Insurers with federally insured depository institutions such as State Farm, TIAA and USAA will soon — perhaps by mid-September — be subject to minimum consolidated capital requirements from the Federal Reserve Board, according to sources, in a long-anticipated move coming more than eight years after the Dodd-Frank Act gave the Fed certain insurance oversight powers.
The capital rules are colloquially known as the “Building Block Approach,” or BBA, and cleave close to the existing state regulatory insurance capital framework for the insurance subsidiaries of the holding company. A proposal for the BBA was first unveiled by then-Fed Gov. Danel Tarullo in May 2016.
The Fed will calculate the insurer’s total minimum capital requirement by generally adding up the capital positions of the subsidiaries, insurance, banking or otherwise and scaling them under a unified capital requirement.
Under Dodd-Frank, the Fed has regulatory responsibilities for insurance holding companies with savings and loan and thrifts as well as those deemed systemically important.
For example, TIAA Direct is the banking front of TIAA’s bank-created trust company and is headquartered in St. Louis, Missouri. The three insurers who received latter designation have since shed their label, leaving a handful or more of insurance savings and loan holding companies. According to the Fed, these insurance thrift holding companies “represent just under 10% of U.S. insurance industry assets and span a wide range of sizes, structures, and business activities.”
The Fed’s capital regime would not go so far as to recognize the “permitted accounting practices” that states grant, such as in the high-profile case of GE Capital (no longer subject to any Fed supervision), which won approval it said in a March 2018 filing from Kansas insurance regulators to recognize reserve increases over a seven-year period . GE was permitted by Kansas to do so to address an almost $15 billion long-term care insurance reserve shortfall.
The BBA aggregation process would prevent the double-counting that could stem from intercompany transactions, according to Fed Vice Chairman for Supervision Randal Quarles, speaking early this year at a life insurance industry roundtable event in Naples, Florida.
As Quarles explained in his speech, the aggregation of the building blocks’ capital “requires a further step after adjustments are applied,” a methodology called scaling to create an apples to apples risk measurement for the different ratios and thresholds of the subsidiaries. This measurement would result in the minimum capital requirement for the entire enterprise.
“Our goal with the BBA is to capture all material risk of each supervised organization, leverage existing legal-entity standards, and minimize burden,” Quarles stated in his speech to the American Council of Life Insurers at its Jan. 9 event.
Because the BBA is derived from the state-based insurance capital standards of the National Association of Insurance Commissioners, it will reinforce “the important role that insurers’ investments play in our economy,” Quarles stated.
The insurance industry has long-clamored for rules that would respect its particular business model, not one that was designed for banks. The Collins Amendment to Dodd Frank allowed the Federal Reserve Board the flexibility to apply these insurance-based l standards to domestic insurers in crafting the rules.
However, the insurer’s depository institutions would get the bank regulatory regime treatment as would nonbank and noninsurance activities or e building blocks of the whole enterprise. These are expected to include derivatives and some hedging activities.
Once the enterprise’s entities are grouped into building blocks, and capital resources and requirements are computed for each building block, the enterprise’s capital position is produced by generally adding up the capital positions of each building block.
Work on the capital standards of the Fed has been under development alongside the work it and members of the NAIC together with the Federal Insurance Office at the Treasury Department, or “Team USA,” have been doing to advance a U.S.-friendly global group capital calculation through the International Association of Insurance Supervisors or IAIS.
Meanwhile, the NAIC is working in its liquidity stress testing framework for large life insurers through its Macroprudential Initiative (MPI).
The Fed did not comment on the proposed rules or their release.