FIO, EIOPA and SIFI; acronyms we should get to know
The global financial crisis of 2008 has affected almost every industry, especially insurance. In order to improve federal regulation and oversight of the insurance industry, two new ‘supervisory’ bodies were created: the Federal Insurance Office (FIO) in the U.S., and the European Insurance and Occupational Pensions Authority (EIOPA) in the European Union.
The obvious fallout from the creation of FIO and EIOPA will be an accelerated regulation on the global insurance industry. With the continued malaise of the economy and more regulation to follow, insurance carriers are realizing that the business model that drives their profit is breaking down. The call for a new platform with significant new strategies will challenge long-standing operating procedures. Other factors to watch out for include:
- The reliance on low risk investments is no longer available. Government Bonds are being downgraded, and high interest rates are not in the future. Therefore, how will companies generate returns that will enable growth and attract investment money?
- What should insurance carriers expect from the FIO and the EIOPA? Clearly, a regulatory hierarchy is forming – flowing up from state regulation to government global regulation. Will the regulation be consistent or disjointed between all regulators?
- The FSOC is a council of federal financial regulators, chaired by the secretary of the Treasury, who have the authority to designate non-bank financial institutions, insurance companies, securities firms, hedge funds, finance companies and others – as systemically important financial institutions (SIFIs). These firms are considered “systemically important” because their failure might cause instability in the U.S. financial system. Once it is designated as an SIFI, the firm is turned over for “stringent” regulation by the Federal Reserve. However, the criterion for SIFI has not been released as of this date.
- How will the Insurance carriers change with this new regulatory onslaught? The New York Times reported that insurance companies will swiftly dismantle their banking business to reduce the amount of regulation.
- Weaker companies will sell off products or divisions to companies with greater capital. The stronger companies will continue to grow through diversification and expansion of product selection.
- European Companies may put their US operations up for sale
- The final effect of the European Union economy and the regulations put in place by EIOPA may entice European Insurance Carriers to re domicile in the US.
It’s been half a century since the insurance industry has seen these kinds of regulatory changes. The policies put into place by the FIO and EIOPA are sure to impact both domestic and global market trends. While the state of economic recovery remains uncertain, it’s clear that a new business model for insurance carriers looms not far ahead.
About the Author
David Bardelli is a Senior Vice President and the Casualty Practice Leader for WGA. David has extensive knowledge with casualty risks, including technology healthcare, business services and miscellaneous manufacturing groups of all sizes.