Insurers will need to move beyond ‘check-the-box’ compliance as there are indications that 2014 will be more complex and compliance-driven... Matthew S. Vuolo, partner at Nelson Levine de Luca & Hamilton

In your experience, what is the most significant regulatory challenge insurers will face this year? That’s the question we put to experts in the field writing on JD Supra. The answer depends on whom you ask, of course - and, as Hilary Rowen, partner at law firm Sedgwick LLP, noted: it can also differ by insurance industry sector. Here’s what we heard back.

The Affordable Care Act

Ms. Rowen at Sedgwick: “For health carriers, the greatest regulatory challenges in 2014 will arise from implementation of the Affordable Care Act. The last minute extensions in enrollment and payment deadlines may generate adverse interactions with state insurance codes and regulations that govern health policy issuance and renewals. In those states that actively review individual and/or small group premiums, there is a significant chance of rate suppression. The Affordable Care Act contains several mechanisms in which health insurers that enroll a disproportionate percentage of less healthy, higher cost members are cross-subsidized by other health insurers. However, the cross-subsidy mechanisms are premised on rate adequacy. In an environment in which rates are being suppressed by regulators, these mechanisms will not function.”

Cross-Border Supervision

From Matthew S. Vuolo, partner at Nelson Levine de Luca & Hamilton: “The global convergence of the industry and cross-border supervision of insurance groups will be the most significant regulatory challenge insurers will face this year. Insurers will need to move beyond ‘check-the-box’ compliance as there are indications that 2014 will be more complex and compliance-driven. Solvency II in Europe and the 50 state-based system in the U.S. are a few examples of imminent regulatory concerns for insurers. The uncertainty around what role, if any, the federal government will have with regard to regulatory mandates adds another level of complexity. Insurers will need to prepare for new capital requirements, including changes to risk-based capital and the introduction of new methods for determining regulatory capital such as the Own Risk and Solvency Assessment (ORSA). Also, there are concerns about increased oversight by banking regulators as insurers are not typically accustomed to such a heightened level of oversight, which may trump existing insurance regulation, yet would still require compliance.”

Own Risk and Solvency Assessment (ORSA)

Ms. Rowen again: “For property-casualty insurers and life insurers, the most significant regulatory challenge in 2014 is preparation for ORSA (Own Risk and Solvency Assessment).  Although ORSA reports will not be required until 2015, the framework for ORSA compliance has to be established this year.  ORSA requires a comprehensive, forward looking assessment of an insurer’s financial risks – including risks arising from market changes and the regulatory environment – in the context of the insurer’s business plans.   As insurers’ boards of directors need to sign off on ORSA reports, ORSA compliance will – or should – get significant attention in the C suite.   (As a side note, health insurers are subject to ORSA.  However, in 2014, the regulatory dilemmas posed by the Affordable Care Act are likely to trump ORSA.) “

Construction Coverage

And finally, from Chris Mosley at law firm Sherman & Howard: “In addition to the implementation of the health care act, the insurance industry is likely to see significant developments continue in the construction coverage arena. The Texas Supreme Court decision in Ewing Construction Co. is likely just the start of judicial and legislative activity across the country addressing the issue of insurance coverage for construction defect claims. The issue will be particularly important as the new construction housing market improves and participants in the construction industry look for protection against construction defect lawsuits.”

Stay tuned for additional perspectives as they come in.

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