Regulation and Risk Are Opportunities

Albert Moore

Albert J. Moore, ASA, MAAAI often comment that technology is a universal language. Actuaries everywhere understand Excel spreadsheets. Travel the world, and you will see teenagers and adults with their faces glued to small handheld devices. The internet keeps us all connected. When it comes to technology, we live in a global economy. Adapt, or be left behind.

For insurance professionals, insurance regulation has become a global force. This issue of The Actuary has several articles about regulation. Actuaries must understand and account for the global regulatory risk. Yet, most of us think locally. Actuaries must begin to adapt and consider global insurance regulation while continuing to grow in our professional responsibility to serve the public interest.

I find technology utterly fascinating. I look forward to my copy of Technology Review, a magazine published by my alma mater, the Massachusetts Institute of Technology (MIT). I keep abreast of technological developments and adoption.

I also find civics, law and government extremely interesting, and I find history fascinating as well. My family keeps me supplied with many audio books during my commute. Most are historical fiction written by G.A. Henty, who wrote more than 122 novels. Some are deemed controversial because of his perspective on history. I particularly enjoy Wulf the Saxon: A Story of the Norman Conquest. My next book likely will be With Lee in Virginia, A Story of the American Civil War.

In addition to my interest in technology, law and history, insurance regulation is one of my many topics of interest. My very first assignments entailed writing programs to calculate newly-introduced U.S. regulatory requirements in the Deficit Reduction Act of 1984 (DEFRA) and Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Modeling software was being introduced at the time to meet new cash flow testing demands.

Technology, law, history, Robert E. Lee and insurance regulation all remind me of the topic of my commentary. Consider the legal case: PAUL v. VIRGINIA, 75 U.S. 168 (8 Wall. 168, 19 L.Ed. 357).

“An act of the legislature of Virginia, passed on the 3d of February, 1866, provided that no insurance company, not incorporated under the laws of the State, should carry on its business within the State without previously obtaining a license for that purpose; and that it should not receive such license until it had deposited with the treasurer of the State bonds of a specified character, to an amount varying from thirty to fifty thousand dollars, according to the extent of the capital employed. The bonds to be deposited were to consist of six per cent. bonds of the State, or other bonds of public corporations guaranteed by the State, or bonds of individuals, residents of the State, executed for money lent or debts contracted after the passage of the act, bearing not less than six per cent. per annum interest.”1

One of the questions raised by Samuel Paul, a resident of Virginia who served as the agent for companies and individuals primarily from New York, was whether the state law was unconstitutional because aspects of the law ran afoul of the Commerce Clause of the U.S. Constitution. Did states have the right to regulate insurance? In Article I of the U.S. Constitution, Congress is given the power “to regulate commerce with foreign nations, and among the several States.”

The Supreme Court held: “We perceive nothing in the statute of Virginia which conflicts with the Constitution of the United States; and the judgment of the Supreme Court of Appeals of that State must, therefore, be affirmed.” Thus, state regulation of insurance within the United States was settled in 1868.

The purposes and emphasis of insurance regulation are not static. In the United States, the nature of insurance regulation has changed dramatically over the past few decades. I see the following general trend in insurance regulation in the United States: It began with regulation and prescription of licensing and legal rules and definitions. Insurance regulation then was subject to insurance taxation and market oversight. Finally, consumer protections were erected.

The evolving insurance regulation continued with the passage of TEFRA and DEFRA to clearly define insurance from other financial instruments. The Technical And Miscellaneous Revenue Act of 1988 (TAMRA) was introduced to regulate consumer manipulation of the insurance taxation benefits. Regulators became concerned with capital adequacy. Solvency concerns have been the most recent regulatory focus in the United States and around the globe.

Today, I see a growing call for changes in the advisory role of insurance professionals. A related issue is an evaluation of the appropriateness of a financial instrument to meet the needs of a client. More than ever, actuaries and the insurance industry must help frame the debate.

The most recent example in the United States is the proposed rule from our Department of Labor (DOL) that would require brokers working with retirement accounts to act in the best interest of clients. I believe brokers already generally act in the best interests of clients. I do not want to enter that debate.

I only raise the DOL rule as an example of increased global regulation. It should serve as evidence that regulation in Europe, Asia, Canada and the United States will likely be discussed and incorporated in a country, state or province near you. In this issue of The Actuary, we interviewed four actuaries from around the globe to gain insight into their nations’ regulatory frameworks.

Consider the following perspective of Patrick Collinson as written in The Guardian: “New rules that ban commission-based selling are due to come into force on New Year’s Eve in the biggest shake-up of the investment industry for decades, dubbed by some ‘the death of the salesman.’”2

Some in the United States likely would have assumed the author was addressing the DOL rule. However, this statement was written on Dec. 30, 2012, describing the evolving regulation introduced in the United Kingdom. That regulation had the stated goal to allow clients to “see clearly the cost of financial advice.” The main force of the reforms can be traced back to pension industry reforms in 2006.

My point is that actuaries who believe that a global perspective is unnecessary should examine the globalization of the regulatory risk. Proposed changes and reforms in one nation may soon be the discussion in another.

Regulators already have begun to think and act globally. Many national regulatory bodies have begun to establish channels of communication across borders and seas. Technology has made the world a smaller place by revolutionizing the speed of travel and communication. Technology has facilitated the ability for actuaries to develop very complex models and perform analysis that could never have been achieved in the past.

With the increasing complexity of insurance products, our industry will be challenged to ensure our clients have all of the information and tools to understand what they are buying. Harnessing New Changes explains the SOA’s new regulatory change web resource. Actuaries must expand their perspectives to include an increasing responsibility in understanding and managing the regulatory risk. Risk is indeed opportunity.

Albert J. Moore, ASA, MAAA, is second vice president, Actuarial Systems, at Ohio National Financial Services in Cincinnati.