House hearing should bring U.S. approach to ICS into sharper focus

The NAIC meeting is kicking up a lot of talk on international capital standards, and position or positions of TEAM USA may come more into focus during a hearing of the House Financial Services Committee Nov. 18 as Federal Reserve Board insurance policy czar Tom Sullivan, Federal Insurance Office Director Michael McRaith and NAIC Vice President and International Committee Chair Michael Consedine are called upon to testify.
So far, all we have on paper regarding the U.S. ICS approach is the NAIC working group discussion draft of two potential group capital methodologies: RBC Plus and Cash Flow. A hybrid of the two is also under discussion and generating buzz, although no one has endorsed it yet.
“RBC Plus” utilizes selected design features from the existing legal entity RBC framework. The accounting basis for this methodology is the insurance group’s U.S. GAAP accounts, says the NAIC’s ComFrame Development and Analysis Working Group, which people lovingly call C-Dog, aka CDAWG.
The “Cash Flow” concept follows the general methodology of asset adequacy testing for insurers. This methodology is being proposed partly in response to the sentiment that an ideal global insurance group capital standard should be accounting independent and thus would be able to perform its function in any accounting environment, according to the CDAWG group.
Property casualty insurers have expressed concern about the Cash Flow method, which would require significant use of internal models and scenarios would have to be updated periodically, and, as CDAWG has written, may not be easily understood or compared to a factor-based or RBC approach.
NAIC staff states CDAWG has not completed sufficient research to develop a potential hybrid approach, but it is possible that a combination of both the above methodologies could be developed that would reflect a factor-based approach (RBC Plus) as the minimum group capital requirement,coupled with a cash flow/stress testing approach as a complement to the minimum group capital requirement.
So far, any agreement among U.S. agencies is focused on avoiding market valuation for the assets underpinning the capital used for any standard. The International Association o Insurance Supervisors will put out its draft on the ICS by the end of December. No one seems certain if the U.S. or its various supervisory component will be submitting their work on an alternate U.S. approach by early December.
SNL Financial will be covering the capital standard proposals as they move forward and the hearing, so stay tuned. I will try and provide a link here later from our coverage.
Here’s our SNL Financial Coverage: https://www.snl.com/interactivex/article.aspx?id=29916991&KPLT=6

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