The NAIC meeting is kicking up a lot of talk on international capital standards, and position or positions of TEAM USA may come more into focus during a hearing of the House Financial Services Committee Nov. 18 as Federal Reserve Board insurance policy czar Tom Sullivan, Federal Insurance Office Director Michael McRaith and NAIC Vice President and International Committee Chair Michael Consedine are called upon to testify.
So far, all we have on paper regarding the U.S. ICS approach is the NAIC working group discussion draft of two potential group capital methodologies: RBC Plus and Cash Flow. A hybrid of the two is also under discussion and generating buzz, although no one has endorsed it yet.
“RBC Plus” utilizes selected design features from the existing legal entity RBC framework. The accounting basis for this methodology is the insurance group’s U.S. GAAP accounts, says the NAIC’s ComFrame Development and Analysis Working Group, which people lovingly call C-Dog, aka CDAWG.
The “Cash Flow” concept follows the general methodology of asset adequacy testing for insurers. This methodology is being proposed partly in response to the sentiment that an ideal global insurance group capital standard should be accounting independent and thus would be able to perform its function in any accounting environment, according to the CDAWG group.
Property casualty insurers have expressed concern about the Cash Flow method, which would require significant use of internal models and scenarios would have to be updated periodically, and, as CDAWG has written, may not be easily understood or compared to a factor-based or RBC approach.
NAIC staff states CDAWG has not completed sufficient research to develop a potential hybrid approach, but it is possible that a combination of both the above methodologies could be developed that would reflect a factor-based approach (RBC Plus) as the minimum group capital requirement,coupled with a cash flow/stress testing approach as a complement to the minimum group capital requirement.
So far, any agreement among U.S. agencies is focused on avoiding market valuation for the assets underpinning the capital used for any standard. The International Association o Insurance Supervisors will put out its draft on the ICS by the end of December. No one seems certain if the U.S. or its various supervisory component will be submitting their work on an alternate U.S. approach by early December.
SNL Financial will be covering the capital standard proposals as they move forward and the hearing, so stay tuned. I will try and provide a link here later from our coverage.
Here’s our SNL Financial Coverage: https://www.snl.com/interactivex/article.aspx?id=29916991&KPLT=6
Tag: Federal reserve
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.
FIO wants national approach in key areas, is watchful in others
Washington-Sept. 24, 2014
In the U.S. Department of the Treasury’s Federal Insurance Office (FIO) newly-released second Annual Report on the Insurance Industry, there are a few glimpses into further action FIO might be considering beyond its standard “monitor and report on” response to state-by state variations and issues of concern.
For example, the FIO is concerned with consumers’ retirement needs in the form of insurance products like life insurance and annuities and the availability of products and access to them in a safe manner.
In light of the decrease in life insurance agents and policies sold to individuals while needs remains high, FIO is looking into ways to promote access to what it deems “essential insurance products.”
The report discusses going beyond efforts in addition to the already preemptive pending legislation known as the National Association of Registered Agents and Brokers Reform Act of 2013 (NARAB II.)
Additionally, the report also says that questions concerning reinsurance collateral should be uniformly addressed on the national level.
FIO has been monitoring measures state-by-state to reform the requirements relating to collateral for reinsurance for almost three couple years now (the NAIC model law passed November 2011) but has found that in the 23 states that have adopted some measures of reform, authorization to accept less than 100% collateral has not been uniform in structure or implementation.
Thus, FIO suggests in its report, it is time for it to step in perhaps or at least make sure the issue is tackled at the national level.
FIO also voices its continued concern with the use of captive reinsurance as a source of risk in the life sector. The report acknowledges state regulatory attempts to address the issue but follows up with continuing concern from various sectors. However, FIO is still at the “monitor and report” stage here.
Also, the approach to ensuring availability and affordability of personal auto insurance remains open, as FIO is till monitoring the issue after receiving requested comments this spring and summer from stakeholders on how to define affordable personal auto insurance, including possible metrics.
The FIO is also appears to be getting involved with the Death Master File data to help make sure beneficiaries receive death benefit payments on policies. FIO said in the report is working to support stakeholder efforts to identify suitable alternative data sources, while working with stakeholders (including the National Technical Information Service, which supervises public access to the DMF) to support appropriate access to the DMF.
The report is largely positive on market performance. It stated that bottom-line numbers in the insurance marketplace in 2013 were encouraging and that at U.S. insurers have continued to show resilience in the aftermath of the financial crisis. Gains in net income drove reported surplus of both the P/C and L/H sectors to record levels.
At year-end 2013, the L/H sector reported approximately $335 billion in capital and surplus, and the P/C sector reported approximately $665 billion in capital and surplus, although net written premiums for the L/H sector were down slightly, from records set in 2012.
FIO has pointed out before, and does so here again, that while the United States remains the world’s largest insurance market by premium volume, its share has declined both as a percentage of domestic GDP and as a percentage of worldwide market share. Emerging economies have seen dramatic increases in premium volume, the report graphs.
This segues into updates on international supervisory activities and progress, the Federal Reserve supervision of insurers and matters examined in the watershed FIO Modernization report, released last December.
FIO’s support of international prudential standard-setting activities spearheaded through the International Association of Insurance Supervisors (IAIS), and implementation of such standards by the “appropriate national authorities” is clear in the new report, which sites financial stability, enhanced understanding and consistency as guiding principles in global insurance supervisory efforts.
FIO, which was established within Treasury as part of the Dodd-Frank Act, has a statutory duty to monitor all aspects of the insurance sector, including identifying issues that could contribute to systemic risk in the insurance industry or the U.S. financial system, which is where captive reinsurance concerns could play out. FIO also is supposed to assess the availability and affordability of insurance to traditionally underserved populations, advise the Secretary of the Treasury on major domestic insurance policy issues, and represent the United States on prudential aspects of international insurance matters, a role which FIO Director Michael McRaith has, by all accounts, heartily undertaken.
House capital standards ‘fix’ won’t fly with weighted feathers, some complain
UPDATE: Bill PASSES the House on Tuesday evening with three measures attached–collateralized loan obligation rules, mortgage transaction fees, points definitions and business risk mitigation and price stabilization requirements. More coverage in future post.
Washington, Sept. 16–
The insurance industry is bracing for possible action tonight from the U.S. House on the Dodd-Frank Act’s Collins Amendment fix or HR 5461, the “Insurance Capital Standards Clarification Act of 2014,” after fits and starts, centered on what Congresswoman Maxine Waters, D-CA, Ranking Member of the Financial Services Committee (FSC) called”three divisive measures that make substantive changes” to the 2010 law.
The measure is based on legislation introduced by Rep. Gary Miller, R-CA., and Rep. Carolyn McCarthy D-N.Y., and sponsored also by sponsored by Rep. Andy Barr, R-Ky., and would clarify the Fed’s authority under the Dodd-Frank Act’s Collins Amendment.
Another person close to the insurance industry called it a game of cat and mouse, with the House leadership adding new provisions despite hearing from the Senate the bill would be a no-go there and on the President’s desk, as well. Another merely called it “messy,” with added provisions on requirements regarding mortgage transaction fees and collateralized loan obligations.
The unadulterated
“fix” provision is largely backed by the entire insurance sector involved and most of Congress who has weighed in, and the chairman of the FSC, Rep. Jeb Hensarling, R-Texas, has promised the industry a clean bill during the lame duck period after the elections, according to a source.
The legislative solution to the tightly wrought Section 171 of the Act would allow the Federal Reserve Board flexibility in applying the required minimum capital standards on its regulated entities engaged predominantly in insurance.
Otherwise, the Fed has said it basically has no choice but to require the capital standards whether for insurers or banks, even though it has acknowledged in various arenas that insurance capital is not measured the same way or for the same purposes as bank capital.
Over in the Senate, a bipartisan bill has passed, and Fed Gov. Daniel K. Tarullo has said clarifying legislation would be welcome.
“We can and should make common-sense changes to lessen the regulatory burden,” Tarullo stated at a hearing last week in the Senate. Regarding giving the Fed flexibility to tailor the capital standards it places on insurance companies, the Senate passed, by unanimous consent, a fix so that insurance companies are not subject to bank-like capital requirements contrary to their business mode, he pointed out.
Tarullo testified that it “would be very welcome if the House would follow” the Senate’s lead and enact the legislation, to give the Fed the kind of flexibility in making an assessment on the liability vulnerabilities of insurance companies that are unique to insurance companies.
Meanwhile the Fed is going to conduct a quantitative impact study to try to develop some more information on insurance industry specific products, and look at what it calls the liability vulnerabilities of insurers.
Back in the House, Waters complained that the House is “circumventing and politicizing” the process so that the fix, if packaged with other measures, will go nowhere in the Senate.
“Make no mistake – but for the Chairman’s intransigence, the insurance capital fix bill could be on the President’s desk for signature tomorrow,” Waters stated.
What the ed does determine on capital adequacy for insurers under its purview–systemically important institutions and insurers with savings & loans- is still unknown, but some analysts think it could mirror what the standard is globally as the G-20’s Financial Stability Board adopts the proposed capital requirements for global systemically important insurers (G-SIIs) from the International Association of Insurance Supervisors (IAIS).
This is a good indication of what future capital standards from the Federal Reserve will look like for domestic SIFI insurers, says a note from Washington Analysis.
“While it is likely to be modified by U.S.regulators, we view the IAIS proposal as manageable for the group, as it is tailored to insurance and similar in many ways to existing Risk Based Capital (RBC) requirements. We do not expect the Fed to propose domestic capital requirements until Q1 2015, at the earliest, with final rules unlikely until at least mid-2015,” Washington Analysis said in a note to its clients and others.
In the meantime, eyes are also on Tarullo’s fixation with insurance liabilities and how the Fed will weigh them as it develops capital standards for its stable of insurers, which include Prudential Financial, AIG and TIAA-Cref.
Under one alternative, the Fed “would be able to take account of the different liability structure of core insurance kind of activities and that would allow us to shape capital requirements at the consolidated holding company level in a way that fully took account of those differences in business model, Tarullo said in his Sept. 9 Senate testimony before the Banking, Housing and Urban Committee.
*Photo of maxine Waters courtesy of http://waters.house.gov/
Fed conducting ‘quantitative impact study’ on insurance products as it weighs capital standards
The Federal Reserve Board is undertaking a quantitative impact study to develop information on insurance industry specific products, said Fed Gov. Daniel K. Tarullo in Senate testimony today.
But Tarullo also it would be “very welcome” if the House would follow the lead that the Senate did in enact legislation that basically allows the Fed flexibility in taking into account the distinctions between banking and insurance when setting capital standards as does the Senate bill, Capital Standards Clarification Act of 2014.
Such legislation would allow the Fed to make an assessment on the liability vulnerabilities of insurance companies – that are unique to insurance companies, Tarullo said.
The Fed, of course, is the prudential regulator of systemically important financial institutions (SIFIs), like Prudential Financial and AIG, and also oversees the insurance companies that still have savings and loans or thrifts.
Section 171 of the Dodd Frank Act requires the Fed to impose minimum capital standards on insurance holding companies on a consolidated basis and really gives no room, according to an opinion from the Fed general counsel, at least, for the capital rules to be narrowly tailored to insurers, who plan their businesses so assets match liabilities, not so that they have capital cushions, per se. However, he seemed to indicate it would be possible in testimony today.
“In the absence of the legislation, we’ll still be able to — to do some things because there are insurance products of — that — that do not resemble existing bank products,” Tarullo stated. “And so in some cases, we can and we’re already planning to assign different risk weights to those based upon our assessment of the actual risk associated with — with those assets.”
But — but that’s — that’s where the — the two-tracking is actually taking place.
I mentioned a little back the quantitative impact study that we’re doing, by getting more information, I think, from the insurance companies, we hope to actually find a few other areas where consistent with existing statutory requirements, we could still make some adjustments,” he explained to Sen. Mike Johanns,R-Neb., based on an unofficial transcript.
Tarullo said the Fed would continue with this approach of using two tracks of planning with respect to capital rules for insurance companies.
Tarullo testified on a panel before the Senate Banking, Housing Urban Affairs Committee on a hearing titled “Wall Street Reform: Assessing and Enhancing the Financial Regulatory System.”
His questions were in response to questions starting with Committee Chair Tim Johnson, D-South Dakota if it were important for Congress to act soon on capital standards.
The Fed did not have a comment on Tarullo’s remarks.
Tarullo let lawmakers where he thought the distinction was in banking versus insurance: “The assets are often the same. It’s — it’s really on that liability side of the balance sheet that — that you feel a difference in what a property and casualty insurer does as opposed to what a bank does and that’s what we’d like to be able to take into account,” he stated.
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.
FSOC annual report testimony on Hill Tues., while FSOC eyeing Stage 2 nonbank, meets in closed session
The Financial Stability Oversight Council (FSOC) will have a busy day Tuesday, June 24, as it meets in a closed, executive session and as Treasury Secretary Jack Lew testified before the House Financial Services Committee (HFSC) on a hearing entitled “The Annual Report of the Financial Stability Oversight Council.” Lew will be the only witness.
Although insurance is a subset of FSOC’s realm and of its annual report, there may be questions from lawmakers on the prudential regulation by the Federal Reserve of large insurers and asset managers, discussion on the application of domestic and proposed international capital standards and on FSOC’s internal business. HFSC passed measures last week on party line voting, to try and put the brakes on FSOC’s designation process and open it up to more federal officials and Congress.
MetLife is still in stage 3 of its potential designation as a nonbank systemically important financial institution (SIFI.) However, according to a readout of the March 27 FSOC meeting, which was closed, there was a discussion in late March on not only a stage potential designee but also a stage 2 financial company.
MetLife has already acknowledged it is in stage 3 and discussions are likely to continue Tuesday. Of interest, the company, now stage 2 analysis, is perhaps an insurer or reinsurer.
Although the minutes did not disclose the sector, presentations on the unidentified company were given by John Nolan, deputy director for Financial Stability in the Federal Insurance Office (FIO), who provided an update on the status of the ongoing analysis of the company. Randall Dodd, senior policy advisor at FIO, Todd Cohen, policy advisor at Treasury; and Scott Alvarez, General Counsel of the Federal Reserve, were available to answer questions on the company. However, the minutes do not reflect any presentation made by the office of the FSOC voting member with Insurance Expertise, so it could be FIO’s and the Fed’s take on an asset manager with insurance holdings, or perhaps a large reinsurer.
The Financial Stability Board, in concert with the International Association of Insurance Supervisors (IAIS) is coming out with its reinsurance global systemically important insurers (G-SIIs) around November of this year. As far as domestics, Berkshire Hathaway could possibly be among them because of its size, although the percentage of insurance as part of Berkshire Hathaway may not meet specific FSOC threshold material for insurance companies.
The annual report for 2014 again discussed again interest rate risk for insurance companies:
“Despite a significant rise in longer-term interest rates this past year, the insurance industry continued to report investment margins that were below historic averages,” the annual report of FSOC stated.
“If historically low interest rates persist, insurance companies could face a challenge generating investment returns that are sufficient to meet the cash flow demands of liabilities,” the report continued. Interest rates remained well below historical averages and continued to weigh on life insurance investment yields.
Legacy products in particular (including annuities, long-term care, and universal life insurance with secondary guarantees) have been less profitable in the current interest rate environment, as they were originally priced and sold under differing market conditions, as insurers have found out, the report noted.
The current low interest rate environment also may affect the use of captive reinsurance: the low rates affect the present value of insurers’ contract obligations (increasing the present values
of future obligations), and therefore may encourage use of reinsurance for insurance products with liability valuations that are interest-rate-sensitive
FSOC recommends that the Federal Insurance Office (FIO) and state insurance regulators continue to monitor and assess interest rate risk resulting from severe interest rate shocks.
FSOC also reported that Life insurance revenue from insurance and annuity products decreased to $583 billion in 2013 from the record $645 billion set in 2012.
Although Expanded product distribution channels and a more favorable interest rate environment led to higher fixed annuity sales, a number of one- time transactions and increased reinsurance cession overcame the improved fixed annuity sales and led to the decrease in total revenues.
Life insurers’ average portfolio yields continued to decline in 2013, but at a slower rate than in 2012, the report stated. Nonetheless, the life insurance sector’s net income rose 6.8% to $41 billion, a record high, benefitting from rising equity markets.
FSOC also delved into concerns regarding captive reinsurance. It pointed out that regulators and rating agencies have noted that the broad use of captive reinsurance by life insurers may result in regulatory capital ratios that potentially understate risk.
During times of financial market volatility when reserve and capital levels for some products should increase, an insurance company that uses captive reinsurance may not be required to hold higher reserves and capital. This could become a financial stability concern if a large, complex insurance organization were to experience financial distress,” the annual report stated.
The concerns have some offsets: The implementation of principles-based reserving (PBR) by the states may eliminate the need to use captive reinsurance for the purpose of reducing reserves that are significantly higher than expected losses, according to the report.
The Federal Reserve issued a “Supervision and Regulation Letter” (SRL) in December 2013 concerning the effects of risk transfer activities on capital adequacy, which would apply to captive reinsurance risk transfer transactions for insurance companies it supervises when they become subject to the Federal Reserve’s risk-based capital framework.
The FIO is still monitoring both the role and impact of captives in the sector and the potential for regulatory improvements at the state level, as well.
Property/Casualty sector revenue from insurance products increased 3.9% to $544 billion in 2013, a record high.
Rates charged by insurers to policyholders increased moderately in most commercial lines of P/C business led by strong sales of workers’ compensation and demand for personal auto insurance. Net income increased to a record level of $70 billion, or an increase of 91.5% from 2012, as expenses and losses paid on claims declined and there were no major storms during the hurricane season in 2013, the annual report stated.
Fed hires Tom Sullivan as its insurance chief
The Federal Reserve Board has hired an insurance regulatory chief after a long search for an insurance expert to fill the new position. Former Connecticut insurance regulator and industry consultant Tom Sullivan has accepted a position as the senior advisor for insurance to the Board of Governors.
A Fed spokesperson for the board said he starts the high-profile post June 9.
As such, Sullivan will be representing the Fed at all domestic and international insurance forums, he stated in an email to colleagues in the insurance sector.
Sullivan has most recently been a partner at PricewaterhouseCoopers. Word was that the well-regarded insurance regulatory expert was also once on the short list for NAIC CEO before the organization hired Sen. Ben Nelson, D-Neb., for the post a year and a-halfago.
The Fed, as a prudential regulator of systemically important insurers (non-bank SIFIs) and insurers with thrift holding companies (SLHCs), has an ever-more powerful voice in insurance regulation. The Fed is well as a member of the Financial Stability Board (FSB), has a seat at every table now, including at the International Association of Insurance Supervisors, in Basel.
The Fed has been seeking an insurance leader for some time, and several names have come up on the short list.
“I am excited to be joining the Fed and there is a lot of work to be done given their statutory authority as consolidated regulator for the designated insurer non-bank SIFI’s and the insurer owned SLHC’s,” Sullivan said in an email.
Sullivan will be working with insurance supervisory cohorts the NAIC’s international team of state regulators Kevin McCarty (Florida), Tom Leonardi (Connecticut) and Michael Consedine (Pennsylvania), among others, as well as the Treasury’s Federal Insurance Office (FIO.)
Sullivan takes the helm of the key insurance official title at a critical time. Controversial proposed capital standards are under development globally for insurers that are not only systemically important but that are also internationally active, and these standards must be translated to and put up for acceptance by local jurisdictions like the United States.
Congress, the Fed and U.S. insurers are struggling with what to do with seemingly inflexible strict minimum requirement capital standards that would also hammer down on insurance SIFIs and thrift holding companies under Sections 165 and 171 of the 2010 Dodd Frank Act. Legislation is pending, with the American Council of Life Insurance (ACLI) taking out a full-page ad last week “highlighting the life insurance industry’s support for critical legislation (S. 2270 and H.R 4510) that would clarify the Federal Reserve Board’s authority to apply insurance-based capital standards to insurance companies under the Fed’s supervision.”
Indeed, a similar ad from the ACLI will run in Politico on June 4.
Sullivan served as Connecticut insurance commissioner throughout the 2008 financial crisis and AIG’s downfall. He was appointed by Republican Gov. Mary Jodi Rell in 2007. As chair of the NAIC’s LIfe Insurance and Annuities Committee and has testified before Congress as a state regulator that prudential oversight of insurers by the states works, citing solvency and capital standards that “have ensured that policyholder commitments are met and that companies remain stable.”
Sullivan is a lifelong Connecticut resident who graduated from Western Connecticut Sate University and got his MBA from the University of Connecticut.
Early reaction was positive from those who have worked with the amiable, well-seasoned executive.
“The Federal Reserve Board has made a solid appointment in choosing Thomas Sullivan, who has keen regulatory and industry insight. He understands the importance of state-based regulation, and the difference between banking and insurance. This is a great step forward that will benefit consumers and insurers,” stated current Connecticut commissioner and IAIS Executive Committee member Tom Leonardi.
Leonardi sits on numerous supervisory colleges as commissioner and is extraordinarily active in international insurance supervision,and will be working closely with Sullivan on capital standards for and oversight discussions embedded in the IAIS’ ComFrame initiative and in higher loss absorbency standards for global systemically important insurers and reinsurers. The latter group, the reinsurers, is expected to be identified this summer by the IAIS.
NAIC President and North Dakota Insurance Commissioner Adam Hamm stated,”Tom’s strong regulatory experience, comprehension of the insurance sector, and thorough understanding of America’s national system of state-based insurance regulation will be a tremendous asset to the Board on both domestic and international issues.We look forward to working with Tom in his new position as we continue to enhance our working relationship with the Federal Reserve.”
Author: Liz Festa, June 2, 2014
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, Mexico. Aguilera-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.
WASHINGTON INSURANCE RIDER 