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.

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.