The National Association of Insurance Commissioners (NAIC) is taking deep offense to the latest perceived blow by the Financial Stability Board (FSB) to the U.S. system of insurance regulation.
The FSB's critical peer review of the United States, focusing on the state of insurance supervision, was released earlier this week.
The report recognized that state regulators are effective at the two main things they set out to do, which are ensuring effective policyholder protection and ensuring financial solvency, according to Connecticut Insurance Commissioner and head of the NAIC's International Insurance Relations Committee Tom Leonardi.
Yet, "the FSB dismissed what we do well and focused on other things I do not feel are as important," Leonardi said in a telephone interview Aug. 29.
The FSB report found that while the state-based regulatory system was effective in assuring policyholder protection and the soundness of individual insurance companies, it lacked a systemic focus and the capacity to exercise group-wide oversight.
Leonardi thinks the FSB believes the U.S. system is too decentralized and in need of a systemic focus. "It also thinks we lack group-wide supervision," he said.
"When someone says we don't do group supervision, that is just not true," he added, pointing out that regulators have been doing group supervision for decades and Connecticut, for one, has gone from participating in three supervisory colleges at a Tier One level to participating in 15.
Supervisory colleges are a critical point of how we regulate in this country, Leonardi explained.
But the FSB peer review report, in part, "shows a lack of understanding of what we do," he said.
However, some point out that the financial crisis revealed a weakness in the fact that companies like AIG that who had no consolidated regulator because the various supervisors of different parts weren't talking to each other.
Leonardi also sits on the International Association of Insurance Supervisors (IAIS) Executive Committee and chairs the NAIC's Financial Stability Task Force. He noted that through the task force and other work, the NAIC is very focused on stability.
With regard to decentralization, Leonardi pointed out that it was instead a centralized structure that proved to be a failure during the economic crisis of 2008, with the Office of Thrift Supervision (OTS) culpable for a failing AIG's oversight, while the decentralized insurance regulatory system was the system proving itself hardy.
So, the FSB's premise is "absurd," Leonardi said.
"I don't want to pick on the federal regulators, everyone's professional and doing the best they can, but centralized regulation failed. That did not happen in insurance. Yes, it is decentralized and yes it is not streamlined, but it doesn't fail," he said. But now FSB is finding fault with that model, he added.
"Why go from a system that works and go to one that has failed? It is totally illogical," Leonardi said. "The other thing is that you have people from the European Union trying to analyze the U.S. That is like a Yankee fan selected to judge the Red Sox."
