For ‘Team USA’, ICS falls woefully short, but they won’t say they’ll vote against it in Abu Dhabi

Leaders of the insurance supervisory group known as “Team USA” came out swinging Sept. 12 against perceived design flaws in the international Insurance Capital Standard or ICS, but would not assure a Senate committee that they would vote against the proposed measure in November. 

In a hearing before the U.S. Senate Committee on Banking, Housing & Urban Affairs, the proposed ICS came under fire for clashing with the U.S. insurance market’s framework. The ICS is under development at the standard-setting body, the International Association of Insurance Supervisors.

Tom Sullivan, a director at the Federal Reserve Board, and its insurance czar, Steven Seitz, director of the Federal Insurance Office at the U.S. Treasury, and Eric Cioppa, president of the National Association of Insurance Commissioners, showed a united front as members of Team USA in opposing an ICS that utilizes a more volatile market-based valuation method for insurance. 

The IAIS’s ultimate goal  is a single ICS that includes a common methodology and/or one that brings about comparable results across global regions, a task that has been under serious development since annual field-testing began in 2015.  

Such an approach would be bad for the U.S. system of insurance and retirement products, with its buy-and-hold with its long-term approach to investing, they agreed in testimony before lawmakers.

The current ICS requirements would also “result in the non-recognition of certain financial instruments critical to financing U.S. insurance operations as qualifying capital… This potentially jeopardizes the ability of insurers to offer retirement products such as life insurance and annuities and make long-term investments, for example in infrastructure,” Cioppa testified.

Instead, the U.S. oversight system as well as the industry is pushing for an alternative approach aligned with U.S. supervisory systems, called the aggregation method. This method is a heightened version of the state-based risk-based capital system for the legal entities under the insurance holding companies while also establishing minimum capital requirements. 

The IAIS will meet in mid-November in Abu Dhabi and is expected to kick off the official five-year ICS monitoring period wit the adoption of an updated an updated version of the ICS known as version 2.0. After a period of five years of new, confidentially submitted data input to group-wide supervisors , ending in 2024, the ICS is expected to become a standard group wide capital requirement for global insurers.

“If U.S. authorities were to withdraw from ICS negotiations altogether, it would almost certainly destroy chances of a harmonized international capital standard in the near term,” stated Drinker Biddle members of the Insurance Regulatory and Transactional Team in a publication in May 2019, following up on the NAIC’s International Insurance Forum in Washington that month. 

Keeping these stakes in mind, Sullivan, Seitz and Cioppa, also Maine’s insurance superintendent, balked at providing a simple one-word answer to Sen. Tim Scott’s, R-S.C., question on whether they would vote ‘No’ on the ICS at the meeting. They all hedged and left their options open, explaining the situation was more nuanced and they plan to stay engaged and at the table. 

Can you confirm that since you think the ICS is “unacceptable,” you would vote ‘No?’” Scott asked Cioppa. 

“A lot can change during the monitoring period,” Cioppa responded. He noted there are meetings still occurring before the annual IAIS event in Abu Dhabi. 

“We have to stay engaged. That’s a needle we have to thread … The current construct is not going to work for us, Cioppa testified. “At the end of the day You can’t put lipstick on a pig if they don’t change the pig,” Cioppa explained to Scott.

After the metaphors and  arguments for continued nuanced considerations from the witnesses, Scott told them, “I still didn’t hear ‘No.’” 

The senator, who was an insurance professional in the annuities market formerly,  expressed concern about the path forward for the world’s largest insurance market.

If we are at the table but not making progress at the IAIS, then that tells me that b ing at the table “is not enough—that in fact we should do something that sends a clear signal,” Scott said toward the end of the Thursday morning hearing. 

Cioppa did state in his written testimony unequivocally, “But let me also be clear, we will not be implementing the current ICS in the U.S. 

However, Scott warned the insurance industry oversight panel that he needs “the confidence that the system has to be protected against all odds or I should rethink my commitment to those folks who are going to represent Team USA.”

Sullivan responded to the same question by noting that, “Directionally, we are there but there’s nuance in the give-and-take of international dialogue.” Sullivan, formerly Connecticut’s insurance commissioner, assured Scott that Team USA is “not going to accept a bad deal,” and added, “we’ll see what’s in front of us in November.”

Seitz, the FIO’s third director since the office got started in 2011 and its former deputy, said that questions on the ICS are not binary question and Team USA would push for progress in the next two months. 

“Treasury is working to improve the design of the ICS so that it more appropriately reflects the unique business model of insurers … The ICS needs to appropriately consider long-term savings products that are critical to millions of Americans entering retirement,” Seitz testified. 

The FIO director said that the ICS adopted in November will most likely need further work. 

The aggregation approach or chassis incorporates the NAIC’s own Group Capital Calculation (GCC) and by the “Building Block Approachproposed just last week by Sullivan’s team at the Federal Reserve for its Savings and Loan Holding Companies engaged mostly in insurance operations. 

Insurance company data confidentiality remains a big concern of insurers participating in the monitoring process.

Cioppa acknowledged to the senate committee that no capital standard is prescribed at this point but if a number gets out there can cause material harm to a company.

Sen. Bob Menendez, D-N.J., had noted that debt underwriters and rating agencies might be seeking data furnished by the ICS process and “companies continue to tell us that more assurances are needed” to protect the release of this data. 

needle and three assorted color sewing threads

Photo by Suzy Hazelwood on Pexels.com

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