Actuarial Notes

Regulatory Risk and North American Insurance Organizations

By Tom Herget and Dave Sandberg · Casualty Actuarial Society, Canadian Institute of Actuaries and Society of Actuaries · 2014

Study guide: Exam CFE-101

A research report, dated August 2014, on regulatory risk in the North American insurance company environment. It aims to identify regulatory structures and influences in North America, provide examples that illustrate regulatory risk, and suggest mitigation ideas for both insurers and their regulators. It was sponsored by the Casualty Actuarial Society, the Canadian Institute of Actuaries and the Society of Actuaries.

On the syllabus

  • Exam CFE-101 — Regulatory Risk and North American Insurance Organizations, sections 6.1-6.14 & 7; outcomes 1.3a, 2.1a, 3.2f.

1 Introduction

  • 1.1 Background and Purpose
  • 1.2 Contents
  • 1.3 Regulatory Risk Definition
  • 1.4 High-Level Summary
  • 1.5 Disclaimer

2 Insurance Regulation in the United States

  • 2.1 States
    • 2.1.1 Key Functions
      • 2.1.1.1 Company Licensing
      • 2.1.1.2 Producer Licensing
      • 2.1.1.3 Product Regulation
      • 2.1.1.4 Market Regulation
      • 2.1.1.5 Financial Regulation
    • 2.1.2 Insurance Department Organization in Sample Jurisdictions
      • 2.1.2.1 California
      • 2.1.2.2 Florida
      • 2.1.2.3 Illinois
      • 2.1.2.4 Minnesota
      • 2.1.2.5 Nebraska
      • 2.1.2.6 New York
      • 2.1.2.7 Forms of Organization in Select Other Countries
        • 2.1.2.7.1 Republic of South Africa
        • 2.1.2.7.2 Taiwan
        • 2.1.2.7.3 United Kingdom
  • 2.2 National Association of Insurance Commissioners
  • 2.3 National Conference of Insurance Legislators
  • 2.4 Department of Managed Health Care (California)
  • 2.5 Federal Insurance Office
  • 2.6 Financial Stability Oversight Council
  • 2.7 Securities and Exchange Commission
  • 2.8 Federal Reserve System
  • 2.9 Department of Labor
  • 2.10 Consumer Financial Protection Bureau

3 Insurance Regulation in Mexico

  • 3.1 Key Functions
    • 3.1.1 Licensing Companies
    • 3.1.2 Licensing Agents
    • 3.1.3 Approving Products
    • 3.1.4 Examination of Market Conduct
    • 3.1.5 Solvency Oversight
    • 3.1.6 Prospective Risk Oversight by CNSF
    • 3.1.7 Taxation of Insurance
  • 3.2 Impact of Regulation on Corporate Governance

4 Insurance Regulation in Canada

  • 4.1 Provincial
  • 4.2 Federal
    • 4.2.1 Key Functions
    • 4.2.2 Activities
      • 4.2.2.1 Operations Support
      • 4.2.2.2 Solvency Oversight
      • 4.2.2.3 Prospective Risk Oversight
        • 4.2.2.3.1 Capital Issues
        • 4.2.2.3.2 Accounting Policy
        • 4.2.2.3.3 Research
        • 4.2.2.3.4 Product Review
        • 4.2.2.3.5 Emerging Risks
        • 4.2.2.3.6 Feedback from Those Regulated

5 Other Organizations, National and International, with Significant Influence on Insurers

  • 5.1 Standard-Setters
    • 5.1.1 Financial Accounting Standards Board
    • 5.1.2 International Accounting Standards Board
    • 5.1.3 International Association of Insurance Supervisors
  • 5.2 Tax Authorities
  • 5.3 Nationally Recognized Statistical Rating Organizations
  • 5.4 Accounting Firms
  • 5.5 Public Company Accounting Oversight Board
  • 5.6 Actuarial Standards Board
  • 5.7 Actuarial Board for Counseling and Discipline
  • 5.8 Actuarial Public Policy Organizations
    • 5.8.1 American Academy of Actuaries
    • 5.8.2 Canadian Institute of Actuaries
    • 5.8.3 Asociación Mexicana de Actuarios
    • 5.8.4 Colegio Nacional de Actuarios
    • 5.8.5 International Actuarial Association
  • 5.9 Trade Organizations
    • 5.9.1 American Council of Life Insurers
    • 5.9.2 Property Casualty Insurers Association of America
    • 5.9.3 National Association of Mutual Insurance Companies
    • 5.9.4 American Insurance Association
    • 5.9.5 Reinsurance Association of America
    • 5.9.6 Canadian Life and Health Insurance Association
    • 5.9.7 Asociación Mexicana de Instituciones de Seguros
  • 5.10 Other Organizations
    • 5.10.1 International Monetary Fund
    • 5.10.2 World Bank
    • 5.10.3 Office of Economic Cooperation and Development
    • 5.10.4 Joint Forum
    • 5.10.5 Geneva Association
    • 5.10.6 Financial Stability Board
    • 5.10.7 European Insurance and Occupational Pensions Authority
    • 5.10.8 European Commission
    • 5.10.9 American Institute of Certified Public Accountants
    • 5.10.10 Office of Foreign Assets Control
    • 5.10.11 Financial Industry Regulatory Authority
    • 5.10.12 Security Investors Protection Corporation

6 Regulatory Risk Examples

  • 6.1 Gaps Between Legislation and Supervision
  • 6.2 Segregated Funds in Canada
  • 6.3 Too Many Regulators
  • 6.4 Government Override of Prior Legislative Mandate
  • 6.5 Conflicting Policy with Other Agencies
  • 6.6 Conflicting or Overlapping Investigative Powers for Different Regulatory Authorities
  • 6.7 Privacy
  • 6.8 U.S. State Variations in Life or Health Valuation Requirements
  • 6.9 Product Approval Process
  • 6.10 Mandated Minimum Loss Ratios on Health Products
  • 6.11 Failure to Communicate with Regulator
  • 6.12 Risk Pooling
  • 6.13 New York Insurance Market of the Late 1800s
  • 6.14 Failures of the 1980s Insurance Market
  • 6.15 Canadian Change in Accounting Basis
  • 6.16 Permitted Practices
  • 6.17 Bailouts
  • 6.18 Setting Capital Requirements (and Permitted Dividends) for an Uncertain Future
  • 6.19 Ability to Exit
  • 6.20 Competing with a Government Entity
  • 6.21 Sources of Funding
  • 6.22 Underutilized Market – How to Encourage Broader Participation
  • 6.23 Setting Stress-Testing Criteria
  • 6.24 Striking the Balance between Simplicity and Accuracy
  • 6.25 Dual Role as Regulator/Supervisor
  • 6.26 Cross-Border or Cross-Jurisdictional Issues Where Other Regulators have Different Missions and/or Priorities
  • 6.27 Interpretive Differences of Complex Regulations Causing Unlevel Playing Fields
  • 6.28 Detroit Default
  • 6.29 Social Security Symmetry
  • 6.30 A Foot on Each Side of the Ocean
  • 6.31 Legislation in Limbo
  • 6.32 Managing Major Regulatory Change

7 Strategies to Address Regulatory Risk

  • 7.1 Strategies for Regulators and Insurers
    • 7.1.1 The Identification of Risk
    • 7.1.2 The Evaluation of Risk
    • 7.1.3 The Treatment (or Mitigation) of Risk
    • 7.1.4 The Assessment of Risk
  • 7.2 Strategies for Insurers
    • 7.2.1 Compliance
    • 7.2.2 Internal Audit
    • 7.2.3 Government Relations
      • 7.2.3.1 Ideal Characteristics
      • 7.2.3.2 Awareness of the Political World Surrounding Regulators
      • 7.2.3.3 Identifying Opportunity and Future Risks
      • 7.2.3.4 Being Active with Professional Organizations and Trade Associations
  • 7.3 Strategies for Regulators
    • 7.3.1 Regulators May Consider Utilizing the ERM Control Cycle Beyond its Traditional Focus on Financial Risk
      • 7.3.1.1 Evaluating the Efficacy of the Regulatory Review and Approval Processes
      • 7.3.1.2 Being Able to Distinguish and Prioritize Regulatory Resources
    • 7.3.2 Increased Collaboration and the Use of Impact Studies
    • 7.3.3 Insight from the Future ORSA Filings
  • 7.4 Concluding Comments

Sources