NAIC to Adopt Use of Cross-border Surveillance Tool

U.S. insurance regulators have been involved in its development since early in 2011 as the project work streams got under way and are among the first regulators to adopt usage, according to the NAIC.

The June FSB paper on the subject asked," Given that a unique LEI system for financial markets offers manifold benefits, an obvious question is why such a system is not already in place?"

"There are insufficiently strong incentives in private markets to overcome two sources of market failure. The first is a problem of collective action and co-ordination, reflecting the challenges of gaining agreement that a particular identification scheme offers the best approach. The second reflects the problem of launching a network. The benefits from the system increase as more and more parties acquire an LEI. At the launch, private incentives for potential early movers to acquire an LEI are low. To date it has proved impossible to get over this initial hurdle relying purely on voluntary adoption and market incentives.

…To ensure global acceptance and the long-term future of the LEI system, the public sector must put in place a governance framework with a number of key objectives: to support the delivery of a public good; to ensure that public interests in the system are protected; to promote common standards; and to facilitate widespread global adoption," the FSB wrote.

Powell et al also noted that "confidentiality of the reference data, particularly ownership information, is likely to be a hurdle that must be discussed and addressed. The international nature of the LEI requires flexibility in confidentiality because of legal and cultural differences across borders."

"The LEI system will improve the ability of insurance and other financial regulators to track, analyze and understand interconnectedness, risk exposures and systemic issues in a global marketplace," said Kevin McCarty, NAIC president and Florida insurance commissioner. "This project represents a significant improvement in global transparency."

There will also be reference data maintained by the registrars.

The proposal to add the LEI was exposed for comment in June and discussed among state regulators and industry participants at the Atlanta Summer National Meeting; after which the proposal was unanimously adopted by the NAIC's Financial Condition Committee. The LEI proposal went through this process and has been adopted by all members of the NAIC through the technical changes process.