Fed calls for data in quantitative impact study on ‘its’ insurers

Washington, Sept. 30 —

It’s here. The Federal Reserve Board today invited insurers to participate in a voluntary data collection for a quantitative impact study (QIS) to analyze the impact of various aspects of the regulatory capital framework.
The study will be designed to help the Fed to possibly tailor its capital requirements for its supervised institutions, which include savings and loans substantially engaged in insurance underwriting activities, and Dodd Frank’s nonbank/insurance systemically important financial institutions (SIFIs.)
Section 171 of the Dodd-Frank Act requires, in part, that the Board establish consolidated minimum risk-based and leverage requirements for depository institution holding companies and nonbank financial companies supervised by the Board that are not less than the generally applicable risk-based capital and leverage requirements that apply to insured depository institutions.
The QIS is more than a glimmer of hope for insurers who were concerned about draconian, ill-placed capital standards that did not befit their capital structure mixed with inflexibility in rule interpretation with regard to long-tail liabilities and premium collection.
The Fed says the QIS is being conducted to allow the Board to better understand how to design a capital framework for insurance holding companies that is compliant with Section 171, the so-called (Maine GOP Sen. Susan) Collins Amendment.

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

The study’s results could help tailor capital requirements for insurers even without the pending Congressional legislation, as the Fed follows for a two-track system.
Under the track where there is no legislative fix for the Collins Amendment, the Fed would “still be able to do some things because there are insurance products…that do not resemble existing bank products. And so in some cases, we can and we’re already planning to assign different risk weights to those based upon our assessment of the actual risk associated with — with those assets,” in the words of Fed Board Gov. Mark Tarullo before a Senate Banking Committee earlier this month.
By getting more information from the insurance companies, Tarullo said then, “We hope to actually find a few other areas where consistent with existing statutory requirements, we could still make some adjustments.”
He said it “all come down to core insurance activities and the different kind of liability risks that are associated with them, noting the assets are often the same but that it is on the liability side of the balance sheet where an insurer capital structure is unique and deserves a different treatment, perhaps.
Tarullo said that the Fed would “like to be able to take (the liability difference between insurers and banks) into account” during his testimony.
Information provided via the QIS should be as of year-end 2013, unless noted otherwise for purposes of reporting specific line items. Note that the Federal Reserve may follow-up with participating firms to better understand the information provided in the final submission package.
The QIS template and QIS instructions were developed exclusively for the purposes of this data collection exercise. The QIS data collection and subsequent analysis of that data are not to be construed as an official interpretation of other documents published by the Federal Reserve System or as representing any final decisions regarding implementation of a regulatory capital framework or reporting requirements for the firms in scope. Data and responses provided via the QIS will be used and maintained in a manner that  the Fed says is designed to preserve firm anonymity and confidentiality of the voluntarily-submitted data.

The reporting template is detailed with many subcategories that add up to toal capital, including amounts such as  capital requirements for underwriting risks, including international subsidiaries and total investments in the Tier 2 capital instrument of other financial institutions that the holding company holds reciprocally, where such reciprocal crossholdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold.

Exposures and debt obligations, performance standby letters of credit and transaction-related contingent items are also to be detailed in the line by line data call.

The Fed seems open to collecting any and all information the insurer can produce, in a form that can reflect statutory or national accounting standards.

The QIS template is divided into four parts: Part I: Regulatory Capital Components and Ratios; Part II: Risk-weighted Assets; Part III: Separate Account Data; and  Part IV: State-based or Foreign Equivalent Risk-Based Capital (RBC) Requirements.

Parts I and II are based on Federal Reserve’s regulatory capital schedule for holding companies modified as appropriate for the QIS, and ask for consolidated data under Generally Accepted Accounting Principles (GAAP). T

The QIS instructions for Parts I and II also include guidance on reporting insurance-specific assets, as well as general guidance on expectations for estimating GAAP numbers for companies that produce financial statements based only upon Statutory Accounting Principles (SAP).

Firms that produce financial statements based upon SAP only are requested to include narrative responses to certain questions to provide the Federal Reserve with a better understanding of the assumptions used to estimate amounts under GAAP, as well as a breakdown of certain regulatory capital components and insurance-specific assets.

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