Heard at the D.C. Insurance Forums: To Go Global or not to Go Global or, Can a ‘Broken Chassis’ be Fixed?

Washington, May 17, 2022 –At recent insurance regulatory forums in Washington D.C, international insurance supervisors, state officials and other participants wrestled with the tensions of multi-national issues and whether the necessary responses should be global or not. 

The contrast between those talking about cooperation and consensus and those in the U.S. primarily focusing on local market solutions was stark on issues from climate change to international capital standards.

Federal Reserve Board Senior Associate Director Tom Sullivan, who has both banking and insurance supervision in his portfolio, compared the insurance capital standard (ICS), which will apply internationally active insurance groups (IAIGs) to a “broken chassis.”

No matter how one tries to rearrange the components or salvage the chassis to make it operate again, it is still broken, Sullivan said of the International Association of Insurance Supervisors‘ key financial solvency-monitoring tool according to multiple people in attendance. Sullivan spoke May 11 at the annual Networks Financial Institute’s insurance public policy summit sponsored by the Scott College of Business at Indiana State University and Faegre Drinker in Washington. The former Connecticut insurance commissioner stressed that the U.S. wants an ICS that respects the U.S. market.

The Fed, where Sullivan has served through the long development process, is developing a building block method of aggregation for a consolidated capital requirement for domestic IAIGs alongside work by the NAIC with its own solvency-monitoring Group Capital Calculation(GCC). The efforts of both organizations are tied together and bound as the aggregation method as they are built upon, or leverage, the state system of risk-based capital calculations to capture enterprise-wide risk. 

Two days later, Victoria Saporta, chair of the IAIS Executive Committee, which is shepherding the ICS through its five-year monitoring period that began in 2020, said the group is close to releasing a consultation paper and is closer on “equivalence” than it was in 2018.

Saporta was referring to the granting of the U.S. capital calculation method, also known as the aggregation method, to be “considered a viable alternative to the ICS for measuring group capital,” as the National Association of Insurance Commissioners puts it. The IAIS official, who serves as executive director, prudential policy, Bank Of England, spoke May 13 at the NAIC-sponsored annual international insurance forum, also held in the U.S. capital. 

Fitch Ratings recently noted that, in theory, the consolidated group-wide capital measurement standard known as the ICS whose most important principle is comparability of outcomes across jurisdictions for easier cross-border oversight and analysis “should improve comparability between insurance groups that operate under different solvency regimes” globally.

 “However, it will only be effective if all major jurisdictions implement it consistently,” Fitch stated in a May 10 release, just before the pair of Washington meetings got underway. 

Yet if what U.S. officials are saying continue to hold sway, challenges await.

NAIC President and Idaho Insurance Director Dean Cameron made it clear in public remarks at both forums that there are dark clouds gathering with regard to the ICS’ application and acceptance by U.S. regulators. 

“The NAIC is being forced into a decision where we will have to make some very tough decisions,” he said at the Networks Financial meeting. Cameron referred to an inferior product, in discussing the ICS while adding that it is “critically important “ that the NAIC does what it feels is right, whether it is in agreement with the IAIS or not. 

At the international forum, the NAIC president for 2022 continued to remark on concerns over the developing ICS process. 

Cameron “acknowledged the NAIC’s disappointment that we have been unable to reach agreement yet on comparability criteria that reflect a viable path forward for the Aggregation Method,” according to an NAIC website summary of his remarks. This lack of agreement directly threatens the foundation of the NAIC’s agreement with the IAIS in at its meeting in Abu Dhabi in November 2019, according to the NAIC.

The ICS Version 2.0 supposedly allows for comparable outcomes to be assessed during the five year monitoring period before 2025 implementation and enforcement. At the Abu Dhabi meeting, the IAIS agreed to allow for comparable outcomes to its ICS to include the U.S. methodology for computing group capital requirements for the IAIGs.

Whether there is a compromise on aggregation method/ICS comparability criteria by the time the IAIS meets in Croatia in mid-June — less than a month away — or whether the NAIC walks away remains to be seen, but the window is short and obstacles appear to be large.

Bryan Pickel, head of external affairs for Prudential Financial, Inc.,
said as part of a May 13 panel discussion on charting the future of insurance supervision in a rapidly changing world that the “end of globalization as we know it is something the IAIS should think about.” 

Pickel also pointed out that Prudential is a global company but not global in market-to market practice with bricks and mortar in many countries, responsive to the country it in which it is doing business.

The IAIS and U.K.’s regulator Saporta in her remarks March 13 at the NAIC forum discussed consensus on various aspects of handling climate change risk, and called the challenges of climate change very sobering, with a need for “action now.,” as delayed action is in itself a risk for the insurance sector. A panel moderated by Connecticut Insurance Commissioner Andrew Mais at the NAIC meeting also kicked off by identifying “consensus.”

Cameron had also spoken about consensus and working together on climate chance at the earlier Networks Financial forum, referring to collaboration among regulators and other parties on preventing and mitigating damage from wildfires and floods moving forward. 

However, the Idaho insurance director voiced his displeasure at thee Networks Financial summit on politics and duplicative efforts from different regulators. 

 The NAIC recently adopted an updated climate disclosure form standard for reporting climate-related risks, that is in alignment with the benchmark international Task Force on Climate-Related Financial Disclosures (TCFD).

Meanwhile, the Securities and Exchange Commission’s lengthy proposed disclosure rules on climate risk, announced March 21, are drawing some consternation from others in the sector, industry and presumable some state regulators as well. The SEC climate risk disclosure behemoth has been described as extensive and overly-prescriptive, and will face challenges from the industry, according to representatives attending the Washington meetings. Comments are due to the agency shortly, May 21, and many are anticipated. UPDATE week of May 20: Comment period has been extended through June 17.

However, even with fissures and concerns between nations, between organizations, between states and federal approaches and even among states themselves, there did seem to be more goodwill on climate risk issues than on international capital standard comparability and implementation.


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