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A new world order: U.S. and European insurers debate demands of converging regulations.

There are significant differences in the regulatory structures for insurance in the world's two biggest markets--the United States and the European Union--but those differences may be narrowing.

Over the past few years, E.U. legislators in Brussels have either adopted or proposed a flurry of laws aimed at harmonizing and rationalizing insurance regulation within an extremely complex economic union of 25 nations with dozens of languages and wide cultural differences. As the European Union lurches toward hard-fought compromise on a handful of insurance issues, debate As heating up again in the United States over whether state-level regulation of insurance makes sense, as opposed to an optional federal charter.

It can be difficult to compare U.S. regulation with that in the European Union which is "a unique organization" in that it is close to a federation along the lines of the United States, but with political and cultural divisions (such as language) that make regulatory harmonization difficult, said Lucia Caudet, a spokeswoman with the Comite Europeen des Assurances.

The CEA, an umbrella trade organization that counts among its members 33 national insurance trade groups throughout Europe, As concerned that in the flurry of new rules, either adopted or proposed, E.U. officials have lost sight of the overarching goal of regulatory integration. The recent publication of a "Green Paper on the E.U. Financial Services Policy 2005-2010," released by the European Commission, may provide a breather. The paper outlines the commission's intent to consolidate existing financial services legislation; focus on transposing E.U. rules into the laws of the member states; and evaluate the results of existing rules rather than introducing new ones.

The green paper invited comment from the financial services sector and from citizens to be incorporated into a proposed policy on financial services. This was to be outlined in a "white paper," publication of which was imminent as Best's Review went to press.

While the European Union bas been active in promulgating insurance legislation, national regulators and legislators still can implement their own measures at the local level, contributing to a confusing mix of rules. "Over the past 10 years we've had a huge increase in legislation, with the aim being to create a single insurance market," said Caudet. "Insurers and other businesses have been complaining that there's an over-regulation of the insurance business, with too much of a regulatory burden.

"There still isn't a truly harmonized European Union in the area of insurance," she said.

Border Crossing

One area of concern for the CEA is cross-border retail insurance business. Although a Spanish insurer now may sell its products in Poland, "Few E.U. citizens will actually buy their insurance abroad," said Caudet.

The commission is planning a new initiative to try to foster retail cross-border activity, Caudet said. "We think that is unrealistic for the moment, because of the nature of the insurance business," she said. "The notion of proximity means that you have to have trust in the company you're buying from. They have to speak your language, and they have to be there to offer after-sale services."

To have a spate of E.U. regulations come down now to encourage cross-border retail activity would put the cart before the horse, Caudet said. "We'd rather see them deal with the supervisory obstacles and issues such as taxation and solvency first," she said.

The CEA would like to sec the European Union create a lead supervisor to oversee regulation of "pan-European" insurance groups--insurers that do business in more than one E.U. member state. "E.U. legislation needs to implement this concept to avoid the overlapping reporting and other complications that several groups are facing," CEA President Gerard de La Martiniere said in a statement. If an insurer is doing business in five different E.U. countries, the question becomes: Does it have to be regulated by five different supervisors, or can there be one lead supervisor?

Caudet said that concept is difficult to implement in Europe because of cultural differences. While in the United States, the insurance regulators in each of the 50 states may implement different rules to fit the local economy or demographics, Europe must grapple with the many different languages and cultural customs among its member states.

"Northern European and Anglo-Saxon countries are used to principles-based regulation, codes of conduct and self-regulation, where the Mediterranean countries are law based," said Caudet. It would be difficult to persuade all national regulatory authorities to trust an overriding authority, she said.

Regulators on the national level have shown some resistance to the idea of an E.U.-level industry supervisor, much like state regulators in the United States who look askance at periodic debates about establishing an optional federal charter for insurers that would prefer federal regulation.

One example of this came to light with the European Parliament's passage of the Reinsurance Directive earlier this year. To get to the point where the uniform regulation of reinsurance could be implemented across the European Union, backers of the directive had to persuade regulators in France and Portugal to give up their defense of collateralization requirements for foreign reinsurers. Both eventually did so, but reluctantly.

Collateral Damage

The Reinsurance Directive, which will be implemented in phases over the next two years, is a prime example of a dynamic developing between Europe and the United States. The elimination of collateralization requirements--under which, say, a German reinsurer would have to post collateral in France to cover risks underwritten in France--is seen by European legislators as a tool to pry U.S. insurance regulators free of their own cherished collateralization rules for alien reinsurers.

Peter Skinner, a member of the European Parliament's committee on economic and monetary affairs and rapporteur, or sponsor, of the directive, has said that if regulators in the United States don't compromise on collateral requirements, the European Union tan seek to impose collateral requirements on U.S. reinsurers or take the dispute to the World Trade Organization as a trade dispute.

Skinner said he hopes to sec U.S. insurance regulators agree to incremental steps in reducing their collateral requirements. "The U.S. state legislators may have thought that they could control this, but it becomes a global event with the E.U. involved," he said.

But Skinner must look to U.S. state regulators through the National Association of Insurance Commissioners and state lawmakers through the National Conference of Insurance Legislators to change U.S. collateral requirements. There is no comparable federal body in the United States to engage--a situation Skinner described as "frustrating."

States of Confusion

As Europeans wrestle with the problems of a single market with 25 national insurance regulators, the state-vs.-federal debate is heating up in the United States. Many insurers long have complained about the hassle of obtaining licenses in as many as 51 jurisdictions, and the debate periodically flares over whether the state-based regulatory system makes sense.

Two efforts are under way in Washington aimed at shifting at least some insurance regulation to the federal level. One is a lobbying effort by some industry groups, including representatives of insurance agents and brokers, to get the U.S. Congress to consider an optional federal charter that would allow insurers to opt for federal, instead of state, regulation.

The second is a bill called the State Modernization and Regulatory Transparency Act, which includes provisions to phase out state regulation in certain areas and force state regulators to enact certain model laws or updated laws by specific deadlines.

Industry practitioners in the United States see these efforts as part of a broader trend that points to a consolidation of regulatory responsibilities at the federal level. Francine L. Semaya, a partner with the law firm Cozen O'Connor, said federal laws that appear to add to the momentum in that direction include the Terrorism Risk Insurance Act, which puts the U.S. Treasury in the role of reinsurer of last resort for large-scale terrorism catastrophes, and the 2002 Sarbanes-Oxley Act.

As a response to the spectacular corporate accounting scandals kicked off by the 2001 collapse of energy trader Enron Corp., Sarbanes-Oxley lays down some firm rules about how corporations in the United States should be governed, who's responsible for a company's financial health and what boards of directors need to do to protect shareholders' interests.

One concern of U.S. insurers about Sarbanes-Oxley is that it may carry with it the danger of dual regulation in terms of the responsibilities of boards, auditors and officers of insurers, said Semaya. "State regulation does have a lot in place on that," she said. "My concern is that anytime you have dual regulation, you have two competing interests, and who do you follow?"

Semaya wonders whether Sarbanes-Oxley would lead naturally to the adoption of an optional federal charter, allowing insurers to seek supervision under a single federal regulator. "Federal regulation may be the way to go for some lines of business, but I personally don't think it works," she said. Semaya said there are too many economic and demo graphic differences among the states to believe uniform nationwide rules would work in all lines of insurance.

The European Union's proposed Audit Directive, sometimes referred to as the 8th Company Law Directive, addresses corporate-governance issues in ways that mirror the U.S. Sarbanes-Oxley Act of 2002. Caudet said insurers, like all other European businesses, are watching closely to sec how it would affect the way they govern themselves and report their financial positions.

Caudet characterized the Audit Directive as "more principles-based" than Sarbanes-Oxley, the result of compromises made between E.U. legislators and business leaders, the latter of whom were concerned about the lack of flexibility allowed to corporate officials in the American version. Other observers, such as PricewaterhouseCoopers, have said it is too simplistic to characterize the differences between the two laws as principles vs. rules-based, since both laws share many aspects. But PricewaterhouseCoopers has commented that the E.U. law is less prescriptive than the American version, since there is less harmonization among the E.U. member states.

A concession won for insurers by the CEA on the Audit Directive is that the European Commission agreed to study the possible liability exposure of auditing firms under the directive and to present an impact study to help insurers gauge market capacity, affordability of premiums, and terms and conditions for liability coverage.

The Audit Directive has been approved by the European Commission and the parliament. As of this writing, it is awaiting formal adoption by the E.U. Council of Ministers to become law.

The United States may provide a test case for the effects of corporate-governance rules imposed from a supra-state or federal level. Sarbanes-Oxley has been in effect for three years, and at least for U.S. insurers, again is raising debate over state-vs.-federal regulation.

Oversight Overload

U.S. insurers generally believe they had more than enough rules to comply with before the advent of Sarbanes-Oxley, and that the 2002 law threatens regulatory overkill, especially since it may be applied to nonpublic companies such as mutual insurers, said Semaya. The impact of Sarbanes-Oxley is on the agenda for the NAIC's Winter National Meeting in December, she said.

Among the Audit Directive's cheerleaders is Charlie McCreevy, the E.U. commissioner for the internal market and services. In numerous public statements this year, McCreevy had emphasized the directive's presumed role in aiding the convergence of international corporate-governance standards. The directive, he said, "provides a basis fur effective and balanced cooperation between regulators in the E.U. and with regulators in third countries, such as the U.S. Public Company Accounting Oversight Board."

The SMART Act is another "front and center issue" for U.S. insurers, said Semaya, who chairs her law firm's insurance, corporate and regulatory practice group. "You have the SMART proposal, which for the moment has been tabled because of TRIA and the [hurricane] catastrophe issues," she said.

Semaya, who chairs the American Bar Association's Tort Trial and Insurance Practice Section Task Force on Federal Involvement in Insurance Regulation Modernization, said she believes the SMART Act "will move forward at some point," though for now it has been overshadowed by catastrophe legislation. Semaya's group has been working with federal legislators to help make the SMART Act work with minimal disruption to the industry.

Co-sponsored, interestingly, by U.S. Rep. Michael Oxley of SarbanesOxley fame, the SMART Act would reaffirm the 1945 McCarran-Ferguson Act that gives U.S. states the authority to regulate insurance, but it also would strip away their rate-setting authority. Two years after the bill's passage, property/casualty companies' rates no longer would be subject to state review. Credit insurance, title insurance, mortgage insurance, gap insurance and medical-malpractice insurance would be excluded. The legislation also would make it easier for insurers to move products to market more quickly.

State government officials are, not surprisingly, up in arms about the SMART Act's threat to their turf. Among industry representatives, there is growing support.

At the October annual meeting of the Property Casualty Insurers Association of America, the industry's largest U.S. trade group, PCIAA's president and chief executive officer, Ernst Csiszar, called for changes to 100 years of state regulation that, he said in a speech, resulted in "a system that requires companies to ask permission to change the price of their product from 51 separate regulators, an ineffective national association of state regulators and a range of state systems that varies from open competition in Illinois to a communist-style regulatory system in Massachusetts."

Csiszar should know what he's talking about. He was South Carolina's insurance commissioner for five years and once was president of the National Association of Insurance Commissioners, a group he often criticized from within.

Imperfect Harmony

Another force for regulatory harmonization in Europe is the proposed Solvency II framework, a risk-based solvency standard the European Union aims to apply to all insurers. Solvency II may be the most important element of all when it comes to imposing uniform regulatory standards, said Charles Ilako, lead partner in the global financial services regulatory practice of PricewaterhouseCoopers.

The European Union's original aim was to have Solvency II in place by 2007, but it now appears that won't happen until 2010, said Ilako.

"Solvency II is going to be the most important insurance regulatory issue over the next five years or so," said Ilako. "Capital solvency regimes have been very different from one state to another in the E.U. This is the first main attempt to come up with a sophisticated means to assess insurer solvency across the E.U."

In the United States, regulators at the state level are responsible for insurer solvency standards, and while it has been that way to a similar extent in the European Union, that now is changing, said Ilako. "The Solvency II framework is going to be focused on recognition of risk-based models for determining liabilities and capital," he said.

Ilako predicted Solvency II would succeed in that it would spread outside the European Union and become applicable in other countries around the world over time. Australian regulators are working with the European Union on solvency standards, and other countries in the Far East are likely to do so as well, he said.

"We don't believe this is solely a European phenomenon," he said.

Key Points

* Concerns over regulatory harmonization among the European Union's 25 member countries echo the U.S. debate over state-vs.-federal regulation.

* The European Union has adopted a steady stream of insurance legislation, but insurers are concerned the key problem of regulatory harmonization has been ignored.

* Corporate-governance measures in both the European Union and the United States may indirectly force eventual convergence of regulatory methods.

Regulations' Parallel Paths

United States

Sarbanes-Oxley Act of 2002

Signed into law on July 30, 2002, Sarbanes-Oxley was the U.S. Congress' response to a series of high-profile accounting scandals that began with the collapse of energy trader Enron Corp. in late 2001. The Act included sweeping changes in rules on corporate governance, auditing and accountability, placing more pressure on top offices of public companies to verify the accuracy of financial statements.

Terrorism Risk Insurance Act

Enacted in 2002 by the U.S. Congress as a measure to provide U.S. government backstop protection to the insurance industry in the event of another terrorist attack on a scale like the Sept. 11, 2001, catastrophe, TRIA was given a three-year lifespan to help stabilize the U.S. terrorism insurance market. It is scheduled to end on Dec. 31, 2005, though industry groups are lobbying down to the wire to convince Congress to extend the Act in some form.

State Modernization and Regulatory Transparency Act

Proposed by U.S. Rep. Mike Oxley, R-Ohio, chairman of the House Financial Services Committee, and Rep. Richard Baker, R-La., chairman of the Capital Markets Subcommittee, the SMART Act would reaffirm the 1945 McCarran-Ferguson Act that gives states the authority to regulate insurance, but it also strips away their rate-setting authority. The Act would also make it easier for insurers to get products to market.

European Union

Green Paper on E.U. Financial Services Policy 2005-2010

Issued by European Commission in May 2005, the paper outlines the E.U.'s intention to focus on consolidating existing insurance legislation and transposing it into the national laws of the member states. Consultation was accepted from interested parties until Aug. 1. The commission was expected to issue a white paper outlining its legislative program some time in November.

Reinsurance Directive Passed by E.U. Parliament on June 7, 2005, the

directive seeks to unify regulatory standards for reinsurance among the 25 E.U. member states. Expected to be approved by E.U. Council by the end of 2005, and will be implemented in stages over the next two years. A key component is the elimination of collateral requirements for foreign reinsurers among the E.U. states, a step seen by European reinsurers as a tool with which to force U.S. state regulators to drop their own collateral requirements for foreign reinsurers.

8th Company Law Directive, aka Audit Directive

Published in March 2004, passed by E.U. Parliament on Sept. 28, 2005. Expected to be implemented on Jan. 1,2006. Seen as an E.U. version of the U.S. Sarbanes-Oxley Act, the directive ouUines corporate governance and financial reporting requirements for all public companies based in the European Union. Somewhat less prescriptive than Sarbanes-Oxley, allowing for greater differences among national rules of the 25 member states.

Solvency II

A proposed E.U. directive aimed at unifying solvency standards for insurers. An extension of the Solvency I directive, adopted in 2002, Solvency II seeks a broader application of uniform solvency standards among insurers. The European Commission and the Committee of European Insurance and occupational Pensions Supervisors have been taking comments on Solvency II, and the latter is expected to launch a quantitative study on the impact of the proposed directive soon. Solvency II was originally to have been implemented by 2007. Now it appears 2010 is a more realistic date for implementation.

European Union: A Political Framework All Its Own

The most obvious difference between the European Union and the United States when comparing the "federal" governments of each is that the European Union lacks a chief executive branch equivalent to the U.S. president and his administration. Instead, the European Union has the European Commission, which has some executive powers, mainly in competition law, and the ability to propose legislation. It has 25 ministers, one from each member state.

The president of the commission is appointed by consensus among the national governments of the member states and is accountable to the European Parliament. The commission presidency is an agenda-setting role, which can be turned into a bully pulpit from which the occupant can lobby for legislative action. The president has no power to take unilateral action on political or regulatory matters and can be dismissed if parliament dissolves the commission through a no-confidence vote.

The European Parliament, whose members are elected by and represent the citizens of the 25 E.U. member states, is responsible for considering proposed legislation and either passing or rejecting it. Parliament also makes recommendations on unresolved regulatory matters. Members are elected by citizens in their home countries every five years.

Members of the Council of the European Union--also referred to as the Council of Ministers--consist of national ministers who represent their respective member-state governments. The council is roughly equivalent to a senate, though its members aren't elected by popular vote. Over the years, the council has gained more political influence, moving from what once was an advisory body to a position co-equal with the parliament on some issues, in that some measures require passage by both bodies to be adopted as law.

The council is headed by a president, who holds the office for six months and can set the agenda for council meetings. The presidency is assigned on a rotating basis, giving all member states a chance at holding the office.
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Title Annotation:Regulatory/Law
Comment:A new world order: U.S. and European insurers debate demands of converging regulations.(Regulatory/Law)
Author:Pilla, David
Publication:Best's Review
Geographic Code:1USA
Date:Dec 1, 2005
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