ICS adopted, but US to keep it at arms length while its approach gets 5 years to show similar results

–Updated with Treasury’s negative reaction to the ICS and industry response.

The International Capital Standard for insurers is making its long-awaited debut on the global stage but the U.S. will not be using it as-is: the International Association of Insurance Supervisors has voted in its annual meeting in Abu Dhabi Nov. 14 for the ICS to go into play with a five year monitoring period.

Key to the vote, though, is an agreement to include the U.S.-based methodology for computing capital standards in the same monitoring period rather than waiting five years — and then considering it then.

This assessment, backed by the U.S., will take place according to the same ICS timeline. After this period, if the aggregation method “is deemed to provide comparable outcomes to the ICS, it will be considered an outcome-equivalent approach for implementation,” the IAIS stated in a release.

Both insurance group participation in the monitoring and the results of this monitoring period are still fluid, though, as political, regulatory and industry sector pressure have coalesced against any solvency system that does not conform to the balance sheets of U.S. insurers.

The purpose of the ICS is to form a “common language” of capital to discuss and assess systemic risk and insurance company solvency across borders, to keep both companies and global markets out of trouble.

Team USA” — state insurance regulators, the Federal Insurance Office at the Treasury Department and the Federal Reserve Board — is claiming partial victory for advancing its cause in the pursuit of a framework that works for all jurisdictions in promoting global financial stability. The National Association of Insurance Commissioners was fervent in stressing, though, that is not committed to using this or another iteration of the ICS, now or in the future, if the computation methodology does not meet its needs. 

“While U.S. state regulators will not be implementing the ICS, we remain committed to an approach to group capital analysis which can and should be viewed as comparable to the outcomes achieved by the ICS,” stated Eric Cioppa, NAIC president and superintendent of the Maine Bureau of Insurance, in a Nov. 14 press release.

The U.S. aggregation methodology is currently under development at the NAIC, although the Federal Reserve has created a similarly-derived approach based on state insurance regulation for the insurers it regulates as thrift holding companies.

The U.S. has long held that its approach to capital cushions  works for the insurance industry it oversees.Swiveling to the IAIS strict quantitative model with its dependence on more volatile market-adjusted valuations would be detrimental to U.S. industry and regulatory interests, state regulators have argued, pointing to the long-tail investments on balance sheets here in the U.S. from products like indexed annuities and universal life products with return guarantees.

The NAIC suggested it did approve of the advancement of the ICS in the formal vote without committing to using it  in any formulation it deems unfit for its purposes. The voting by various jurisdictions is confidential so the votes are not publicly available.

However, Treasury made its displeasure clearly known.  “U.S. insurers should not face pressure to participate in a reference ICS that is not expected to apply in the United States and does not fit our markets. The current form of the ICS could also risk limiting U.S. consumers’ access to important long-term saving products,” a readout from Treasury stated.

It did  nod to the U.S. stakeholder  teamwork and negotiations that led to its decision.

For their part, U.S. state regulators “will continue to assess future progress to ensure the ICS and the approach to comparability develops in a way that does not run counter to U.S. interests,” the NAIC stated cautiously.

However, as one source noted, the devil is in the details and it is too soon to say whether there has been an agreement that will hold, given the subjective nature of comparable outcomes or equivalence.  The IAIS said in a press release Nov. 14 that it had agreed on a definition of comparable outcomes for the ICS. This means it will develop a system or tools to judge whether the U.S. aggregation method, although different, will produce comparable or substantially the same results as the newly-adopted ICS.

In doing so, though, IAIS could potentially still use its market-adjusted valuation ((MAV) approach to test for equivalence, for example, which would run contrary to the Team USA approach.

ICS Version 2.0’s  five-year monitoring period starts in January 2020. During this period,  internationally active insurance groups will submit data and undergo testing. The NAIC made clear though that the IAIS  “cannot mandate participation and ultimate decision-making rests with state group-wide supervisors.”

The NAIC noted that state regulators only supported the ICS vote in Abu Dhabi “after the IAIS agreed to significant changes resulting in an achievable definition and approach to assessment of comparable outcomes, providing a clear path for the Aggregation Method.”

The IAIS agreed to make other modifications the U.S. had sought, including ICS modifications, an economic impact assessment and operational and timeline enhancements.

“Members of Team USA have been clear that the pathway provided today ensures the Aggregation Method, as one part of a comprehensive U.S. regulatory framework, will be viewed through outcomes it provides and not simply a quantitative lens,” the NAIC stated in a press release.

Team USA appears to be sticking together.

“In coordination with the Federal Reserve and Treasury, we are committed to remaining actively engaged at the IAIS in the ICS project and all other work streams and are committed to advocate for, and only accept, those proposals that are in the best interest of U.S. consumers and insurers,” stated Massachusetts Insurance Commissioner Gary Anderson, who chair the NAIC’s International Insurance Relations Committee.  

The ICS has been at least five years in the making.

During the coming monitoring period, the ICS won’t trigger any supervisory action, the IAIS assured although U.S. rating agencies’ staff have been eager to find out how it would affect insurers’ credit ratings, industry executives have said.

Team USA left with “a scrap of paper and a promise to come to an agreement on ICS down the road… probably the best deal that was available but still just an illusory promise to agree to something down the road..,” one U.S. insurance industry participant said.

Team USA technical members are now pouring over the documents to figure out what exactly was decided and how certain financial terms are defined and applied.

Results during this period are meant to be confidential, as they have been during the development and testing phase.


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