The National Association of Insurance Commissioners (NAIC) istaking deep offense to the latest perceived blow by the FinancialStability Board (FSB) to the U.S. system of insuranceregulation.

The FSB's critical peer review of the United States, focusing onthe state of insurance supervision, was released earlier thisweek.

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The report recognized that state regulators are effective at thetwo main things they set out to do, which are ensuring effectivepolicyholder protection and ensuring financial solvency, accordingto Connecticut Insurance Commissioner and head of the NAIC'sInternational Insurance Relations Committee ThomasB. Leonardi (pictured).

Yet, "the FSB dismissed what we do well and focused on otherthings I do not feel are as important," Leonardi said in atelephone interview Aug. 29.

The FSB report found that while the state-based regulatorysystem was effective in assuring policyholder protection and thesoundness of individual insurance companies, it lacked a systemicfocus and the capacity to exercise group-wide oversight.

Leonardi thinks the FSB believes the U.S. system is toodecentralized and in need of a systemic focus.Leonardi says the report, in part, "shows a lackof understanding of what we do," he said.

"I don't want to pick on the federal regulators, everyone'sprofessional and doing the best they can, but centralizedregulation failed," he said. "That did not happen in insurance.Yes, it is decentralized and yes it is not streamlined, but itdoesn't fail."

"Why go from a system that works and go to one that has failed?It is totally illogical," Leonardi added. "You have peoplefrom the European Union trying to analyze the U.S. That is like aYankee fan selected to judge the Red Sox."

Additionally, Leonardi was not happy with a U.S. FSBmember: the U.S. Treasury.

"I would hold up our insurance regulatory system against anysystem in the world," Leonardi said. "I am disappointed that theU.S. Treasury did not recognize the inherent flaws in the reportand the unsubstantiated nature of the report's conclusions,"Leonardi said.

The comment Treasury made on the report two days ago was: "As amember of the FSB, we welcome the evaluation of our financialsector policies by an independent international body. We agree withthe findings that the establishment of the Financial StabilityOversight Council, the Office of Financial Research and the FederalInsurance Office represent important steps to enhance thestability of the financial system." 

The FSB report called for bolstering the role of FIO andimposing a more uniform regime.

PCI REACTS

"PCI agrees with the FSB analysis on the need to ensureeffective and efficient coordination, information sharing, andaddress any overlap or gaps in the roles and responsibilities ofthe agencies. However, an approach that is designed for banksshould not be imposed on insurers, which have very differentbusiness models and risk profiles," said DavidSnyder, vice president of international policy for theProperty Casualty Insurers Association of America.

"As the dialogue continues regarding potential structuralchanges to help ensure financial stability, it is important toremember that the US state-based insurance regulatory system hassuccessfully overseen the largest insurance market in the world forover 150 years," said Snyder. "Our market is large and diverse,well serves consumers and has withstood the financial crisis,better than some other sectors, unprecedented natural catastrophes,and years of economic slowdown."

"We must keep in mind that the FSB Peer Review Report wasprepared by a global team that may not like our state-based system,not because it is ineffective, but because it is different," Snyderconcluded.