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.