First Ever: Global Capital Standards for Insurers

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On October 9, 2013, the International Association of Insurance Supervisors (IAIS) took a significant step toward developing a first-ever risk-based global insurance capital standard (ICS). The target date for development of the ICS is 2016, with full implementation beginning in 2019 after two years of testing and refinement.

Peter Braumüller, chair of the IAIS Executive Committee, said: "[i]t is undeniable that the business of insurance is global, and global issues demand global responses" and that "[t]his is why the IAIS, whose Members constitute nearly all of the world's insurance supervisors, has committed to develop and implement the first-ever risk based global insurance capital standard." In the official IAIS press release, Michael T. McRaith, director of the U.S. Treasury Department's Federal Insurance Office (FIO) and chair of the IAIS Technical Committee, noted that "[f]rom the financial crisis, we learned that our global financial regulatory regime should be more robust and comprehensive in scope, and jurisdictions should share a commitment to global standards."

The IAIS has been working since 2010 on a Common Framework (ComFrame) for the Supervision of Internationally Active Insurance Groups (IAIGs), which is intended to establish a comprehensive framework for supervisors to address group-wide activities and risks of IAIGs. The IAIS announcement noted that ComFrame has always included a capital component within its solvency assessment procedures. Now, the capital component will be used as the starting point for the development of the ICS, which will then be included in ComFrame.

The IAIS also announced that by late 2014 it will have finalized and made ready for implementation "straightforward, backstop capital requirements" for insurers that are designated as global systemically important insurers (G-SIIs). In August,1 we reported that nine international insurance groups, including AIG, Prudential Financial and MetLife, have been designated G-SIIs. The new capital requirements will serve as the foundation for their "higher loss absorbency" requirements.

Ben Nelson, CEO of the National Association of Insurance Commissioners (NAIC), issued an immediate response to the IAIS's announcement:

Although U.S. state insurance regulators continue to have serious concerns about the timing, necessity, and complexity of developing a global capital standard given regulatory differences around the globe, we intend to remain fully engaged in the process to ensure that any development augments the strong legal entity capital standards in the U.S. that have provided proven and tested security for U.S. policyholders and stable insurance markets for consumers and industry.

In September, we noted that "there is a marked reluctance among NAIC members to give the FIO, or international organizations such as the FSB [Financial Stability Board] or the IAIS, power to regulate U.S. insurance institutions."2 The NAIC's views are set out in more detail in a paper entitled U.S. Regulators' Views: IAIS Common Framework for the Supervision of Internationally Active Insurance Groups "ComFrame," dated August 2013. The following passages indicate that the NAIC's views on group capital are not consistent with those of the IAIS—or the FIO:

U.S. insurance regulators support the development of ComFrame to the extent that it results in an outcomes-focused framework that enhances supervision of IAIGs. We would oppose ComFrame to the extent that it results in prescriptive and duplicative layers of global requirements that mandate changes to U.S. supervision inconsistent with the best interest of U.S. insurance companies or customers.

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To the extent that ComFrame involves a group capital calculation, it should be part of a group capital assessment, not a strict regulatory requirement. The group capital assessment should include an understanding of local jurisdictional capital requirements, an assessment of intra-group transactions, the accounting framework, real-world considerations regarding the nature of fungibility of capital, and use of stress and scenario-based testing.

The development of a widely accepted group capital standard for insurers, and group supervision generally, will likely be a drawn-out process. It will be interesting to see how the involvement of federal regulators in the new insurance regulatory regime will influence this process. The statement by FIO Director McRaith indicates that a global insurance capital standard has his support. If the Federal Reserve's application to become a member of the IAIS and its Executive Committee is successful, there will be another U.S. federal regulator—this one with a banking focus—involved. It remains to be seen whether the influence of the NAIC in the future of insurance regulation is being diluted.

Notes

  1. Duane Morris Alert, "Financial Stability Board Designates Nine Global Insurance Groups as 'Global Systemically Important Insurers,'" August 5, 2013.
  2. Duane Morris Alert, "Insurance Regulatory Update - Holding Company Supervision, Designation of Prudential Financial as Being 'Too Big to Fail,' Principle-Based Reserving and Captives," September 23, 2013.