Forty-two senators wrote to Federal Reserve System Vice Chairman Randal Quarles May 13 urging the Fed to reject the requirement for a global capital standard for U.S. insurers while questioning work done so far on a standard that it says is a mismatch with the U.S.system.
U.S. regulatory agencies and supervisors at the state and federal level have for months pointed out that the capital standards that could be adopted by the International Association of Insurance Supervisors at its annual meeting in Abu Dhabi in November are nonbinding.
However, the specter of tangible impact on U.S. insurers is stoking fears among the industry and support for those worries from Congress.
“Our concern is that, even if those standards are nonbinding on the U.S., they may still present real and negative ramifications for U.S. insurers operating in markets abroad,” the letter stated. “For example, U.S. insurers operating abroad could face various non-tariff forms of regulatory retaliation which would harm U.S. consumers as well as global insurance markets,” the group of bipartisan Senators who signed the letter stated. A few Democrats, including Sen. Kyrsten Sinema, D-Az., signed on.
U.S. insurance regulators and the Senators oppose the proposed framework that uses a market-adjusted valuation approach that they feel does not suit the long-term guarantees of life insurance products. This would be problematic for insurance products “necessary for providing retirement security for aging populations,” according to the Republican senators.
For its part, the Fed is still working on its own group-based capital standard based on the NAIC-supported aggregation approach, sometimes called a building-block model for assessing group capital.
A Fed spokesperson responded to the letter by stating, “we have received the letter and plan to respond.”
The senators want the Fed to come out publicly in support of the aggregation approach as well as state-based capital regimes before the November meeting.
According to a source speaking on the sidelines of the NAIC international insurance forum May 13, insurers are being asked by rating agencies and others for capital calculations in advance of any adoption of the ICS this fall. This would impact the insurers risk and debt profile.
Ann Kappler, senior Vice President and deputy general counsel of Prudential Financial said on a panel at the NAIC international forum May 14 that “we are worried (the ICS standard) will become a quantitative action,” rather than qualitative.
Third-parties want to see the numbers, Kappler noted, mentioning rating agencies and fiduciaries. The rating agencies and other third parties are asking because “they think it (the ICS) actual means something,” Kappler said.
For instance, the proposed ICS framework could “introduce excessive volatility, and involve excessive reliance on supervised firms’ internal models,” the senators wrote in their letter.
The senators also asked the Fed to share its work plan “for achieving international recognition of the U.S. aggregation approaches to group capital and other well-developed, proven insurance solvency regulatory systems.
The Congressional letter was led by the signatures of Senators M. Michael Rounds, R-S.D. and Tim Scott, R-S.C.
The large swathe of senators were not alone in calling for a halt to any adoption of what they see as an ill-fitting capital regime.
At the NAIC international insurance forum May 13, U.S. Treasury Secretary Steven Mnuchin and NAIC President and Maine Insurance Superintendent Eric Cioppa emphasized in public remarks the need for international standards that reflect the U.S. regulatory structure. Mnuchin also discussed the long-term savings products necessary fee retirement security that could suffer at the hands of the market-based ICS.
According to Cioppa, “those most impacted by the ICS are near unanimous in highlighting concerns, whether due to design, perception, communication or future implementation. ” These include companies that are undergoing field-testing.
Cioppa said in his public remarks “that somewhere along the way of developing the ICS, rather than guiding our journey to arrive at our agreed-upon destination, the ICS seems to have gotten into the car building business, stipulating the acceptable chassis, engine, and paint color as well.”
“If ICS Version 2.0 is to be launched smoothly at the end of this year, the IAIS will need to address these concerns, and the clock is ticking,” Cioppa stated.
NAIC CEO Michael Consedine later weighed in with a blog post on LinkedIn using his film critic chops to apply the game theory in “A Beautiful Mind” to a potentially unfortunate ICS outcome of not win-win but of winners and losers.