The federal government, state insurance regulators and international regulatory bodies are all actively engaged in the development of capital standard calculations to be employed in the supervision of entities in their respective jurisdictions. This client alert provides an update on some key recent developments in this area.
Bipartisan Senate Bill Introduced on International Capital Standards
On June 14, 2017, Senators Dean Heller, R-Nev., and Jonathan Tester, D-Mont., introduced a bill (S.1360) that would require the Board of Governors of the Federal Reserve System (the Board of Governors) and the U.S. Treasury Secretary (the Treasury Secretary) to take certain actions before agreeing to or adopting any international capital insurance standard with an international standard-setting organization or foreign governmental or regulatory entity.
By way of background, the International Association of Insurance Supervisors (the IAIS), a standard-setting body comprising insurance regulators in multiple jurisdictions across the world (including the National Association of Insurance Commissioners (NAIC) and its members representing 56 U.S. jurisdictions), is in the process of developing capital standards for insurance groups that operate globally. Generally, the IAIS issues three levels of insurance regulatory guidelines, each applying to a progressively narrower subset of insurers. Insurance Core Principles, or ICPs, apply to all insurers. Insurers that are “internationally active insurance groups” (IAIGs) fall under the Common Framework for the Supervision of IAIGs, or ComFrame, which focuses on groupwide risks. Narrower still are the regulations that apply to insurers “whose distress or disorderly failure would potentially cause significant disruption to the global financial system and economic activity, i.e., global systemically important insurers (G-SIIs).” Although the IAIS has no formal legal or regulatory authority, it influences regulators around the world in its publications of supervisory principles, and operates and is looked upon (as the NAIC is in the United States) as a standard-setting body on international insurance regulation.
Although the NAIC and its constituent members are members of the IAIS, the NAIC and state insurance regulators have publicly voiced criticism about the IAIS’s alleged lack of transparency, its perceived failure to respect the regulatory standards developed in the U.S. via the state-based system of insurance regulation, and the “bank-centric” approach that the IAIS has taken with respect to capital standards for insurance companies.
It is in this context that Senate Bill 1360, or the International Insurance Capital Standards Accountability Act of 2017, has been introduced by a bipartisan group of Senators.
The bill would impose certain requirements that must be met before the Treasury Secretary and the Board of Governors could agree to or adopt any international capital insurance standard with an international standard-setting organization or foreign governmental or regulatory entity, including:
The text of the proposed international capital insurance standard must be published in the Federal Register, made available for public comment for a period of at least 30 days and submitted to certain designated committees of Congress.
The proposed international capital insurance standard must not be inconsistent with capital requirements set forth in the state-based system of insurance regulation.
If the proposed international capital insurance standard will apply to a company supervised by the Board of Governors (such as a non-bank systemically important financial institution, or SIFI), the international capital insurance standard must not be inconsistent with the capital requirements of the Board of Governors for that company. It should be noted that in late 2014, federal legislation was enacted clarifying that capital standards imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act on SIFIs could be tailored as appropriate for SIFIs that are insurance companies.
The bill would also require the Treasury Secretary and the Board of Governors to submit an annual report and testimony to Congress regarding progress on the development of international capital standards.
In additional to the above-listed requirements, before consenting to the adoption of any international capital standards, the Treasury Secretary and the Chair of the Board of Governors would, in consultation with the NAIC, be required to submit to Congress a study on the effect that the proposed capital standard would have on consumers and markets in the United States. Such study would be subject to a 60-day public comment period and review by the Comptroller General of the United States.
Separately, the bill would also require the Board of Governors to establish an Advisory Committee on International Capital Standards to be composed of 11 or fewer members that represent “a diverse set of expert perspectives from the various sectors of the insurance industry of the United States” including agents and brokers, academics, consumer advocates and experts on issues facing underserved insurance communities and consumers.
The NAIC has been focused on the development of a group capital calculation for U.S. regulators to use in evaluating the financial position of an insurer’s holding company system. As part of this process, on a conference call June 29, 2017, the NAIC’s Group Capital Calculation (E) Working Group (the GCCWG) discussed comment letters received in reaction to an NAIC staff memorandum on specific issues related to group capital calculation.
The March 22, 2017, memorandum, which had been exposed by the GCCWG at the NAIC Spring National Meeting, outlines possible approaches in designing group capital standards for U.S. insurers that do not prepare risk-based capital, or RBC, calculations, such as captives. The memorandum also discusses the use of permitted and prescribed practices in this context, recommending certain adjustments to group capital determinations to take into account the possibility of internal movements of capital, i.e., regulatory arbitrage. The June 29 conference call focused on, among other things, identifying in a comprehensive, centralized fashion those permitted practices currently in use in the various states for RBC reporting.
The memorandum also suggests special rules for life insurance company captives used in reserve financing transactions, such as those in the context of Regulation XXX and AXXX and Actuarial Guideline 48. Specifically, the memorandum asks state regulators to consider whether these captives should be permitted to value their liabilities under principle-based reserving (PBR) for legacy business (as to which PBR generally does not apply) as well as new business.
The interested-party comment period associated with the memorandum ended May 26, 2017, during which comment letters were received from key industry groups including the American Academy of Actuaries, the American Council of Life Insurers (ACLI) and America’s Health Insurance Plans (AHIP), as well as a number of prominent carriers.