In a speech during the IIS Global Insurance at the United Nations, former Connecticut Insurance commissioner and Senior Advisor at Evercore Tom Leonardi, discussed unintended consequences form some insurance regulation. He says Market Consistent Valuation, for instance, will hurt long-term investment strategies, long-term insurance products. speaks with Tom Leonardi, a Senior Advisor at Evercore and former Connecticut Insurance commissioner, about recent development in insurance regulation, and how some are stifling growth.

Market Consistent Valuation has been pushed by a number of international regulators in the IAIS Global Capital Standards and part of Solvency II. Mr. Leonardi is concerned that Market Consistent Valuation creates volatility within insurance company balance sheets and income statements. Insurers buy long term assets to match long term liabilities, unlike banks. Insurers now have to mark up or down assets they intend to hold for a long term – on a quarterly basis. The unintended consequences include a lack of willingness by insurers to invest in long-term bonds offered by governments for infrastructure projects, a lack of long-term insurance products, leaving governments to finance social security for its citizens.

According to Leonardi, the FSB and international regulators would like the U.S. insurance system to have one regulator rather than out national state-based system. “The reality is (that) it’s not going to change in the next year…or the next 50 years.” Mr. Leonardi points out that the U.S. system works, and has been proven through many financial crisis and two world wars.

The Federal Reserve under Dodd Frank has responsibility on the three SIFISs and four bank holding companies. Mr. Leonardi does not believe the Fed is looking to expand their responsibilities beyond what Dodd Frank has given them.

Mr. Leonardi says the number one goal of regulators is to protect policyholders. In addition they should create and apply a set of rules that are clearly defined so that industry knows what’s expected of them. Changing rules creates uncertainty, and the industry and capital markets do not like uncertainty.

According to Mr. Leonardi, the NAIC and State regulators are looking to pass principle-based reserving, and some States are trying to pass the Model Holding Company Act. He suggests regulators should take a closer look at Captives issues and regulatory arbitrage within the system.

For more of our coverage from the IIS Global Insurance Forum, visit the On Demand Library.

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