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: IAIS
NAIC decries the member vote to end IAIS ‘observer’ status
Oct. 27, 2014, Washington — The National Association of Insurance Commissioners (NAIC) expressed strong opposition to the International Association of Insurance Supervisors (IAIS) vote to end observer membership status for non-members. The vote, which took place in closed session at the annual general meeting on Oct. 25 in Amsterdam, amended IAIS bylaws to end this observer status, which included participation in some IAIS meetings.
The IAIS is creating new stakeholder consultation procedures which have not at all been embraced by the once and former observers.
Ahthough the vote occurred in a closed session, the NAIC delegation voted against the measure, while the Federal Insurance Office (FIO) voted for it and the Federal Reserve Board representative allegedly left the room.
After attempts to work together, the schism on international supervisory issues among U.S. representatives is still defined by issues such as this.
“I am extremely disappointed in the outcome of Saturday’s vote to end observer status at the IAIS,” said Adam Hamm, NAIC President and North Dakota insurance commissioner and IAIS member. “Observers run the range of consumer advocates, insurance experts, and industry representatives – all of whom have critical input to share on the real-world consequences of decisions made by regulators. Shutting them out of the official process in favor of ‘invite only’ participation deprives IAIS members and stakeholders alike and could diminish the credibility of decisions made at the IAIS,” said Hamm, who also sits on the US Financial Stability Oversight Council (FSOC.)
ALthough the FSOC role does not assure one of membership, the fact that the NAIC members are state regulators does.
Observers, from insurance groups and lobbyists to consumer advocates to the insurance expert on the FSOC have previously spoken out against the change, criticizing the long-anticipated move for lack of access and lack of time to effect any important and long supervisory process of crafting rules — rules that would be eventually applied to insurance companies, and effect regulations, markets and consumers.
“Relegating systemic risk policymakers to only those opportunities afforded to the general public would reduce the likelihood of effective attainment of the IAIS goal of providing a meaningful contribution towards global financial stability,” FSOC Independent Insurance Expert Woodall stated in a comment letter to the IAIS in early September.
Said consumer advocate Peter Kochenburger, executive director of the Law School’s Insurance Law Center,”I would say that the IAIS annual conference in Amsterdam further confirmed the value of stakeholder participation: (1) without any consumer (policyholder) participation the dialogue is either regulators talking only to themselves, or to the industry, with the crucial second party to any insurance transaction, the policyholder, not having a voice (2) as the industry points out, they will be responsible for ultimately following and implementing changes in national (or state) insurance laws and have a knowledge base and stake in participating in its making.”
The new consultation procedures being developed will likely outline how certain stakeholders may participate in portions of some meetings by invitation only as well as the creation of open hearings with stakeholders separate from IAIS meetings.
The Center for Economic Justice (CEJ), run by IAIS observer consumer advocate Birny Birnbaum, said also in a comment letter Sept. 2, the IAIS new, proposed policy for consultation of stakeholders is not a good solution because it “will not ensure all relevant stakeholders are properly consulted because there is no formal consumer participation program or assistance, because the implementation is left to the discretion of the Chair and because there is no formal training for members or committee leadership in implementing public participation policies and procedures.”
Besides being “clearly not transparent,” the proposed ‘standardized framework’ is too short on the required interactions and too long on the options to ensure consistent stakeholder interaction across committees and projects,” Birnbaum wrote.
The IAIS is in part funded by Observer fees and some anticipate that the G-20’s Financial Stability Board (FSB), which is directing many of the IAIS work on international capital standards, may pay the funds now.
“Over the years, the IAIS has benefitted from the input and ideas provided by our observers which not only result in quality end products, but also provide our stakeholders with a better understanding of our work and our development processes,” said Kevin McCarty, Florida insurance commissioner and past NAIC president, who has served in IAIS roles for some years and who serves on the IAIS Executive Committee.
“…we are concerned about changes which will result in less transparency and openness by closing all meetings to stakeholders going forward,” he continued, contrasting the NAIC’s policy of transparency with the IAIS’ plan.
U.S. state regulators are not alone in their concern with the new process. Congress has introduced a bipartisan resolution calling for openness and transparency by the IAIS, the NAIC pointed out in a release.
Dave Snyder of the Property Casualty Insurance Association (PCI), who recently returned from Amsterdam, remarked that”the NAIC vote upholds the views of our federal and state lawmakers and our traditions of openness to all interested parties. On the other hand, the IAIS action is a serious mistake as it will make it more difficult to meaningfully consider the views of all stakeholders. It will also potentially result in flawed standards and guidance that will run into preventable opposition and thereby fail to be implemented.”
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.
‘Team’ USA trying to fashion own capital standard for global stage
The development of group capital standards or the global insurance capital standard (ICS) has reached U.S. shores and the sector is working together–or listening together–to develop possible approaches.
To that end, U.S. regulators and stewards of domestic insurance policy met with the insurance industry Friday to discuss possible approaches to a U.S.specific group capital framework that would satisfy the International Association of Insurance Supervisors (IAIS).
The National Association of Insurance Commissioners (NAIC) hosted its ComFrame Development and Analysis Working Group in Washington with members of the insurance industry, and representatives from the U.S. Treasury Department’s Federal Insurance Office (FIO) and the Federal Reserve Board to discuss a U.S. group capital proposal that respects jurisdictional accounting requirements and perhaps also incorporates the U.S. risk based capital (RBC) approach.
Many in the U.S. favor jurisdictional-based approach rather than a standard imposed globally, leading to proposed solutions for crafting a domestic capital standard that would be okay’ed by global supervisory forums .
Any standard would be adopted by the Fed for its stable of insurers–thrifts and systemically important insurers–and the states, via the NAIC for all other insurance groups.
The Fed and Treasury are influential members of the G-20’s Financial Stability Board (FSB) and have a great role in capital standard development for financial institutions worldwide.
The meeting was led by Florida Insurance Commissioner Kevin McCarty, past NAIC president, Pennsylvania Commissioner Michael Consedine, head of the NAIC’s International Insurance Relations (G) Committee and NAIC president-elect, Tennessee Commissioner Julie Mix McPeak and New Jersey Commissioner Ken Kobylowski.
The NAIC staunchly adheres to a position that any capital objective be the protection of policyholders.
Various companies suggested as possible approaches and alternatives as “work to date on these standards has revealed numerous issues and difficulties calibrating a global capital standard for such a diverse industry,” as Liberty Mutual wrote in a presentation submitted to the NAIC.
Suggested capital development approaches, based on materials submitted to the NAIC, include use of an insurance group’s own capital mode, more use of supervisory colleges, developing a group RBC formula which considers banking and non-insurance entities operating within the group (CNA), valuing cash flows, calibration with potential disaster scenarios and risks, replacing insurance reserves with best estimate liabilities to remove the major source of inconsistency across companies and regimes (Prudential Financial) while maintaining consistency between he valuation of assets and liabilities (a life insurance sector approach), and mutual recognition of local solvency regimes for international groups (Aegon/Transamerica) and use of U.S. statutory reporting measurement framework as a way to assess capital adequacy (Allstate.)
“It is more important to focus on the total asset requirement than the level of required reserves or capital on a separate basis. The focus should be on holding adequate total assets to meet obligations as they come due,” stated the American Academy of Actuaries.
New York Life put forth that “the new standards should require insurers to stress test cash flows under a set of prescribed stress scenarios. We believe that a cash flow stress testing approach offers the best way to ensure solvency and financial stability in a globally comparable manner, while preserving appropriate incentives for U.S. life insurers to continue offering sound, long-duration products that provide security to consumers.”
Or, as one person summarized. “Don’t come up with a dollar amount, come up with a probability that your cash inflows over time will exceed cash outflows…”
Non-life, property casualty companies were not so interested in matching long-term liabilities or cash flow testing because they are invested in short and medium-term municipal bonds of about seven years in duration, which need to be rolled out several times over the course of 30 years. The 30 year-notes are not as attractive anymore among low interest rate environment.
Most tossed out any mark to market accounting approach for valuations. Representatives discussed the need for a level playing field between large and small companies, the compliance costs involved for all companies in meeting these or any standards and the need for more meetings, including and in-person meeting before November.
The NAIC wants to have a recommendation for discussion and action at its Nov. 16-19 national meeting in Washington.
Some of the ideas advancing from the Sept. 19th meeting include the sentiment that domestic coordination is important if ideas are to advance internationally with a broad desire ti have all US voices say the same thing, and that p/c and life insurance need different standards, according to Dave Snyder of the Property Casualty Insurance Association Of America (PCI).
Other points include a skepticism about comparability between countries, a standard that recognizes the US model as one of the standards for compliance and an appreciation, he said, for NAIC’s transparent process.
However, Snyder said, there is “no guarantee at this point that the IAIS will accept an RBC-based system as one option for compliance…However, there are regulators outside the US that might share similar views and their systems ought to be recognized as being compliant with an ICS.”
The IAIS May 2014 ICS Conceptual Memorandum introduced jurisdictional group capital methods (the oft-cited paragraph 30) that could be accepted instead of the ICS as-is.
Although there is general NAIC and industry acceptance, if not enthusiasm here, that there will be an ICS of some sort, a byproduct–or product–of the IAIS ComFrame project which has been re-imagined by the FSB since ComFrame’s 2010 inception, not many in the U.S. are true believers.
“It is interesting to note that the effort to converge insurer accounting standards has failed after a ten year effort. Many times during the last decade it was asserted that the ‘train has left the station,’ regarding that effort. Apparently, U.S. accounting standard setters discovered “reverse” gear,” stated Marty Carus, former AIG compliance executive and a former long-time New York insurance regulator.
MetLife receives preliminary SIFI designation from FSOC
Washington, Sept. 4 — After more than a year of review, the Financial Stability Oversight Council (FSOC) voted today to preliminarily designate MetLife, the country’s largest life insurer, a nonbank systemically risky financial institution or SIFI, and the insurer said it is weighing its options.
The Council’s vote was unanimous with one member voting present. AIG, when it was designated, had an unanimous vote. Prudential Financial’s final designation vote was 7-2, with an abstention from the new SEC chairwoman.
“MetLife strongly disagrees with the Financial Stability Oversight Council’s preliminary designation of MetLife as a SIFI,” stated after the vote.
“MetLife is not systemically important under the Dodd-Frank Act criteria. In fact, MetLife has served as a source of financial strength and stability during times of economic distress, including the 2008 financial crisis,”MetLife CEO Steven Kandarian continued in a prepared statement this afternoon.
The preliminary designation came in a closed meeting of the FSOC, over which U.S. Treasury Secretary Jacob Lew presides.
Kandarian said that MetLife is not ruling out any of the available remedies under Dodd-Frank to contest a SIFI designation.
Prudential Financial appealed the decision last year by the FSOC and lost but did not pursue the matter through the court system.
MetLife now has 30 days to request a hearing before the Council to contest the proposed determination. After any hearing, the Council may make a final determination regarding the company.
FSOC does not intend to publicly announce the name of any nonbank financial company that is under evaluation before a final determination is made.
Instead, MetLife did the talking today: “The current regulatory system oversees a stable industry that pays out more than $500 billion every year. Imposing bank-centric capital rules on life insurance companies will make it more difficult for Americans to buy products that help protect their financial futures. At a time when government social safety nets are under increasing pressure and corporate pensions are disappearing, the goal of public policy should be to preserve and encourage competitively priced financial protection for consumers,” Kandarian stated.
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, insurers have argued.
When and if New York-based MetLife is formally designated, it would be subject to enhanced prudential supervision from what (again) will be its primary regulatory Federal Reserve Board, with a host of accompanying holding company oversight and capital standards, a yet to be worked out by the Fed.
The vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing and the time-frame to respond elapses.
However, the most interesting part of MetLife’s potential designation will be the rationale used by FSOC. For example, for Prudential, last year, the FSOC majority started with the premise of an impaired insurer, with a run on the bank scenario, that many in the insurance industry–and the independent insurance expert, Roy Woodall, thought was implausible, according to his dissent.
Last year, FSOC determined that Prudential’s material financial distress could pose a threat to financial stability focusing on two of the channels: exposure and asset liquidation.
“The Council has based its conclusion solely on what is referred to as the First Determination Standard; namely: ‘material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States,'” Woodall stated in his dissent.
Under Dodd Frank regulations, FSOC can, but does not require, that it begin with the company in distress and make determinations from there.
Passing that up brings the Second Determination Standard, dealing with the activities of an institution, into play.
“Given the questionable and unreasonable basis for the Council’s reliance solely on the First Determination Standard, it is my position that it would have been prudent for the Council also to have considered the Second Determination Standard pertaining to activities,” Woodall stated in the Prudential dissent of September 2013.
The fact that there were no dissents today–a ‘present’ vote is not a dissent–it appears the FSOC COULD have used the second determination route with MetLife.
Reaction from the Hill will certainly come, as some concerned lawmakers there have been attempting to stop FSOC in its tracks and have it reconsider SIFI designations until there is further disclosure on proceedings.
Rep. John K. Delaney, D-Md., a member of the House Committee on Financial Services,stated he had concerns about the process behind the MetLife designation, particularly regarding an alleged lack of communication and transparency.
“I generally support FSOC and its goals, but believe the details can be improved,” said Delaney, who, in July introduced with Rep. Dennis Ross, R-Fla., the FSOC Improvement Act (H.R. 5180) to address concerns about lack of transparency in the SIFI designation process.
MetLife, like its insurance SIFI brethren AIG and Prudential, is already designated as a global systemically important insurer (G-SII) by the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS), which is expecting to designate any global reinsurers it deems systemically risky this November.
MetLife has been regulated by the Fed before, back when it owned a bank. MetLife debanked in early 2013 in part to get out from under the Fed’s Tier One capital-focused oversight, where it was subject to stress tests it believed befit banks, not insurers.
Insurance trades were having none of what the FSOC delivered today.
The American Council of Life Insurers (ACLI) said it “is extremely disappointed” by the designation today of another life insurance company, MetLife, as a SIFI.
“No single life insurer poses a systemic risk to the U.S.economy,” it simply stated.
For its part, he Property Casualty Insurance Association of America (PCI)’s Robert Gordon, senior vice president, policy development and research, stated that “while a particular combination of facts, including the performance of non-insurance activities, may trigger a determination of systemic risk for an institution, such a determination does not alter the fact that property and casualty and other traditional insurance activities do not give rise to systemic risk.”
Rep. Scott Garrett, R-NJ), chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, who once tried to gain entry to a closed FSOC meeting, let loose on the preliminary decision: “Today’s irresponsible and inappropriate designation of another U.S. business as too-big-to-fail only strengthens my resolve to reform the out-of-control FSOC….This designation flies in the face of a unanimous, bipartisan vote in the House of Representatives to postpone any additional designations,” he said.
Garret and others have been engaged in a flurry of letter-writing over the past months to get answers from Lew and FSOC.
FSOC’s Woodall troubled by IAIS’s proposal to limit involvement; others weigh in
The ability for international authorities to confer with policymakers with authority for financial stability in the insurance sector would be greatly hindered under an International Association of Insurance Supervisors (IAIS) proposal to basically cease “Observer” status Jan. 1. argues a member of the US Financial Stability Oversight Council (FSOC.)
FSOC Independent insurance member Roy Woodall says that the proposal detailed in the IAIS Notice of Request for Comment of Aug. 4, 2014, would render null and void the purpose for joining as an “Observer” earlier this year, (see http://www.insurancejournal.com/news/national/2014/02/18/320673.htm) and could dampen oversight of global financial stability.
“Relegating systemic risk policymakers to only those opportunities afforded to the general public would reduce the likelihood of effective attainment of the IAIS goal of providing a meaningful contribution towards global financial stability,” Woodall stated in a comment letter to the IAIS late last week.
The IAIS is and must remain a critically important resource to systemic risk policymakers throughout the world. To achieve its objective of contributing to global financial stability, the IAIS should consider how best to ensure that it continues to have the strongest possible ties with systemic risk policymakers so that they will benefit from and be able to act upon the informed and knowledgeable efforts of the IAIS in the area of global financial stability,” Woodall wrote.
Comments on the proposal are due Sept. 2.
The Notice of Request for Comment announced two agreements by the IAIS Executive Committee: an agreement that non-members would no longer generally participate in meetings but rather be invited when necessary to provide targeted, technical input; and that IAIS engagement with outside stakeholders would increase through special sessions, more dissemination of documents and the use of conference calls as opposed to the in-person high-level meetings the IAIS has been holding thus far.
But the IAIS proposal could have the unintended effect of excluding policymakers with legal authorities for financial stability regarding the insurance sector and who may not themselves be supervisors–like himself, Woodall argues.
For global financial stability to be most effective it needs experts on the insurance sector, and to include those with legal authority, he points out.
Woodall suggests that the IAIS could provide for participation by systemic risk policymakers as non-voting members, a suggestion that has been thorny in the past.
The IAIS could reconsider revising its bylaws so that the IAIS could include “national organizations” and their members, which would include systemic risk policymakers who serve on the FSOC — and members of other similar national bodies elsewhere, Woodall suggests.
For instance, the IAIS has similarly recognized the need for engagement by critical participants in other areas and has welcomed the participation of organizations like the World Bank, the Asian Development Bank and others as non-voting members, he notes.
Woodall acted to join as an “Observer” after a proposed IAIS bylaw amendment that would have permitted systemic risk policymakers to join as non-voting members was tabled by the IAIS Executive Committee at the annual meeting in Washington, D.C. in 2012. U.S. members of the IAIS Executive Committee at the time were divided on the motion, with reports of concern about the wording and the inclusion of too many non-specific insurance entities with too broad a view of a jurisdiction’s financial stability officials.
The NAIC and the U.S. are already heavyweight members because of their numbers and agencies represented, which include the Federal Insurance Office and the Federal Reserve Board now, too.
Woodall noted that as an “Observer” he benefits from perspective of other Observers, who also would fall off the IAIS rosters under the proposal. Woodall says the other groups help give a by better understanding the implications for industry and consumers of matters under IAIS consideration.
As such, he says he is sympathetic to the goal of ensuring that the IAIS not become wholly detached from those who may be able to provide such important perspectives.
Consumer advocates who recently also were granted Observer status, including those in the U.S. funded through the National Association of Insurance Commissioners (NAIC) are also slamming the proposal by the IAIS.
Center for Economic Justice (CEJ)’s Birny Birnbaum, a seasoned consumer advocate and also a member of FIO’s advisory committee, criticized the unequal access some parties have had and its potential effects on all stakeholders, including his constituency, consumers, in his Sept. 2 comments.
“We applaud the IAIS proposal to stop ‘pay-to-play’ and allow any interested party to follow and participate in the activities of the IAIS. However, meaningful participation by consumers of insurance in IAIS processes requires the establishment of a formal IAIS consumer participation program reflecting a commitment to obtain consumer input….”
“We note the irony of a request for comment on public participation procedures with a note on page 1 limiting the information to Members and Observers,” Birnbaum added.
Peter Kochenburger, one of the internationally-focused NAIC consumer advocates, and an insurance law professor at University of Connecticut where he is executive director of the Law School’s Insurance Law Center, said he agrees with the serious concerns state regulators, insurers and trade associations that the IAIS draft procedures would greatly limit stakeholder involvement.
“Closing most meetings to outside observers reverses the presumption of openness and transparency, and doesn’t speed up any processes – allowing stakeholders to observe proceedings does not mean IAIS working groups must have public comment periods, or even interact with stakeholders at these sessions,” Kochenburger said. “If the IAIS was considered a public deliberative body, its draft procedures would violate many state open meeting laws,” he added.
Consumer observers are further disadvantaged, though, he said.
“We don’t come with the power and resources of insurers and other stakeholders; if we are listened to it is not because of our market share in a country, but the quality of ideas, and commitment and experience in consumer (policyholder) protection. Our credibility and therefore our effectiveness often depends on speaking publicly at hearings and committees and being able to communicate directly with supervisors. Much of this will be lost, along with the opportunity to meet consumer observers from other countries, who will now have equally minimal opportunities to meet in person,” Kochenburger said.
The proposed procedures will reduce the opportunity for contributions by closing meetings that once were open, says Property Casualty Insurers Association (PCI) of America’s Dave Snyder, a long-time Observer.
The general rule in the proposal is that meetings will be closed but guests may be invited in at the discretion of the IAIS.
“This is the most fundamental of all flaws in the new procedures. The reverse should be the case, especially when the role of IAIS, as noted by the paper, has significantly increased,” stated Snyder, who says PCI strongly agrees with the remarks of the NAIC (comments here), which trumpets transparency and stakeholder participation for their own sake and as a means to increase the likelihood of acceptance and overall efficiency.
Snyder welcomed open Executive Committee sessions but said these would not compensate for closing other meetings and closing meetings combined with inviting “guests” into them.
Observers have decried the proposed policy not only because it will change the dynamics of interaction but because it comes at a critical time–the IAIS is not a sleepy organization leased a few desks by a banking oversight body in Basel, anymore.
A global insurance capital standard by 2016 for globally active insurance groups is under development, with expected implementation by 2019, alongside the 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.
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.
International organizations such as the International Actuarial Association, the World Federation of Insurance Intermediaries and Insurance Europe are also Observers.
Right now, all eyes are on 21st Annual Conference of the IAIS in Amsterdam, October 23- 24, 2014. The theme of IAIS 2014 will be: ’Enhancing policyholder protection and financial stability through governance and risk management’. The group will decide then how to proceed. See: http://www.iais2014.org/
However, the American Council of Life Insurers (ACLI) warns, “that the IAIS should refuse to become an ivory tower bureaucratic elite,” by instead continuing inclusive interaction with diverse stakeholder groups with… those who may not agree on approach but who have the same objectives. “This is how you will be prepared for the next crisis and not the last one,” stated the ACLI comments, written by Robert Neill, formerly of FIO.
Nonbank SIFIs agenda set for Sept. 4 FSOC. Is MetLife SIFI-hood soon?
MetLife, the country’s largest life insurance company, could have its day of reckoning next week with regard to a potential systemically important financial institution designation.
Treasury Secretary Jacob Lew has scheduled a closed session of the Financial Stability Oversight Council (FSOC) for Thursday, Sept. 4.
If later designated, MetLife would be subject to enhanced prudential supervision from the Federal Reserve Board, with a host of accompanying holding company oversight and capital standards, a yet to be worked out by the Fed.
A vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing and the time-frame to respond elapses.
According to the FSOC’s notice, the preliminary agenda next week includes a discussion of nonbank financial company designations, consideration of the Council’s fiscal year 2015 budget, a discussion of the its analysis on asset management’s systemic risk, if any, and an update on the Board of Governors of the Federal Reserve System and FDIC’s recent review of resolution plans submitted by large, complex banking organizations.
Although the book is closed on MetLife now, after an August 19 notational vote by FSOC in a closed session, that doesn’t mean the FSOC is necessarily ready with its proposal to designate MetLife and has scheduled a vote. The Council agenda’s use of the word “preliminary” means things are still fluid in workflow in that corner of the world that determines SIFI designations. It is also understood, based on earlier minutes referring to presentations from the Federal Insurance Office (FIO) that there is another insurer under review, in Stage 2 of SIFI analysis. This may be Berkshire Hathaway, as was suggested by Bloomberg news reports in early 2014.
On Aug. 19, the Council deemed its evidentiary record regarding a nonbank financial company
to be complete in accordance the rules and guidance of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
FSOC will not officially identify the institutions under review until a final determination is made but MetLife, like Prudential Financial land AIG before it, has made no bones about its position. It also has opposed SIFI status in public remarks for well over the year MetLife has been under consideration.
There is legislation pending in the House meant to establish a six-month moratorium on SIFI designations and to make the meetings open to more officials developed by members who fear a black box operation at the FSOC. Meanwhile, in both chambers of Congress, there is legislation to make Section 171 of Dodd Frank, the so-called Collins Amendment, flexible so it does not establish unwanted minimum capital standards in line with bank models on insurers supervised by the Fed, which include not only SIFIs but insurers with savings and loans. The Fed’s general counsel Scott Alvarez has issued an opinion that as Section 171 stands, there is no flexibility to carve out a way to treat insurers differently.
MetLife, along with AIG and Prudential, are already deemed to be global systemically important insurers (G-SIIs). reinsurers are expected to be named by the International Association of Insurance Supervisors (IAIS) and the G-20’s Financial Stability Board (FSB) in November.
Yes, the book on MetLife is closed; vote on SIFI desgination next step
The Financial Stability Oversight Council voted Aug. 19 unanimously to close the evidentiary record on a what it says is a nonbank financial company, which we shall refer to as MetLife.
MetLife has been in Stage 3 of the review process for potential designation as a systemically risky financial institution (SIFI) for over a year.
Closing the books is the next step before the FSOC gathers in person or by phone to vote to potentially designate the largest U.S. life insurance company a SIFI, as it has for AIG, GE Capital and Prudential Financial, the second-largest U.S. life insurer. Prudential contested its proposed designation in an appeal, lost its bid and finally accepted it in lieu of a further battle and a higher standard of proof in the courts.
MetLife has long argued that it is not a SIFI, and it will be of interest to many to see whether the vote is unanimous or not.
The vote for Prudential was broken by three dissents, two from voting members Roy Woodall, the appointed independent member with insurance expertise, and Edward DeMarco, then acting chair of the Federal Housing Finance Agency (FHFA), and one from the representative from the state regulators, Missouri Insurance Director John Huff. The Securuties and Exchange Commission (SEC) had abstained in light of the recent Mary Jo White appointment.
When MetLife reached Stage 3 of the FSOC’s designation process in mid-July 2013, CEO Steven Kandarian stated that,
“I do not believe that MetLife is a systemically important financial institution. The Dodd-Frank Act defines a SIFI as a company whose failure ‘could pose a threat to the financial stability of the United States.’ Not only does exposure to MetLife not threaten the financial system, but I cannot think of a single firm that would be threatened by its exposure to MetLife.”
He argued against the scenario that the FSOC in large used that summer to finally designate Prudential, a run on the bank scenario.
“The life insurance industry is a source of financial stability. Even during periods of financial stress, the long-term nature of our liabilities insulates us against bank-like ‘runs’ and the need to sell off assets,” Kandarian said July 16, 2013.
“If only a handful of large life insurers are named SIFIs and subjected to capital rules designed for banks, our ability to issue guarantees would be constrained. We would have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether.”
MetLife is already a global systemically important insurer, as designated by the Financial Stability Board (FSB) after a review by the International Association of Insurance Supervisors (IAIS), as are AIG and Prudential.
The FSOC said in its resolution approving the completion of the record that “the nonbank financial company” has submitted written materials and information to the Council and the Office of Financial Research (OFR) and the staffs of the Council members and their agencies have analyzed such materials and information. The council member agencies are led by the Treasury Secretary or his designee. Including him, there are 10 voting members. They are listed here, by agency: http://www.treasury.gov/initiatives/fsoc/about/council/Pages/default.aspx
The OFR was planning on hiring more insurance expertise at one point, in the spring.
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.
WASHINGTON INSURANCE RIDER 