Insurance Regulation in the United States and Abroad

Insurance Regulation in the United States and Abroad

Order Code RL33439
CRS Report for Congress
Received through the CRS Web
Insurance Regulation in the United States
and Abroad
May 23, 2006
Baird Webel
Analyst in Economics
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Insurance Regulation in the United States and Abroad
Summary
In the past two or three decades, a variety of technological and economic
changes have caused significant upheavals in the global financial services industries.
While this is perhaps most obvious in the new products and new companies (or
merged older companies) that have come onto the market, it can also be seen in the
changes made to the laws and regulatory structures that govern the financial services
firms.
In the United States, the Gramm-Leach-Bliley Act (GLBA) of 1999 significantly
changed the legal requirements applicable to insurers, banks, and securities firms,
while leaving the structure of the regulatory agencies for those industries essentially
unchanged. For both the securities and the banking industry, this has proven
relatively uncontroversial, as both industries had established national systems of
regulation. The insurance industry in the United States, however, has no national
system of regulation — the 1945 McCarran-Ferguson Act gave regulatory authority
to the individual states. This state-based system has proven controversial with some
in Congress calling for federal reform of the system. The 107th and 108th Congresses
both saw legislation introduced to allow for, or mandate, federal licensure and
regulation of insurance companies. Such legislation has been introduced in the 109th
Congress in the form of S. 2509, the “National Insurance Act,” by Senators John
Sununu and Tim Johnson.
Internationally, many countries have also reacted to the technological and
market changes by changing their legal and regulatory systems, with many countries
completely reworking their regulatory structures. The changes made to the regulatory
systems abroad have in many cases been significantly broader than in the United
States. Some countries have created single regulators with broad powers to oversee
the entire financial services industry. Others have instituted a so-called “twin peaks”
model, whereby regulation of banks, insurers, and securities is combined, but there
are two different functional agencies — one focusing on prudential regulation and
another focusing on market conduct.
Another area of significant difference among countries is what occurs should
prudential regulation fail and an insurer become insolvent. Some countries have
instituted guaranty funds that would pay policyholders in the event of an insolvency,
while others have no such systems. Many of the various changes abroad might
illuminate the choices that Congress could face if it chooses to address the U.S.
insurance regulatory structure.
This report will first give a statistical overview of various countries and then
present a summary of U.S. insurance regulatory structure. Following this is an
examination of insurance regulation in European Union as a whole, as well as the
individual regulatory structures in three EU members (United Kingdom, the
Netherlands, and Germany). This report also provides summaries of the systems in
Canada, Australia and Japan. It will be updated only in the event of significant
legislative developments in Congress.

Contents
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. Statistical Comparison of the United States, the European
Union, the United Kingdom, Germany, the Netherlands, Canada,
Australia, and Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Insurance Regulation in the United States
and Abroad
In the past two or three decades, a variety of technological and economic
changes have caused significant upheavals in the global financial services industries.
While this is perhaps most obvious in the new products and new companies (or
merged older companies) that have come onto the market, it can also be seen in the
changes made to the laws and regulatory structures that govern the financial services
firms. In the United States, the Gramm-Leach-Bliley Act (GLBA) of 19991
significantly changed the legal requirements applicable to insurers, banks, and
securities firms, while leaving the structure of the regulatory agencies for those
industries essentially unchanged. Other countries have also changed their legal and
regulatory systems, with many countries completely reworking their regulatory
structures.
While GLBA repealed Depression-era laws mandating the legal separation of
banking, securities, and insurance companies, it left the basic regulatory structure for
these industries intact. For both the securities and banking industry, this has proven
relatively uncontroversial, as both industries had established national systems of
regulation. The insurance industry in the United States, however, has no national
system of regulation — the 1945 McCarran-Ferguson Act2 gave regulatory authority
to the individual states. This state-based system has proven controversial with some
in Congress calling for federal reform of the system. GLBA itself included federal
insurance reforms with provisions that would have created a National Association of
Registered Agents and Brokers (NARAB) if the state insurance regulations were not
modified to allow for nonresident agent and broker license reciprocity between states.
The NARAB provisions ultimately did not take effect, but congressional interest in
the issue has continued. The 107th and 108th Congresses both saw legislation
introduced to allow for, or mandate, federal licensure and regulation of insurance
companies. Legislation creating an optional federal system has been introduced in
the 109th Congress in the form of S. 2509, the “National Insurance Act,” by Senators
John Sununu and Tim Johnson.3
Internationally, many countries have also reacted to the technological and
market changes by changing their legal and regulatory systems, with many countries
completely reworking their regulatory structures. The changes made to the regulatory
systems abroad have been in many cases been significantly broader than in the United
States. Some countries have created single regulators with broad powers to oversee
1 P.L. 106-102, 113 Stat. 1338, 15 U.S.C. 6801 et seq.
2 P.L. 79-15, 59 Stat. 33, 15 U.S.C. 1011 et seq.
3 See CRS Report RL32789, Modernizing Insurance Regulation, by Baird Webel.

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the entire financial services industry. These single regulators generally oversee both
prudential and market conduct regulation of financial firms. Prudential regulation
revolves around seeing that firms remain financially sound and able to fulfill future
promises. This often involves specific oversight of both assets and liabilities of
financial firms. Market conduct regulation revolves around how the firms interact
with customers. Countries have also instituted a so-called “twin peaks” model,
whereby regulation of banks, insurers, and securities is combined, but there are two
different functional agencies — one focuses on prudential regulation while the other
focuses on market conduct.
Another area of significant difference among countries is what occurs should
prudential regulation fail and an insurer become insolvent. Some countries have
instituted guaranty funds that would pay policyholders in the event of an insolvency,
while others have no such systems. Many of the various changes abroad might
illuminate the choices that Congress could face if it chooses to address the U.S.
insurance regulatory structure.
This report will first give a statistical overview of the various countries and then
present a summary of U.S. insurance regulatory structure. Following this is an
examination of insurance regulation in European Union as a whole, as well as the
individual regulatory structures in three EU members (United Kingdom, the
Netherlands, and Germany). This report also provides summaries of the systems in
Canada, Australia and Japan. For each country, the report addresses the following
principle questions:
! Is there combined regulation of banks/securities/insurers or do
different agencies regulate the different firms?
! Is regulation, including prudential regulation and market conduct
regulation, split between national and regional levels?
! Is the regulation for solvency and for market conduct under the same
agency or split?
! Is there regulation of the prices of insurance and the policy forms
that are used? Is there different regulation in this regard for different
types of insurance?
! Is there a guaranty fund in the case of insurer failure? If so, is it
private or public? Mandatory or voluntary? How is it funded?
Does it build up a balance, or is the funding post-failure?
These questions are designed to shed light on the issues arising out of the
current efforts to change the system in the United States. The first three points are
fairly clear, focusing on who carries out the regulation. The fourth addresses one of
the central issues in the debate in the United States, where industry group are strongly
against the substantial rate and form regulations that exist at the state level, whereas
consumer groups are equally adamant that this regulation is necessary for consumer
protection. The final point is meant to illuminate a key issue if the United States
were to institute a federal charter for insurance companies, namely what might be

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done with the current system of state guaranty funds that protect policyholders in the
event of an insolvency.
Table 1. Statistical Comparison of the United States, the
European Union, the United Kingdom, Germany, the
Netherlands, Canada, Australia, and Japan
Total
Total
Market
GDP
Insurance
Premium
Share of
Population
($
Premium
Volume
Foreign
(Millions)
billions)
Volume
per capita
Insurance
($ billions)
($)
Firms
United States
292.4
$11,734
$1,108.1
$3,790
21.2%
EU
457.2
$13,098
$1,116.8
$2,443
NA
UK
59.4
$2,132
$288.6
$4,859
32.1%
Germany
82.5
$2,745
$191.0
$2,315
14.2%
Netherlands
16.3
$608
$60.4
$3,706
22.4%
Canada
31.9
$991
$70.3
$2,204
19.9%
Australia
20.0
$616
$49.5
$2,475
NA
Japan
127.1
$4,702
$492.5
$3,875
20.1%
Source: SwissRe, World Insurance in 2004; market share data is 2003 data from the OECD.
Notes: Total Premium Volume per capita calculated from columns two and four. NA indicates not
available.
United States
The insurance regulatory system in the United States dates to the middle of the
19th century. The first landmark was an 1868 Supreme Court decision4 determining
that insurance did not fall under the interstate commerce clause of the Constitution.
This decision left regulatory power to the individual states which created their own
regulatory bodies and statutes in the following years. While the precise nomenclature
differs from state to state, most have some division of the state government with
specific oversight and regulatory responsibility for insurance companies. The heads
of these insurance departments (often known as insurance commissioners) are
generally either elected in statewide elections or appointed by the governor. A
private association of insurance commissioners, now known as the National
Association of Insurance Commissioners (NAIC), was created in 1871, largely to
help coordinate and harmonize insurance regulation among the states.
4 Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1868).

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In 1944, the Supreme Court reversed its earlier decision and found that
insurance was interstate commerce and thus subject to federal regulation — in
particular, to the federal antitrust laws.5 This provoked a quick reaction from both
the industry and the state governments who prevailed upon Congress to pass the
McCarran-Ferguson Act of 1945, which specifically granted the states the authority
to regulate insurance and granted a limited exemption from the federal antitrust laws.
There has been limited federal intrusion into the insurance regulatory system over the
past 60 years,6 but while bills have been introduced in various Congresses to provide
the federal government increased general regulatory authority over insurance, none
has been enacted. In general, therefore, the states continue to exercise primary
authority to regulate insurance in the United States.
The precise aspects of insurance regulation among the 50 different states, plus
the District of Columbia and four territories, differ substantially. The NAIC and the
National Conference of Insurance Legislators (NCOIL) produce model laws on
various topics, and the NAIC has been very active in promoting other steps, such as
a single point of electronic filing for insurance forms and an interstate compact to
create uniform standards for life insurance products.7 Neither NCOIL nor NAIC,
however, has any real authority to compel states to enact laws that are in line with
their standards.
In general, insurance is highly regulated in the United States on both prudential
and market conduct grounds. Market conduct regulation frequently differs among
lines of insurance, with commercial insurance being less regulated than insurance
purchased by individuals. States require licenses for insurance companies, brokers
and agents, including separate licenses for insurers who are headquartered in another
state. For some types of insurance, particularly compulsory lines, such as workers
compensation and auto, many states have created some form of state insurance entity
or enacted specific regulations to ensure that this insurance is available.
State regulation of rates and forms has been a major issue for insurance
companies and for groups representing insurance consumers. Some in Congress have
called specifically for federal preemption of state control of insurance rates,8 while
others would extend rate and form regulation to the federal level.9 The exact type of
state regulation varies significantly. It extends from strict “prior approval,” in which
any rate change must be approved in advance, to a “no-file” system, where there is
no direct oversight of rates. In between are approaches such as “flex rating,” “file
5 U.S. v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
6 See CRS Report RL32176, The Risk Retention Acts: Background and Issues, by Baird
Webel.
7 For additional information on the NAIC modernization efforts, see June 16, 2005
testimony of the NAIC before the House Financial Services Subcommittee on Capital
M a r k e t s , I n s u r a n c e a n d G o v e r n m e n t S p o n s o r e d E n t e r p r i s e s a t
[http://financialservices.house.gov/media/pdf/061605mdk.pdf].
8 See, for example, Representative Richard Baker’s website at [http://baker.house.gov/html/
content.cfm?id=408]
9 Senator Ernest Hollings’ S. 1073 in the 108th Congress.

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and use,” and “use and file,” which allow insurers some flexibility to change rates
while still requiring some filing with the state insurance regulator. The Insurance
Information Institute lists 31 states with prior approval requirements for at least some
lines of insurance and 30 states (plus the District of Columbia) with no filing
requirements for at least some lines of insurance.10 Most states have some lines that
fall between the two extremes as well.
Insurance guaranty (or guarantee) funds have been created in every state to
provide protection for policyholders in case of an insurer insolvency. Participation
is generally a requirement for licensure in each state. These funds are generally run
by the state departments of insurance and are responsible for satisfying claims against
an insurer once an insurer is declared insolvent by the state’s insurance
commissioner. Most of the state guaranty funds rely on post-hoc assessments on
insurers operating in the state to pay for policyholder claims that are beyond the
insolvent insurer’s remaining assets. The one exception to this is New York’s fund,
which does pre-fund to some extent.11 Should a multistate insurer become insolvent,
the insurer’s home state fund takes the lead in managing the insolvency, but the other
states’ funds are responsible for settling the claims that arise from within their state.
European Union12
Since it began as an agreement covering only the coal and steel industries of six
European countries, the EU has expanded both geographically (25 current members)
and into other economic and political spheres, including insurance regulation. In
most areas where the EU exerts influence on member state laws, one sees a mix of
(1) harmonization of national laws and laws enacted by the EU13 (known as
“directives”) and (2) mutual recognition by the EU member states of the laws or
regulations that are in place in other EU member states.
10 Insurance Information Institute website, Rates and Regulation, at [http://www.iii.org/
media/hottopics/insurance/ratereg].
11 See CRS Report RL32175, Insurance Guaranty Funds, by Carolyn Cobb, for additional
information on guaranty funds in the United States.
12 See CRS Report RS21372, The European Union: Questions and Answers, by Kristin
Archick, for an overview of the European Union.
13 While an EU directive is enacted in a legislative process, it does not directly preempt
individual national laws, as a federal law might do to state law in the United States. Instead,
an EU member state’s government is required to enact a law harmonizing that member
state’s national laws with the EU directive. An imperfect analogy in the United States’s
insurance regulation would be that of the model laws that are adopted by the National
Association of Insurance Commissioners, which must then be enacted by the state
legislatures to take effect. The key difference, however, is that EU member states are
required by international treaty to enact laws following EU directives, whereas U.S. states
are under little or no compulsion to enact NAIC model laws.

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There is no direct regulation of insurers by the EU. However, directives on
insurance regulation date back many years.14 In the 1990s, as part of the creation of
the European “single market,” EU directives introduced mutual recognition based on
common minimum standards of supervision and the system known as the “single
passport” for insurers. Essentially, a licensed insurer in one EU member state is
authorized to do business in any other EU state on the basis of a simple notification
and without the requirement for a separate license. The one exception to this is for
lines that are compulsory in a particular nation (e.g., auto insurance). Prudential
regulation of EU insurers is the responsibility of the home member state, while
market conduct responsibility is somewhat mixed. Contract law, which specifically
governs the interpretation of insurance policies, is generally the domain of the
country in which the contract is signed. EU directives specifically disallow any
requirements for prior approval of rates and forms. Whatever market conduct
regulation of insurers that might occur must follow the fundamental principle of
“national treatment” — foreign insurers from within the EU are treated the same as
national insurers. In 1999, the EU began a project to overhaul the entire regulatory
structure for the financial services industry, known as the Financial Services Action
Plan15 (FSAP). The insurance component of the FSAP has centered on two areas to
date — solvency regulation and regulation of reinsurance.
EU-wide minimum solvency requirements for property/casualty insurers were
first established in 1973, and for life insurers in 1979. These standards were
relatively low and were not updated until after the beginning of the FSAP. The so-
called Solvency I directive, adopted in 2002, updated and indexed the minimum
requirements for inflation and generally increased the minimum capital needed by
insurers. Solvency I also introduced some risk-based capital requirements and
allowed regulators to take action in cases where an insurer’s financial position was
deteriorating even if it continued to meet the minimum requirements. While
Solvency I certainly strengthened the requirements, it did not change the framework
of the previous directives to a large degree; it essentially just changed the formulas
that were in place. As suggested by the title, however, Solvency I was not the end
of EU directives regarding this issue. Solvency II has been proposed to be much
broader than Solvency I. “It contains a fundamental and wide-ranging review of the
current regime in the light of current developments in insurance, risk management,
finance techniques, financial reporting, etc.”16 Solvency II is currently envisioned to
be adopted in July 2007 and to codify and replace the previous directives on
insurance, including Solvency I and the directive on reinsurance. While drafts of the
directive can be found on the EU website,17 the new standards remain a work in
progress.
14 The first directive on solvency, for example, was issued in 1973 and the first on the
establishment of insurance companies in 1964.
15 See CRS Report RL32354, European Union — United States: Financial Services Action
Plan’s Regulatory Reform Issues, by Walter Eubanks, for a more complete overview of the
FSAP.
16 Solvency 2, European Union website, available at [http://europa.eu.int/comm/internal_
market/insurance/solvency2/index_en.htm].
17 Ibid.

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The most recent insurance directive, adopted in September 2005, is on
harmonizing regulation of reinsurance. Previously reinsurance was not the subject
of EU-wide regulation. The reinsurance directive essentially applied the single
passport framework, under which primary insurers operate, to reinsurers. Thus, a
reinsurer domiciled in one EU country is now able to operate throughout the EU
without hindrance except for supervision by its home country regulator. The
directive contains specific prudential requirements that national regulators are to
apply in overseeing reinsurers, including regulation of reinsurer investments. Of
particular note, it also requires the removal of any national collateral requirements
that had been applied by one EU member state on companies from another EU
member state. This removal is significant since the existence of U.S. collateral
requirements has been a matter of contention between European reinsurers and U.S.
regulators. By removing all internal collateral requirements, the EU strengthens its
argument against U.S. collateral requirements. The EU has specifically cited a desire
to improve access to foreign markets as a rationale for adopting the reinsurance
directive.
Over the past few years, there has been a significant amount of work done on
the idea of an EU directive governing insurance guaranty funds. To this point,
however, no conclusion has been reached about either the desirability of such a
directive or what the precise contents of such a directive might be. Many of the EU
member states have no national guaranty funds in place, although some have
implemented such funds in the same time frame that discussions at the EU level have
taken place on the topic.
United Kingdom
Following the country’s tradition of unitary government, regulation of financial
institutions is generally carried out centrally. Today, financial institutions, including
banks, insurers, and securities firms, are regulated by the Financial Services
Authority (FSA), an independent, nongovernmental agency afforded statutory powers
to regulate the financial services industry. The FSA was created in 1997 following
a change in the UK’s government. Reacting to many of the changes in the market,
the new government expressed concerns that the old system was costly, inefficient,
and confusing to both customers and the regulated institutions. In addition, the drive
to create a new regulator was also spurred by scandals, such as the failure of Barings
Bank and the “mis-selling” of pension products.
The FSA initially consolidated nine banking and securities regulators under a
single institution. Before 1997, the Department of Trade and Industry oversaw the
prudential aspects of life and property/casualty insurance. Following four years of
interim arrangements, the FSA obtained full statutory powers in 2001, when the
Financial Services and Markets Act of 2000 (FSMA) came into force. While the
market conduct of life insurers selling investment products was supervised since the
late 1980s, statutory supervision by the FSA of the market conduct of
property/casualty (“general”) insurers was introduced in January 2005. This followed
the implementation by the UK of an EU directive on insurance intermediaries. Prior
to 2005, the sale and marketing of property/casualty insurance was overseen by
General Insurance Standard Council (GISC), an industry self-regulatory organization.

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The FSA is now the sole direct regulator for insurance in the UK. It has
responsibility for both prudential and market conduct regulation. Its approach is an
integrated one, encompassing both regulatory aspects within the insurance directorate
of the agency. On the prudential side, regulation by FSA takes a “proactive, risk-
based”18 approach. It also focuses significant attention on the managerial soundness
and internal controls of individual companies. On the market conduct side, the focus
is on accurate disclosures by the companies to consumers and fair treatment of
customers , both pre- and post-sale. FSA has the legal authority to review insurance
contracts for “unfair” terms and indicates that it will take action, working with
insurance firms “where possible,”19 to change these terms if found to be
inappropriate. The FSA does not intervene in individual cases between the
policyholder and an insurer. This is left to the court system or an independent
ombudsman as discussed below. There is no rate regulation of any kind.
While FSA is the sole direct regulator, there are two other bodies that have some
influence on insurance regulation in the UK. Coming from above, as previously
discussed, are the European Union’s various directives on insurance. Laws and
regulations in the UK are required by the EU treaties to comply with these directives,
and the UK has generally done so in the time frame that is required by the EU. The
other agency that could have some effect on the consumer side of FSA’s insurance
regulation is the UK Financial Ombudsman Service (FOS). The FOS was created by
statute as an independent nonbinding arbiter of consumer complaints outside of the
court system. Essentially, it examines complaints brought by a consumer and
attempts to mediate a solution; if mediation fails, an arbitrator then makes a decision
on an appropriate remedy. The firm involved in the dispute must accept the
ombudsman’s decision up to a limit of ^100,000 (approximately $180,000).20 The
consumer involved has the option of rejecting the settlement and opting for the court
system to settle the dispute. The FOS is funded through fees and assessments on the
financial services industry; there is no charge to consumers for bringing a complaint.
Although the FOS focuses solely on individual cases, it has been recognized that
some FOS decisions could have a wider impact. The FSA and FOS have signed a
memorandum of understanding on how to jointly proceed in such cases.
In 2000, a guaranty fund, the Financial Services Compensation Scheme (FSCS),
was created as provided for by the FSMA. Although a separate entity, the FSCS
covers the range of businesses (banks, insurers, insurance brokers, mortgage banks,
investment firms) that are regulated by the FSA. The FSCS operates on a pay-as-
you-go basis, with assessments levied each year on the industry based on expected
need for the upcoming year. Each of the five industry groups has its own “sub-
scheme” and assessments are based on the amounts needed for each industry. There
is no cross-industry subsidization as, for example, between healthy banks and
insolvent insurers. Each industry group has particular rules and limits for claims with
18 UK Financial Services Authority, The Future Regulation of Insurance:a Progress Report,
available at [http://www.fsa.gov.uk/pubs/policy/bnr_progress3.pdf], p. 45
19 Ibid., p. 29.
20 All U.S. $ estimates use 2005 exchange rates from the CIA World Fact Book, available
at [http://www.cia.gov/cia/publications/factbook].

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a general preference towards paying smaller claims in full. In non-compulsory
general insurance, for example, the FSCS pays in full the first ^2,000 (approximately
$3,600) and then 90% of the remaining claim.
Germany
Germany’s federal structure gives significant sovereignty to its 16 states while
retaining large areas of governance for the federal government. The majority of
supervision over all financial services is done by the federal government; however,
insurance regulation is legally shared with the states. The Federal Financial
Supervisory Authority (BaFin21) is the primary federal regulator for financial
services. BaFin was created in 2002 out of three previous regulators for banking,
securities, and insurers. It is responsible for overseeing all private insurers that are
of “material economic significance,”22 as well as any state-run or other public
insurers that operate in more than one state. The states are responsible for single-
state public insurers and small private insurers. As with other EU states, Germany
is responsible for harmonizing its insurance law with EU directives.
Although now a single entity, BaFin continues to have three separate structures
overseeing banks, securities firms, and insurers. It has created cross-sectional
departments on issues such as overall financial stability, risk analysis, and consumer
issues. BaFin is responsible for both prudential and market conduct issues for
federally regulated insurers and insurance intermediaries. Insurers may engage only
in insurance and insurance-related activities, and there must be legal separation
between life and property/casualty insurers. Banks and insurers may be associated
under the same holding company structure. BaFin conducts onsite examinations and
has wide-ranging powers in cases where a company violates either market conduct
or prudential standards, going as far as replacing the company’s management or
shutting a company down. Following EU directives, there is no prior approval of
either rates or forms, but BaFin does have the authority to examine forms that are in
use for consistency with consumer protection laws. For example, there must be a
“cooling off” period with life insurance policies where the insured can cancel the
policy with no penalty and there are various disclosure requirements as well. BaFin
does not have the authority to intervene in specific consumer complaints, and there
is no government-sponsored ombudsman, as in the UK. There are, however, private
ombudsman services that seek to fill the same role, providing an alternative dispute
resolution service. With the private services, companies are bound to accept the
ombudsman’s decision, but only up to the sum of 5,000 (approximately $6,200),
less than 5% of the amount in the UK.
Germany has a private industry-run guaranty fund for the life insurance industry,
which began in 2002. Participation in the life insurance fund, Protektor AG, was
initially voluntary but is now mandatory for German life insurance companies. The
fund operates on industry assessments that are calculated according to company size.
It is pre-funded, with approximately 240 million (approximately $300 million) in
21 From the German “Bundesanstalt für Finanzdienstleistungsaufsicht.”
22 BaFin website, Responsibilities and Objectives, available at [http://www.bafin.de/bafin/
aufgabenundziele_en.htm#n9].

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assets in 2005 due to an earlier insolvency. In the future, the fund is intended to
increase to a maximum of 500 million (approximately $620 million). As these
assets are drawn upon, the fund is to be recapitalized from the industry, up to the
maximum of 500 million per year. There is no guaranty fund for property/casualty
insurers. It is possible that other insurers might step in and take over an insolvent
insurer, but there is no legal requirement that this occur.
The Netherlands
Following significant legal and market changes during the previous two
decades, including the removal of a prohibition on bank-insurer mergers in 1990, the
Netherlands began reforming its financial services regulation in 2002 and largely
completed the reform in 2004. Three previously separate regulators, the Dutch
central bank (DNB), the pension and insurance supervisor and the investments board,
were consolidated into two regulators operating on the “Twin Peaks” model that was
pioneered by Australia a few years before. One regulator, the DNB, was made
responsible for prudential regulation, while a second, the Authority for Financial
Markets (AFM) was created to oversee market conduct regulation.
The DNB and the AFM are the only direct regulators of insurance in the
Netherlands. Due to the country’s size and unitary governmental structure, there are
no sub-national structures playing a role in insurance regulation. The DNB licenses
insurers separately for seven different life insurance lines and 18 different non-life
insurance lines. A specific legal entity cannot hold both a life and non-life insurance
license. The DNB has authority over all aspects of prudential regulation, including
testing for solvency, capital requirements, and investment rules. It is implementing
a fair market value standard for both assets and liabilities and increasing its attention
to the fitness and trustworthiness of company management. In the case of insurer
difficulty or insolvency, it is authorized to direct an insurer to take specific steps to
protect policyholders or can go as far as appointing a receiver for the company and
liquidating the company to pay off policyholders’ claims. The costs relating to
insurance oversight are funded by the insurance industry.
The AFM oversees the market conduct of insurers and insurance intermediaries.
It issues licenses for those dealing with insurance consumers. Oversight by the AFM
is largely limited to enforcing information disclosure about insurance policies, with
extra disclosure required for policies with an investment component. It does not have
authority to regulate insurance forms or rates. The AFM is funded through levies on
the industries it oversees proportionate to the cost of the oversight.
There is no insurance guaranty fund in the Netherlands.
Canada
While much smaller than the United States, Canada shares a somewhat similar
federal structure with 10 provinces and 3 territories making up the country. The
approach to insurance regulation, however, is much different than in the United
States. In Canada, both the federal and provincial levels share the legal power to

CRS-11
charter and regulate insurers although some de facto specialization at the different
levels has occurred.
On the federal level, the Office of the Superintendent of Financial Institutions
(OSFI) has authority over all federally chartered financial institutions. OSFI was
created in 1987 through a merger of separate offices overseeing banks and insurers.
OSFI’s focus is prudential oversight through the formation and application of
regulations, ongoing risk assessment of financial institutions, and intervention when
necessary to mitigate risk. Canadian law regarding financial regulation is reviewed
every five years. In 2001, this periodic review resulted in new legislation
strengthening OSFI’s position as the primary federal regulator and increasing its
oversight powers. Part of the reason for increased powers was a change in the legal
structure for financial institutions allowing increased concentration, including, for
example, a holding company structure under which banks and insurers can be owned
by the same entity. Also in 2001, a new agency, the Financial Consumer Agency of
Canada (FCAC), was created to enforce federal consumer protection laws and
promote consumer education. OSFI remains the prudential regulatory body and is
the larger of the two entities. According to their websites,23 OSFI employs
approximately 425 people, while FCAC employs 35. Both agencies receive their
funding primarily through assessments and fees on the institutions they regulate.
While OSFI and FCAC regulate at a federal level, each province or territory has
legal authority to regulate provincially chartered insurers for both solvency and
market conduct. The provinces and territories also have the authority to regulate the
market conduct of federally chartered insurers, including requiring provincial licenses
and reviewing forms. The precise structure varies between the different provinces
and territories. Some have a separate agency for financial institutions; some regulate
through the Department of Finance or Attorney General. The Canadian Council of
Insurance Regulators (CCIR) serves a similar function to the NAIC in the United
States, seeking to “develop and harmonize insurance policy and regulation across
jurisdictions.”24 Like the NAIC, however, the CCIR has no authority to compel
provinces and their regulators to follow its efforts at harmonization.
The legal structure may appear very duplicative, with both levels of government
having somewhat overlapping oversight powers. The system, however, has largely
developed into a split system wherein the federal government oversees the solvency
regulation of almost all insurers, even provincially chartered ones, and the provinces
oversee the market conduct regulation of all insurers. OSFI provides oversight of
more than 90% of life insurance companies and more than 80% of property and
casualty insurance firms, as measured by assets. Some of this split is due to the fact
that many insurers, particularly life and health insurers, have chosen to be federally
chartered, which puts them solely under OFSI for solvency regulation. But it is also
due to the choice by three of the provinces — including the largest, Ontario — to
voluntarily accept federal oversight of the solvency of provincially chartered insurers.
On the consumer side, the FCAC is a recently created agency and is mandated to
23 [http://www.osfi-bsif.gc.ca] and [http://www.fcac-acfc.gc.ca].
24 CCIR website, About CCIR, available at [http://www.ccir-ccrra.org/CCIR/about_ccir/
index_en.htm].

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ensure compliance only with federal consumer legislation. Given this and its
relatively small staff, it seems to be expected that the bulk of consumer regulation
will continue at the provincial level. One important difference when comparing the
consumer regulation in Canada and the United States is the issue of rate regulation.
While many U.S. states require prior approval for rate changes or otherwise regulate
rates for many lines of insurance, rate regulation in Canada is limited solely to
automobile insurance rates and not every province/territory regulates these rates.
Canada has two guaranty funds, one for property/casualty insurers, the Property
and Casualty Insurance Compensation Corporation (PACICC), and one for life/health
insurers, Assuris. While both funds are private entities run by the insurance industry,
all property/casualty companies and nearly all life/health companies are required to
be members as a condition of licensure. This applies to both provincially and
federally chartered companies. The funds keep some liquid assets on hand,
CDN$120 million ($104 million) for Assuris and CDN$62 million ($54 million) for
PACICC, but otherwise operate on a post hoc basis — they would be bolstered by
assessments on the insurance industry in the event of an insolvency that required
more assets than remained on the books of the insolvent insurer. As is typical with
many guaranty funds, the Canadian funds aim to ensure that smaller policyholders
are protected to a greater degree than larger policyholders in the event of an insurance
company failure.
Australia
Following significant deregulation of the financial system in the 1980s and early
1990s, Australia undertook reform of its financial regulatory bodies in the late 1990s.
A Financial System Inquiry was created in 1996 and reported recommendations in
1997. Many of these recommendations were put into place in 1998, including the
abolition of the previous bodies supervising insurance, banks, and securities and the
creation of two new federal agencies to oversee all financial institutions. While the
federal government is the preeminent insurance regulator, the six states and two
territories retain authority to regulate two main classes of insurance: personal injury
motor accident and workers compensation.
The two federal insurance regulatory agencies focus on different areas. The
Australian Prudential Regulation Authority (APRA), as the name suggests, focuses
on prudential regulation, ensuring that “financial promises made by institutions
[APRA] supervise[s] are met within a stable, efficient and competitive financial
system.”25 APRA is responsible for granting and revoking insurer licences and has
broad regulatory powers including setting minimum capital requirements, assessing
insurer assets and liabilities, and reinsurance arrangements. Should an insurer
become insolvent, APRA oversees the insolvency and the settling of the company’s
affairs. APRA is largely funded through assessments and fees on the industry it
oversees. The Australian Securities and Investments Commission (ASIC), focuses
on the market conduct of all financial institutions. It is responsible for the licensing
of insurance agents and brokers. Its enforcement power includes both investigating
complaints brought by consumers and self-initiated investigations. It currently
25 APRA website, About APRA Home, available at [http://www.apra.gov.au/aboutApra].

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employs about 1,570 employees. ASIC is funded in the Australian federal
government’s general budget.
States play only a small part in regulating insurance in Australia. Their role is
largely limited to two lines, personal injury motor accident and workers
compensation. These two lines of insurance are compulsory for drivers and
employers respectively. Some of the state governments have created state-run
monopoly insurers to provide for the insurance. In others, there is state involvement
in an insurer of last resort while allowing competition among private insurers for the
rest of the market.
In general, there is relatively little rate and form regulation by Australian
insurance regulators.26 The primary exceptions to this, however, are the two lines
that are state-regulated, particularly in those states that run monopoly insurers. Both
rates and forms for personal injury motor accident and workers compensation are set
by the state regulators. In the aggregate, the rates are generally set to match claims,
so there is no direct public subsidy to insurance consumers for these two lines.
Forms for some other lines — motor vehicle, home building and contents, sickness
and accident, consumer credit and travel insurance — are governed by statute, with
specific coverages and exclusions required. Other lines are essentially unregulated
with regard to forms.
There is no guaranty fund in Australia. A technical study on the possibility of
a fund was begun in 2004. No policy conclusions, however, have been reached. In
the case of an insurer insolvency, the insurer’s remaining assets are liquidated and
policyholders’ claims ranked with other unsecured creditors to be satisfied out of
these assets. Policyholders do, however, enjoy priority with regard to any reinsurance
proceeds subject to the discretion of the court. There is no priority for smaller
policyholders.
Japan
Japan’s financial services regulation, like the rest of the governmental structure,
is centered in the national government in Tokyo. There is little sub-national
regulation of financial services firms. In 1996, Japan implemented a significant
deregulation of the financial sector and shortly thereafter began a restructuring of
financial regulators. Prior to 1998, oversight authority for and regulation of private
sector banks, insurers, and securities firms rested with the Ministry of Finance. In
1998, the Financial Supervisory Agency (FSA) was created under the direction of the
Prime Minister’s office. The FSA was made responsible for supervision and
inspection of financial services firms. Its power was expanded in 2000 and 2001
with the addition of responsibility for overall planning for the financial system and
authority to dispose of failed financial institutions. In 2000, the name was changed
to the Financial Services Agency. Unlike many other countries that have restructured
their systems, Japan did not combine previously separate regulators or change the
functional competence of existing regulators. The creation of the FSA was largely
26 There are standard forms, but an insurer can use make any changes to these forms as long
as the changes are disclosed to the insureds.

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a movement of the regulatory authority, and many of the staff, from the Finance
Ministry to an independent agency. FSA was, however, given some authority that
had rested outside of the Finance Ministry. This new authority included oversight of
small credit unions which had been performed at a local level.
The FSA has complete authority for both prudential and market conduct
regulation of all private insurers. All insurers and insurance intermediaries must be
licensed, but licensure is not limited to single-purpose entities. Insurers may offer
both life and non-life insurance products and subsidiaries of banks and commercial
firms may apply for insurance licenses. The limitation to private insurers, however,
is significant. The Japanese Post Office has acted as both a bank and a life insurer
for many years. In 2005, it held almost 39% of the life insurance assets in the
country.27 A postal privatization law was passed in late 2005. When the Japan Post
life insurance operation is privatized, it will come under FSA authority. Up to this
point, however, this share of the market has not been regulated by FSA or the
Ministry of Finance before it. In addition, there are cooperatives known as “kyosai,”
whose estimated share of non-life insurance is as high as 25% of nationwide direct
non-life premiums.28 These cooperatives are not subject to FSA regulation, although
legislation has been suggested to put them under the FSA umbrella. There are also
government-run insurance programs, including the entire workers compensation
insurance system and a reinsurance program for earthquake risks.
Prior to financial sector deregulation in 1996, insurers in Japan were required
to follow the rates and forms published by cooperative rating bureaus and approved
by the government. As part of the deregulation, this system was abolished. Now,
rating bureaus publish suggested rates, but insurers are not required to follow them.
Prior approval of forms has been replaced by a “notification system” allowing
insurers to use forms after notifying and allowing FSA to review them. Specific
regulation of rates and forms continues with the government-run or required lines of
insurance (i.e., workers compensation, earthquake, and compulsory auto insurance).
There are guaranty funds for both non-life and life insurance in Japan. The
Non-life Insurance Policyholders Protection Corporation of Japan was created in
1998. It is a private corporation that all private primary insurers, domestic and
foreign, operating in Japan are required to join. Insurers are assessed according to
premium volume. The corporation is intended to be pre-funded up to a maximum
amount of ¥50 billion (approximately $450 million), which is 10 times the annual
maximum insurance industry contribution. Policy holders in insolvent insurers are
guaranteed 100% of their claims for compulsory auto and earthquake insurance and
90% of claims for other eligible insurance lines (primarily personal lines). There is
no preference for small policyholders, but many commercial lines, which tend to be
27 Calculation by CRS from statistics found in Japan Post’s Postal Life Insurance annual
book 2005 at [http://www.japanpost.jp/top/disclosure/e2005/pdf/chapter6.pdf], p. 152, and
the Life Insurance Association of Japan’s website at [http://www.seiho.or.jp/english/
Facts/balance_sheet.html].
28 Hiroyoshi Wada, Current Situation and Main Issues in the Japanese Non-Life Market,
available at The Non-Life Insurance Institute of Japan website at [http://www.sonposoken.
or.jp/english/market].

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larger claims, are not eligible for guaranty fund protection. The Life Insurance
Policyholders Protection Corporation of Japan was also established in 1998. It is
likewise funded by industry assessments, though should the fund not be sufficient to
cover an insolvency, a direct subsidy from the government is possible. Policy holders
would receive 90% of their claim.