcomings.
ICP 18 -Risk assessment and management	The relevant laws, regulations or standards should be changed to include a requirement that an insurer have in place comprehensive risk management policies and systems capable of promptly identifying, measuring, assessing, reporting and controlling their risks.
ICP 19 - Insurance activity	The relevant laws or regulation should explicitly provide that an insurer must have in place strategic underwriting and pricing policies approved and reviewed regularly by the Board.
ICP 23 - Capital adequacy and solvency	For general transparency and for comparison, it is recommended that consideration be given to specifying a target safety level for reserving and an associated target safety level for capital. This should assist not only with peer comparisons of reserving and capital across insurers, but also comparisons against other insurance regimes internationally. Requirements to address inflation of capital through multiple gearing (i.e., holding company debt raisings injected as equity into insurance subsidiaries) should be included in the law, regulation or rules. Further development of stress testing could be considered, using the experience gained from exercises undertaken during the financial crisis.
ICP 24 - Intermediaries	Some strengthening of the approach to producer regulation is recommended: (i) to extend broker trust fund arrangements across states (where not already in place) to ensure that client funds are fully protected; (ii) to develop a uniform approach to the regulation of major brokers which reflects the important role which large brokers play in the commercial lines market; and (iii) to complete the current work on a consistent approach to the regulation of commission disclosure. In addition, producers should be required to make disclosures to customers of the status under which they are doing business, including which insurance companies have appointed them.
ICP 28 - Anti-money-laundering, combating the financing of terrorism	It is recommended that a timetable is set for the agreement and implementation of new arrangements between state insurance departments and federal authorities that will deliver greater resourcing of supervisory activities as well as necessary information exchange.

Authorities’ Response to the Assessment

28. The U.S. authorities welcome the opportunity to take part in the U.S. FSAP and the IMF’s assessment of a high level of observance of the IAIS Insurance Core Principles (ICPs). It has provided insurance regulators in the United States with a timely opportunity to undertake a comprehensive self-assessment of the U.S. insurance regulatory system against international standards, and has contributed to ongoing internal reviews and assessments of regulatory practices. In addition, the FSAP has served as a useful platform for providing an overview of the U.S. insurance regulatory system and its multi-jurisdictional structure. The authorities appreciate the recognition by the IMF of the strengths in the regulatory system including areas that the IMF itself has coined as “world leading.”

29. As recognized by the Report, it is important to consider the U.S. assessment in context. The assessment of the U.S. supervisory framework was undertaken in the wake of a severe financial crisis, and movements toward significant changes in supervisory practices have gained momentum as a result of the financial crisis and circumstances emanating from the crisis, including with respect to group-wide supervision. The IMF’s assessment of U.S. compliance with ICP 17, the group-wide supervision standard, goes beyond the scope of the current ICP assessment in that it assesses compliance with a group supervision structure, which is still under discussion and development in most jurisdictions and within the IAIS, where revision of the insurance ICPs that may reflect these changes may not be finalized until 2011.

30. Insurance regulators in the United States are working with regulators around the world on initiatives to enhance group supervision, and have in place inter-regulatory cooperation processes, such as the use of lead state supervisory structures and the Financial Analysis Working Group of the National Association of Insurance Commissioners (NAIC). In addition, the Report acknowledges the comprehensive review underway with the Solvency Modernization Initiative which takes into account international and cross-sectoral practices in the analysis of possible additions or modifications to current insurance regulatory practices.

31. U.S. authorities remain strongly committed to prudential regulatory independence and accountability, including continually striving to improve ways to effectively balance these two objectives. Transparent rulemaking with opportunity for stakeholder involvement, for example, has proven a particularly effective way to provide accountability and improve the regulatory environment, while respecting regulatory independence. As reflected in the assessment of ICP 3, the Supervisory Authority standard, the assessment appears to rely on structural characteristics while failing to fully recognize the effective operational independence of state insurance regulators. In practice, the U.S. multijurisdictional approach to insurance regulation holds regulators accountable to each other in a peer review process that includes on-going nation-wide monitoring through the NAIC, regular dialogue among all regulators, and the ability of states to question the actions of fellow state insurance regulators.

32. Within the assessment, there appear to be philosophical preferences for a principles-based, rather than rules-based, approach to regulation, yet assessment recommendations inconsistently apply those preferences by variously seeking more, as well as fewer, rules. Further, there appears to be no empirical evidence to suggest that one approach is superior to the other or that the choice of approach affects the U.S. regulators’ ability to meet the standards set out in the various ICPs. U.S. authorities fully support a regulatory environment based on principles and made operational by rules that can provide consistent standards throughout the marketplace, yet remain flexible enough to adapt to new developments.

33. The IMF’s assessment of ICP 28, the AML and CFT standard, identified some areas where U.S. AML requirements may be improved upon, but fails to fully recognize the robust protection provided U.S. citizens against money laundering activities. Of note, the United States has a bifurcated regulatory scheme regarding AML regulation. As noted, the federal government has primary jurisdiction of AML statutes while the regulation of insurance and expertise in financial examination of insurance is the responsibility of the states. Although both state and federal authorities have agreed to work together to review the current examination process, it is important to note and remember that an in-depth legal analysis has yet to be undertaken on this subject.

34. U.S. Authorities appreciate the assessment and will thoroughly review the Report’s recommendations and take them into account when initiating and implementing any insurance regulatory reforms. We look forward to engaging in continuing ongoing dialogues with the IMF on how to best collectively improve international financial stability and supervision of the global financial services sector.