IAIS develops BCR; U.S. weighs whether they are evolutionary or revolutionary

The International Association of Insurance Supervisors (IAIS) completed its first step in process to develop group-wide global insurance capital standards during its conference in Amsterdam. This week it announced that it had concluded development of the first-ever global insurance capital standard – Basic Capital Requirements (BCR) for global systemically important insurers (G-SIIs).
The BCR has also been endorsed by the G-20’s own Financial Stability Board (FSB).
“With design of the BCR now complete the IAIS has concluded the first of several steps in its process to develop group-wide global insurance capital standards,” said Peter Braumüller, chair of the IAIS Executive Committee, which also includes Federal Insurance Office (FIO) Director Michael McRaith, a Treasury official, and two U.S. state regulators.
Treasury and the Federal reserve Board as well as the Securities and Exchange Commission sit on the international FSB.
This comes as expected–now it is up to the countries to absorb it or otherwise fit it into their regulatory methodologies.
In the U.S., that means the primary regulator, whether the states or the Fed, depending on whether the insurer owns a thrift/savings & loan has been deemed a systemically important financial institution subject to enhanced prudential regulation.
The adoption in whole or part should be interesting as not all U.S. attendees appear to be on the same page, although some would wish it so.
McRaith, according to those live-tweeting the event at #iais2014 (let’s be clear; this blogger could not attend and turned to social media and attendee feedback) apparently said on a panel on capital standards that there was “a great desire” to move forward with them as long as “no one has to change.”
McRaith also called the BCR development a significant milestone as it is the first ever group capital standard, according to Tweets from attendees. He also focused on the importance of the globalized insurance markets and also noted, according to Tweets, that he was not worried about a monoculture developing with this capital standard.
The IAIS is developing no less than three separate capital standards for SIFIs: the BCR and the higher loss absorption (HLA) for G-SIIs, and the Insurance Capital Standard (ICS) for Internationally Active Insurance Groups (IAIGs.)
The BCR will serve as the comparable foundation for the HLA. Together, BCR and HLA will provide a consolidated group-wide capital requirement that will apply to G-SIIs only. When the ICS is finalized, it will replace the BCR in its role as the foundation for HLA. Got it?
The ICS is expected to be adopted in late 2018 and the HLA from 2019 onward, initially based on BCR as a foundation, moving later to ICS.
From 2019, G-SIIs will be required to hold capital no lower than the BCR plus HLA.
Missouri Insurance Director John M. Huff, in his keynote address,speaking on behalf of the NAIC, notably wavered from the perceived absolutism of a capital principle. He called upon global regulators to “acknowledge that our approaches to capital can be very different.”
Huff called upon the global community to give jurisdictions time needed to “develop standards appropriate to the insurance industry, and resist the pressure to homogenize regulation to treat all products and all investments the same.”
“In the U.S. as an example, with the exception of SIFIs, … the goal of the insurance capital requirements is not to prevent failure of a firm but to ensure the impact to policyholders is minimized. In other words, firms are allowed to fail but policyholders still need to be protected,” Huff stated.
He cautioned that if regulators require too much capital, then prices for consumers go up.
“A delicate balance needs to be achieved, and we must leverage other supervisory powers to complement capital such that we do not become over reliant on it,” Huff stated.
McRaith did acknowledge that a wide variety of views must be taken into account in development of global standards, according to a Tweet from an IAIS official.
Huff partially echoed that sentiment in his remarks: “When it comes to core principles, let’s truly make them principles where there is broad agreement they are critical to policyholder protection …true international norms that individual members can implement in a way appropriate for their home jurisdiction.”
“When it comes to the capital requirements, …we need to recognize that given the timelines, we need to work with present supervisory systems rather than thinking such standards could be used to dramatically reshape those established under existing law. As we move forward on these issues, practical and implementable change will be evolutionary, not revolutionary,” Huff stated.
Based on end-2013 data received during field testing, the average level of the BCR is 75% of the reported jurisdictional group-wide Prescribed Capital Requirement for G-SIIs, and 67% for all 2014 field testing volunteers, the IAIS stated.
Beginning in 2015, the BCR will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of refining the BCR.
The development of HLA requirements to apply to G-SIIs is due to be completed by the end of 2015. The final step is the development of a risk-based group-wide global ICS, due t by the end of 2016 and applied to IAIGs from 2019.
BCR is calculated on a consolidated group-wide basis for all financial and material non-financial activities. It is determined using a “factor-based” approach with 15 factors applying to defined segments and their specified exposure measures within the main categories of a G-SII’s activity – traditional life insurance, traditional non-life insurance, non-traditional insurance, assets and non-insurance.
All holding companies, insurance legal entities, banking legal entities and any other companies in the group will be included in the consolidation.
For more information, see PDFs on the iAIS website here.

NAIC does its housework, ponders internat’l stance amid concerns

Reports from the National Association of Insurance Commissioners (NAIC) summer meeting in Louisville, Ky., demonstrate a desire for the United States to take a uniform national position in international insurance capital regime debates, work on a better way to achieve sound corporate governance and make progress on the reinsurance framework for captives.
On the domestic front, the Executive Committee of the NAIC adopted the XXX/AXXX Triple X/ Actuarial Guideline 38) Reinsurance Framework, which carries with it an action plan to develop proposed changes to the insurer/captive regulations and model laws dealing with ceding reserves in these transactions.
The framework would require the ceding company to disclose the assets and securities used to support the reserves and hold an risk-based capital cushion if the captive does not file RBC. It would not change the statutory reserve requirements. 

The NAIC agreed to move forward to develop a comprehensive framework proposal while numerous groups will develop the details to create the framework, to be approved later by NAIC membership.

The XXX/AG 38 issue propelled itself to the regulatory spotlight more than three years ago in the life actuarial task force meetings, and in the ensuing months and  years, caught the interest of the  Financial Stability Oversight Council (FSOC), the Federal Insurance Office (FIO) and the Federal Reserve. The pressure to find solutions has been ongoing, with the NAIC using its resources and an outside actuarial consultant to create the semblance of a national system  to deal with what some in the life insurance industry say are redundant reserves that choke their books ad others claim is regulatory arbitrage.

The NAIC also  adopted a Corporate Governance Annual Disclosure Model Act and supporting Model Regulation Monday, Aug.. 18. Under it, U.S. insurers will be required to provide a detailed narrative describing governance practices to their lead state or domestic regulator by June 1st of each year. This narrative will be protected by strict confidentiality measures,  which was vastly important to insurers as they would be baring their governance practices to regulators. 

The new corporate governance disclosure requirements are expected to start in 2016, according to the NAIC.

An international capital standards forum featured insurers and regulators, both from the states and the Federal Reserve Board’s insurance policy shop pushing for a U.S.-centric approach or position, with both life insurance and non-life insurance standards, according to one attendee.
The International Association of Insurance Supervisors (IAIS) is creating insurance capital standards under the auspices of the Financial Stability Board (FSB.)
Insurers are concerned that standards are appropriate to the life insurance industry, which offers long duration products and requires a different valuation principle to capture market swings over a generational period of policy obligations. Otherwise, insurers argue, these market swings could create capital standard costs that would be passed on to consumers making products such as long term care and annuities, essential retirement products, unattractive to consumers.
Even the consumer advocates, who may or may not have a role in the  IAIS going forward, if the IAIS drops its observer status, pointed out that the focus on capital is misplaced, according to attendees. It doesn’t address defective, systemically risky products, it was argued.
Pennsylvania Commissioner Michael Consedine noted that when the U.S. speaks with one voice, it is hard to ignore. Consedine is NAIC vice president and chair of the International Insurance Relations (G) Committee (NAIC) but it is hard to fathom what that will be with the FIO  reflecting the Treasury position and maintaining an essential role at the IAIS, along with the NAIC and now the Federal Reserve.

The NAIC, according to a source recap of the meeting, would like to see any model adequately tested, and generally embraces its approach, which protects consumers and not allow capital to flow outside the policyholder protection net.
Consedine has a big year ahead of him as NAIC president-elect and international leader on state insurance regulatory matters–if his governor, Tom Corbett, a Republican, survives a challenge from Democratic opponent, Tom Wolf. Recent polls show Corbett, who was drastically down in the polls, starting to gain some points back.

Another veteran on the international state regulatory scene, the previous head of the G Committee and a member of the IAIS executive committee, Tom Leonardi, is also appointed by a governor facing a tough reelection campaign in Connecticut, where the Republican contender, Tom Foley is polling ahead of Gov. Dannell Malloy.

Leonardi said that although there are potential benefits to adoption of a uniform global capital standard, he still questions the need for a global capital standard. Capital is not fungible, particularly when a company is in financial distress, he noted at the meeting. Implementation with another capital standard that has little in common with existing regulatory standards and industry practices make it a very expensive process to implement, he told attendees at the event.  There is a need to look at a jurisdiction’s entire solvency regulatory regime, which is not standard around the world, Leonardi noted.  

A concern we have, stated Montana Insurance Commissioner and current NAIC president-elect  Monica Lindeen in  an International Insurance Society address June 23,  “is that the last crisis was a banking crisis, not an insurance crisis, yet much of the international discussion and some of the prescriptions proposed for insurers seem very similar to banking solutions developed by banking regulators.”

“In the U.S., we regulate insurance on a legal-entity basis…. If the liabilities are in the U.S., then we expect the assets and capital that support the U.S. business to be there as well. In fact, the strongest protection to the financial system and policyholders might well be that each legal entity, including the holding company, holds capital commensurate with its risks,” Lindeen told the international audience.

IAIS proposing removing ‘observer’ groups, adding public forum and phone time

UPDATE with NAIC consumer rep comment

July 31, Washington—In a move that had been anticipated by some for awhile, the International Association of Insurance Supervisors (IAIS) told members and observers that it is proposing the elimination of “observer” status. If this proposal becomes policy, it would go into effect January 2015.
Comments on the proposal, which is expected to become public Aug. 4, will be due on Sept. 2.
The IAIS, which did not confirm this action or timeline. It has been developing and weighing new processes for participation by interested parties for some time and will continue to do so.
Some groups have in the past been vocal about their  criticism of the move toward what they feel has been a trend at the IAIS toward less transparency and more closed meetings. Observers say the policy will definitely change the dynamics  of interaction with the IAIS at a critical time.

A global insurance capital standard is in the works by 2016 for globally active insurance groups, with implementation by 2019, alongside the continued development of capital standards for global systemically important insurers (G-SIIs) and possibly for global reinsurers.

The IAIS is also developing basic capital requirements (BCRs), which are planned to be finalized this year for implementation by global systemically important insurers (G-SIIs.) BCRs will serve as the foundation for higher loss absorbency (HLA) requirements for G-SIIs, and it is anticipated that their development and testing will also inform development of the ICS, the IAIS stated last year.

“You are talking about very complex issues here –the idea that  they are decided in closed sessions is absurd….Corporate governance now being thrown out the window–they spend 10 years opening up these meetings, and now with the flick of a switch they are going to close them,” one industry executive noted.  “Why is it that the public that is most effected by this have little time…less than a month… to comment?”

Also, recently, there are some key observers who just got their ‘wings.” The latest inductees into the observer ranks had strongly pushed for inclusion–namely, consumer groups and the independent insurance member of the U.S. Financial Stability Oversight Council (FSOC.)

Peter Kochenburger, one of six National Association of Insurance Commissioners  (NAIC) consumer representatives designated for IAIS observer participation was worried about the effect of any new policy after consumers had just gotten their foot in the door.

Unlike big insurance  companies, the consumer advocates are less well known and could have really benefitted from face-time with their counterparts from different countries as well as from having an audience with international regulators, he noted. He expressed concern that  eliminating observer status will reduce the effectiveness of consumers’ participation although that is not the intent of the new proposal.

Kochenburger, a University of Connecticut law professor and executive director of the law school’s insurance law center, says he thinks communicating only via e-mail, conferences calls and the like does not enhance understanding and developing trust (if not agreement) between the parties.  However, he noted, consumer groups will always be very strapped for paying for travel (despite funding up to a point by NAIC) and always vastly outnumbered by the industry in public live meetings so the proposed this emphasis on written communication/comments could help level the playing field a bit.  He also supported the IAIS intention of setting out specific processes and timelines for stakeholder participation, and welcomed written participation.

 

Roy Woodall, the appointed independent insurance expert and insurance voting member at FSOC, gained observer status this winter after trying for more than a year and half to become part of the proceedings. Woodall had publicly expressed strong concern in Congressional hearings about not having access to important regulatory discussions on financial stability of insurers in the FSOC’s wheelhouse when associates at NGOs and other service-oriented organizations could join the top-level discussions.

The Federal Reserve Board, also an FSOC member, was approved for membership –more than observer status-in the fall of 2013. The Federal Insurance Office is also a member.
Observers pay a flat fee of $19,000 Swiss Frances (CHF). A 2013 IAIS list denotes 144 observers for a possible total of 2.736 million CHF which is over $3 million US dollars.
Members pay quite a bit more. Total such fees for 2013 were 3,848,900 CHF or $4.237 million converted today. The NAIC pays a hefty 317,000 CHF, or almost $350,000, dwarfing the fees of any other member. They also bring more people to the table.
The Federal Insurance Office fee is $14,100 CHF and the UK, Canada, the Netherlands and Bermuda have a membership fee of 67,000 CHF, the top fee among most other global jurisdictions.
It is thought that the Financial Stability Board (FSB) could help fund the difference if and when Observers are dropped from membership, although no one is publicly discussing options.
IAIS observers include in the United States as of 2013:  ACE, INA Holdings Inc .,  ACORD
AFLAC, AM Best, American Council of Life Insurers (ACLI,) American Insurance Association(AIA), AIG, Assured Guaranty Municipal Corp., Barnert Global Ltd., Cigna International Corp. CNA Insurance, Deloitte LLP, DLA Piper, LLP, Duane Morris LLP, Examination Resources LLC, Genworth Financial, Liberty Mutual Group, MassMutual Financial Group, MetLife, New York Life International, Northwestern Mutual, Promontory Financial Group, LLC, Property Casualty Insurers Association of America (PCI), Prudential Financial Inc, Reinsurance Association of America USA, Starr International USA Inc., The Chubb Corp., Transatlantic Reinsurance Co., Travelers Companies, Inc., Treliant Risk Advisers, United Health Group and XL Group.

The NAIC consumer representatives, as noted,  and international organizations such as the International Actuarial Association, the World Federation of Insurance Intermediaries and Insurance Europe are also observers.

IAIS meeting glimpse: Powerpoints, cap standard concerns, timetables

At the well-attended meeting of the International Association of Insurance Supervisors (IAIS) in Quebec City this week, much talk centered on the development of capital requirements for insurers, from the giant systemically risky insurers to the merely large and globally active ones.

According to notes from observers there on the discussion and  power-point presentations, as the event is not open to the press, the next step for the basic capital requirement (BCR) is to go to the Financial Stability Board (FSB) with a fairly detailed BCR proposal and have that out for early July consultation. It will then go to the FSB again in mid-September with endorsement by the G-20 later.

IAIS Financial Stability Committee Chair Julian Adams who gave a Powerpoint presentation,  according to sources,there is a preliminary BCR formula with a limited number of factors, and beneath each factor is a small number of underlying risk drivers.  The idea is to capture risks on both the asset and liability sides of the balance sheet, Adams was quoted as saying.

According to sources,  most of the designated global systemically important insurers (G-SIIs) have already provided data after  field testing exercises, and it has been analyzed.  Stresses considered include interest rates up and down, equity failure, mortality increase, non-life underwriting stress.

This data is being analyzed now to develop BCR formula.

As for the Global Insurance Capital Standard (ICS), many comments have been received that run the gamut in their delivery and tone, at least.

The multi-national insurers, insurance trade groups and “global elites” almost universally told IAIS members in Quebec City that they are  very concerned about the  2016 deadline for development of the  new capital standards, especially for internationally active insurance groups (IAIGs.) Some observers said any standard should be principle-based, not prescriptive.  Local supervisors should be able to set own standards within a broad principle-based approach, one insurer was quoted as saying during the observer hearing.  Another asked, shouldn’t regulator be focused on policyholder protection?

Insurers at the IAIS also shared major concerns about process and a result of a single standard in Quebec City. These concerns are not new, but a growing number of voices are joining in.

The ICS implementation  itself will come after the IAIS adoption by 2018, in 2019.  It apparently has not been a major topic yet in terms of development work and the ratio involved is still said to be under discussion, as are the principles, according to a presentation by Federal Insurance Office (FIO) Director Michael McRaith, who spoke there.

The stated  goals of the ICS are to avoid inter-jurisdictional capital arbitrage and reduce, long-term the regulator burden on companies.

Many IAIS member-officials delivered Powerpoint presentation of their work to observers.

It was clear that firms are expected to comply with the ICS in 2019.

The IAIS did not immediately provide comments after a request and Treasury declined comment.

New York Life to take on insurance capital standards policy in Washington

Expect New York Life to become an engaged and active player, even a leader, on insurance capital standard discussions in the nation’s capital.

New York Life Chairman and CEO Ted Mathas galvanized a panel discussion on capital standards for insurers globally and domestically at the NAIC international forum by warning regulators that if standards aren’t properly developed, it might damage insurers’ ability to do some good in the marketplace.

Mathas said New York Life, a proud mutual insurance giant with assets under management of $425 billion in 2013 and a surplus and asset valuation reserve of $21.1 billion, an all-time high, said the company does not expect to be named systemically important either globally or by the Treasury-led Financial Stability Oversight Council (FSOC).

However, Mathas said the capital standards under development for internationally active insurers and the systemically risky or important global and domestic insurers will get worked into a broad part of the industry and possibly bleed into rating agency reviews and more broadly affect the role of insurance in society.

If assets are treated as short-term under accounting or capital rules, then insurers will not be there to buffer the risk they have taken on with huge pension plans, Mathas said, referencing Prudential Insurance and its pioneering of pension risk transfer mega-deals.

Prudential Vice Chair Mark Grier, who sat beside Mathas on the panel platform, slightly nodded. Grier already has been very active in talking to the Federal Reserve Board and other Washington officials given Prudential status as a global systemically important insurer (G-SII) and a U.S.  systemically important financial institution (SIFI).

If assets are treated as short term and there is a one size fits all market consistent methodology, you take away the value added benefits of the insurance industry, Mathas argued.

Mathas is currently making the rounds in Washington and plans to work with other parties to come up with a unified industry statement, or at least one for the company, in response to industry requests and an internal company decision to become engaged in the capital standards debate.

Yoshi Kawai, secretary-general of the International Association of Insurance Supervisors (IAIS) was just as excited to talk about the pursuit of capital standards.

“I cannot stop the feeling of excitement when I talk about capital,” Kawai offered.

Kawai did acknowledge that the market valuation issues are still open to debate and no decision has been made, although it was argued from the  audience that this market valuation debate has persisted for a decade or more and continually creeps into any discussion of global accounting standards.

“When we are regulators, we cannot communicate with the same number, we have to change. We have to change now. Otherwise, it is too late,” Kawai said. There is progress in supervisory colleges but when we compare numbers and discuss them, we do not have the same amount, Kawai lamented.

Kawai and those he works with are seeing an appetite and need for capital standards as European, U.S. and Japanese insurers press further into emerging markets for company growth. Developing markets are hungry for a capital standard too, Kawai noted. Kawai, also a member of the FSB, paid acute attention to a keynote presentation on market trends from Manuel Aguilera-Verduzco, president of the National Insurance and Sureties Commission, MexicoAguilera-Verduzco was chairman of the IAIS between 2001 and 2004.

But Mathas tossed aside Kawai’s analogy on comparability which he made based on temperatures measured in Fahrenheit while landing in the United States on a particularly hot May day  when he is more familiar the lower Celsius number readings.

Mathas response to this was to put on a jacket or sport short-sleeves depending on how warm one’s body feels, respecting regional differences as one already does with climate differences.

Mathas’ solution, which may be difficult to implement with the Collins Amendment in Dodd Frank as a barrier, is to have the Fed utilize stress tests on its insurance stable of companies. Just take prescribed scenarios and run them across cash flows of a asituation and see how they do, Mathas said.

Barring a loose or liberal interpretation of the Collins Amendment (Section 171 of Dodd-Frank) by Fed officials, who many agree are not inclined to monkey with the statute, or the industry-proposed legislative fixes awaiting action in Congress, such a simple or even elegant solution is going to have a very difficult path ahead.

Industry and regulators did agree there is a sense of urgency now with the capital standards under development at the IAIS  at the behest of the G-20‘s Financial Stability Board (FSB)and at the Fed.

Missouri Insurance Director John Huff, the non-voting NAIC appointee to the FSOC, described the capital standards a “bullet train coming down the track.”

Everyone knows the drill. BCR or backstop capital requirements are due this year, perhaps by this July, HLA or higher loss absorbency for global systemically important insurers net year, or 2015, ICS capital standards for  all internationally active insurance groups to be developed in 2016  and applicable in 2019, standards  Huff and others in the U.S. view as having “wide-ranging implications” coupled with unprecedented data collection.

“Someone needs to give the Fed flexibility administratively or legislatively,” Grier said.  “And then there has to be  convergence so we don’t have four different capital standards coming from G-SII, SIFI, ComFrame and the NAIC,” Grier added.