As more federal regulation and oversight is expected for insurers, their focus needs to shift in the near term to strengthening risk governance and risk management, according to an EY paper currently in development exclusively seen by Bloomberg Brief.

“Regulatory change is going to continue for the foreseeable future. No one knows where the capital requirements are going to go, both in the U.S. and on a global basis,”Rick Marx, principal in EY’s financial services risk management practice, said in a telephone interview last week. “To ensure that the regulators in the various jurisdictions actually can get insight into the businesses in different countries and in the U.S. in the different states, to get consistency, there’s a big focus on understanding the companies’ governance models.”

Some areas of specific U.S. requirements for insurers have still yet to be fully defined or promulgated. International policies will also take several years to unfold, the paper said. Marx said in the interview that the part that is “in flux” is more regulator focus on the holistic view of how risk is managed: What’s the dialogue with and reporting to senior management and the board so that they understand the risks that are being taken and how they are being managed? How do we understand the risk profile and how things could potentially go wrong and disrupt the business?

In addition to enhanced risk management and greater expectations for governance, some of the most demanding reform efforts are focused on enhanced group-level prudential regulations for higher capital reserves, mandatory stress testing and tougher supervision, EY said in the paper.

Due to their holistic frameworks, North America and Europe are the two most advanced regions regarding insurance reform, Marx said. In the EU, Marx said the focus is on Solvency II reforms, which begin in 2016. In the U.S., companies are getting ready for the Own Risk Solvency Assessment, or ORSA, which also takes effect in 2016.

“Under Solvency II’s capital projections, insurers with low-rate interest exposures, such as those in Germany, may need to plan for periods of prolonged low interest rates or periods where asset prices drop and interest rates remain low,” said Bloomberg Intelligence Analyst Edmond Christou. “This second scenario — the so-called ‘double hit’ — is becoming more likely in the current economic environment.”

Financial Regulations 4.10

This article and chart were taken from the Bloomberg Brief Financial Regulation Newsletter.
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