House hearing should bring U.S. approach to ICS into sharper focus

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

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.

Renewed FACI to meet Thursday, group now weighted with industry execs

The Federal Advisory Committee on Insurance (FACI) meets today, Aug. 7, in Washington, with a slate of new members. For the first time, industry participants outnumber state regulators.
The agenda is broad, including the first time the committee will meet to discuss the FIO report, How to Modernize and Improve the System of Insurance Regulation in the United States, issued in December.
There are nine high-level insurance or broker industry members, including two from non-U.S.-domiciled holding companies, two academics, the addition of a state legislator with insurance interests, one consumer advocate and eight state insurance regulators. State regulators number eight for a total of 21 members.
FIO Director Michael McRaith oversees the committee, which will again be chaired by the CEO of Marsh & McLennan Cos., this time in the person of Dan Glaser rather than the retired Brian Duperreault.
Originally, half the slots were for state regulators.
Seven are original members of the 15 named almost three years ago, when industry members numbered six participants, state regulators seven, with the addition of one each of an academic representative and a consumer advocate. A few represent the same firms or entities as their predecessors.
The FACI is also scheduled to review of the renewed charter of the FACI and give a status report on international developments. McRaith is a member of the International Association of Insurance Supervisors, and Pennsylvania insurance Commissioner Michael Consedine chairs the National Association of Insurance Commissioners (NAIC) International Committee (G) as well as NAIC vice president. The G Committee is scheduled to have a conference call to discuss, among other things, technical issues with the IAIS’ Basic Capital Requirements (BCR) consultation paper at about the same time as the FACI meeting.
There will also probably be an update on the The EU-U.S. Insurance Project, in which other FACI members are involved. By end 2014, the steering committee of the project has proposed to evaluate the use of a covered agreement to achieve the group supervision stated objectives such as working towards achieving greater comparability between groups in relation to an overall group solvency assessment.
One original and continuing member, Benjamin Lawsky, New York’s Superintendent of Financial Services, recently wrote to members of the Financial Stability Oversight Council, which include McRaith as a nonvoting member, asking for careful consideration in the Council’s review of MetLife as a potential systemically important financial institution and noting that MetLife’s life insurance businesses already are “closely and carefully regulated” by the state of New York and other regulators.

The domestic  insurers named as SIFIs so far by the FSOC,  Prudential Financial and AIG, now have executives on the FACI, as does Allianz, deemed a  global systemically important insurer, as designated by the IAIS/Financial Stability Board (FSB.) Prudential and AIG are also G-SIIs, as is MetLife. Only MetLife, expected to be named a potential SIFI by FSOC soon, is not represented on FACI. Prudential Financial is now overseen on a consolidated basis by the Boston Federal Reserve Bank and AIG by the New York Fed.
The original FACI charter called for the FACI to consist of not more than 15 members. The duties of the FACI are “solely advisory and shall extend only to the submission of advice and recommendations to the FlO, which shall be non-binding,” to the original charter. No determination of fact or policy shall be made by the Committee, according to this 2011 charter, which was renewed in August 2013 for another two years.
FACI has met in person, in public meetings, about half a dozen times since its first meeting in March 2012, and weighed in heavily on the topics of availability and affordability of insurance and the use of captive arrangements by insurers, in open discussions which sometimes turned tense as when former FACI member Thomas Leonardi sparred with McRaith on whether the investigation of captives was even necessary by FACI and FIO. There were also forays into catastrophes, the national flood program and Superstorm Sandy, and an overall broad commitment to look into the retirement and aging of the world’s insurance-buying public.
However,the FACI has seemingly been dormant for at least half a year, although phone calls are not made public.
The 21 individuals (Asterisk denotes original member)appointed today to the Federal Advisory Committee on Insurance include:

· Gary Bhojwani, Chairman of Allianz of America

* Birny Birnbaum, Executive Director, Center for Economic Justice

· Elizabeth Brown, Professor, Georgia State University

* Michael Consedine, Commissioner, Pennsylvania Insurance Department

· Brenda Cude, Professor, University of Georgia

* Jacqueline Cunningham, Commissioner, Virginia Bureau of Insurance

· John Franchini, Superintendent, New Mexico Office of the Superintendent of Insurance

* Loretta Fuller, CEO & CFO, Insurance Solutions Associates

· Nicholas Gerhart, Commissioner, Iowa Insurance Division

· Daniel Glaser, President & CEO, Marsh & McLennan Companies (Chair of the Committee–was Brian Duperreault, retired CEO of Marsh)

· Mark Grier, Vice Chairman, Prudential Financial, Inc.

· David Herzog, EVP & CFO, American International Group, Inc.

· George Keiser, Representative, North Dakota House of Representatives

· James Kelleher, EVP & Chief Legal Officer, Liberty Mutual Insurance

* Scott Kipper, Commissioner, Nevada Division of Insurance

* Benjamin Lawsky, Superintendent, New York Department of Financial Services

· Theodore Mathas, Chairman, President & CEO, New York Life Insurance Company (was Michael Sproule from NY Life)

* Sean McGovern, Chief Risk Officer & General Counsel, Lloyd’s of London

· Julie McPeak, Commissioner, Tennessee Department of Commerce and Insurance

· Franklin (Tad) Montross, Chairman, President & CEO, General Re Corporation

· Theodore Nickel, Commissioner, Wisconsin Office of the Commissioner of Insurance