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Emerging from murky waters: the outlook for capital standards is clearer, but there is still work to be done.

For those of us of that certain age when "distinguished looking" is regarded as the highest compliment, Nemo is not the name of a cute clownfish generating billions in ancillary revenue, but instead brings to mind a submarine captain. This is Captain Nemo, who was first brought to life in Jules Verne's novel, Twenty Thousand Leagues Under the Sea.

He was also the center of that great sci-fi movie 20,000 Leagues Under the Sea with Kirk Douglas, Peter Lorre and James Mason. Nothing beat watching the submarine Nautilus make its way through murky waters to be caught up in the twirling tentacles of a giant squid.

Listening to Federal Reserve Board Governor Daniel Tarullo's seminal speech to the National Association of Insurance Commissioners (NAIC) International Insurance Forum in Washington in May, I had that same feeling of excitement. Finally, there was some clarity as we began to emerge from the murky waters of contending capital standard rumors, but with that clarity came the realization that en route to the happy ending, we still had to figure out how to untangle ourselves from the tentacles.

There has been some argument--rightly or wrongly--that the push for international capital standards over the past few years might have the unintended consequence of diminishing some of the unique strengths of the American model.

That is understandable. It is not difficult to see why some outside the U.S. do not quite understand the American system. They may see our system of state-based regulation not as representative of the laboratory of democracy, but as an inefficient many-headed hydra better replaced by the type of centralized regulation that is more the model throughout much of the world.

Any insurer that has to run the gamut of state regulatory authorities can understand that. Our system may look crazy from the outside, but U.S. insurers, regulators and consumers also know that by and large, our system works.

Whether or not that would continue or how it would change has been in question. That murkiness of outlook was largely reflective of what was sometimes seen as an effort to impose Solvency II type regulation on the U.S. market, and the role of the relevant federal authorities.

Tarullo's speech certainly brought clarity. For those wondering if Solvency II or the insurance capital standards (ICS) or global systemically important insurers standards being developed by the International Association of Insurance Supervisors (IAIS) would determine U.S. capital standards, Tarullo was clearer than crystal: "These are some of the paths we do not intend to take in formulating capital requirements for insurance firms."

The Fed instead described proposed standards that seem to respect and incorporate the current U.S. regulatory structure.

That's the "coming out of the murky waters" part. The tentacles of the giant squid still threaten. U.S. insurers operating in other jurisdictions still have to be concerned with ICS and Solvency II, and we still lack clarity on the functional differences between the Fed standards and the NAIC's proposed group capital calculation.

This is not to disparage any of the systems, but to acknowledge that the slightly different goals and scope of each system drive toward differing structures and methodology. That argues for continuing, if not increased, involvement by insurers in the process with the NAIC, the IAIS, and certainly through stakeholder feedback on the Fed's Advance Notice of Proposed Rulemaking.

The good news is we now have more optimism that there will be a safe harbor. In the words of James Mason's Captain Nemo," There is hope for the future."

Best's Review columnist Howard Mills is global insurance regulatory leader at Deloitte LLP and a former superintendent of the New York Insurance Department. He can be reached at
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Title Annotation:Insight: Regulatory/Law
Author:Mills, Howard
Publication:Best's Review
Geographic Code:4EUUK
Date:Jul 1, 2016
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