‘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.

Staircase at National Fire Group, Hartford, Dec. 10, 1941, courtesy Library of Congress archives via Gottscho-Schleisner, Inc.,  photographer

Staircase at National Fire Group, Hartford Stair, Dec. 10, 1941, courtesy Library of Congress archives via Gottscho-Schleisner, Inc., photographer

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.

Construction of the US Treasury Building, 1857, image courtesy LOC

Construction of the Treasury Building, 1857, courtesy LOC


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.

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.

House TRIA drama upstages Senate’s passage of bill

July 17–The Senate passage of a seven-year extension Terrorism Risk Insurance Program Reauthorization Act of 2014 (S. 2244) 93-4, complete with the package of National Association of Registered Agents and Brokers legislation (NARAB II) as an amendment, doesn’t mean the package will move to a complete legislative bill ready to sign anytime soon.
Division among various interests in the House to delay the legislation in the House, despite the smooth passage in the Senate. The current law, which expires at the end of this year.

House Financial Services Chairman  Jeb Hensarling of Texas

House Financial Services Chairman Jeb Hensarling of Texas

In the past two days, the GOP whip operation has polled Republican members and those the whip counts have been mixed, which signal delay as loud as anything, as sources noted.
House Financial Services Committee Jeb Hensarling, R-Tx., led his committee to pass a five-year extension bill in mid-June that would treat conventional and nuclear chemical biological and radiological (NCBR) terrorist attacks differently, increase in the trigger for government payouts associated with conventional attacks and increased mandatory recoupment amounts.
As of this week, despite being tentatively on the House calendar for a floor vote, H.R. 4871 did not poll well, even before a whip count was attempted, with 218 votes still unlikely with the House bill as-is, sources close to the process said. Now that Hensarling has stated that, “Unfortunately, the Senate’s bill is essentially a status quo bill that uses a phony Washington budget gimmick as a pay-for, meaning it can’t even come to the House floor as written.”
Supporters of the TRIA extension are now looking at months before enactment, possibly, when just last week major insurers who supported both the Senate and the House versions were thinking in terms of days or a couple of weeks.
Certainty is of high value for insurers and commercial realtors as policies come up for renewal and no one knows exactly how to underwrite them.
The author of the bill and chair of the Housing and Insurance Subcommittee, Randy Neugebauer, R-Tx., and the House Leadership are fully behind the bill as passed by the Committee, and a Neugebauer aide underscored the point that a watered-down House bill was not welcome on the House floor. If it comes to the House floor, the bill will not be changed in any major, substantive way, he said.
Indeed, there are some members who feel it does not go far enough, not just those that think it goes too far in its widening of industry funds and capacity over time.
The House bill is supported by major insurers, producers, realty groups and associations and others. Small insurers openly oppose the $500 million trigger and not many don’t embrace the bill despite an opt-out provision on some measures.
The next few months -despite many fewer legislative days on the calendar– will be ones where the House Financial Services Committee leadership helps educate members who are not familiar with the TRIA program, and those that need help understanding the parameters of the bill, according to the Neugebauer aide, who indicated there is no rush and that they will be patient.
The six-month temporary extension will only come into play if the House cannot agree by ore before Christmastime.
“I’m still committed to getting a bill passed, but it has become very clear this week that the process is going to take several more months before there is a resolution….Washington is paying a lot of attention to one group’s concerns, but not enough attention to the other’s. That’s got to change if any TRIA bill is going to pass,” Hensarling stated.
“As this process goes forward over the next several months, I will be using that time to discuss with all members how to continue the program and also make reforms that improve our stewardship of Americans’ hard-earned tax dollars.”

On the action of the day, or as Hensarling put it, “…I’m pleased to hear that the Senate is at least working today,” in reference to the passage and the fact they have ignored job bills sent over to their chamber, insurers and other groups praised the Senate bill.
The Property Casualty Insurers Association of America (PCI) “commends the Senate for passing the Terrorism Risk Insurance Program Reauthorization Act of 2014. This long-term legislation will minimize the disruptions, maintain the availability and affordability of terrorism insurance for consumers, and protect taxpayers,” stated Nat Wienecke, senior vice president, federal government relations “It is great to see members of both parties come together in a broad bipartisan fashion to support America’s economic resiliency plan to recover from terrorist attacks.
“The strong bipartisan vote reflected a relatively smooth process through which the legislation was produced by the Senate Banking Committee, under the leadership of Chairman Tim Johnson of South Dakota and ranking Republican Sen. Mike Crapo of Idaho. The legislation tweaks the industry’s deductibles,” noted Joel Wood, The Council’s senior vice president for government affairs.
The tweaks include increases the “industry recoupment” by $2 billion a year to an overall level of $37.5 billion, and increases the insurer coinsurance level from 15% to 20% over five years.
The Senate legislation, S.2244, is strongly supported by the Administration, many sectors of insurance and commercial policyholder community, the real estate industry and the U.S. Chamber of Commerce. S. 2244 is opposed by the Heritage Foundation, the Consumer Federation of America and the free-market oriented insurance policy thinktank,  R Street Institute.
“Reauthorizing the program will ensure that the American economy remains resilient against the threat of terrorism. The Administration supports swift passage of this legislation and looks forward to working with Congress on this reauthorization and reform process,” came the statement from the WHite House before the vote.

But,according to R Street Senior Fellow R.J. Lehmann, “unlike H.R. 4871, the TRIA Reform Act … the Senate’s proposed seven-year extension fails to make appropriate changes to the program to shift more risk to the private sector.”
As Lehmann noted, the Senate bill does make modest adjustments to the federal share of terrorism losses, which gradually would be scaled back to 80 percent from the current 85 percent, the House bill goes further by raising the trigger level for coverage for conventional terrorist attacks to $500 million.
“Reinsurance broker Guy Carpenter recently issued a report finding that multiline terrorism reinsurance capacity is about $2.5 billion per program for conventional terrorism and about $1 billion per program for coverages that include NBCR,” stated Lehmann said. “The changes proposed in the House bill are well within the bounds of the private market’s existing capacity, and failing to make those changes would put taxpayers on the line for risks that should be borne by big corporations, property owners and insurance companies,” he continued.

NARAB is not a worry for most, although it slightly short of the “love fest” that one confident NAIC official once testified in the Senate it would be in March 2013.
Sen. Tom Coburn,R-Ok., who was one of the 4 Senate “Nay” votes, threatened to hold up Senate vote of the TRIA bill unless concessions were made on NARAB so a “sunset” of NARAB of two years after the first agent or broker receives a license from the clearinghouse was added to the Senate version. No such sunset exists in the House TRIA legislation to which NARAB is attached, sources noted.

The insurance industry will push for the elimination of the NARAB  sunset provision.

The NAIC noted, “while we have long supported the NARAB legislation, we do however have concerns with the inclusion of a sunset provision that could have adverse effects on insurance markets if NARAB were to come into existence and then ultimately be terminated.”

But,  as expected, most do want NARAB now to see the light of day and must pin their hopes on a  succsessful House and  Senate TRIA package.
U.S. Sens. Jon Tester, D-Mont., and Mike Johanns, R-Neb., stated today that the NARAB legislation is expected to lower prices through increased competition because insurance brokers can more easily register across state lines. It was added to a bill reauthorizing the federal backstop for insurance coverage for terrorist attacks.
Tester said, “This is a big step forward to create new opportunities for small agents and brokers and to provide consumers with a better product at a lower price. Streamlining the licensing of registered agents and brokers while maintaining state regulation of the insurance industry will increase competition and better protect consumers”
CIAB, which has been championing a clearinghouse for agents and brokers for many years, may finally see its work come to fruition if the TRIA bill gets past the remaining stumbling blocks.
“We are pleased that the legislation also includes our long-sought NARAB proposal to create a uniform agent/broker nonresident licensure clearinghouse,” said CIAB’s Wood.
“NARAB II is common sense legislation that creates a streamlined agent and broker licensing system that strengthens the competitive insurance market and protects consumers,” PCI’s Wienecke stated.
The Administration/Treasury also backs NARAB.

Thursday’s Child: Vote on TRIA renewal now set for Friday, June 20

The new U.S. House Terrorism Risk Insurance Act extension bill will go to a vote Friday morning, now, in the House Financial Services Committee (HFSC)  after a long debate Thursday, with a variety of amendments added and withdrawn into the afternoon.

The bill , H.R. 4871, appears to poised to move to the floor along party-line votes, although both Democrats and some  Republicans have qualms about some of the provisions. If it does not pass, the HFSC leadership will allow “a clean,” half-year extension only to go to the  House Floor.

However, all was studied politeness and patriotism at the mark-up today as Committee Chairman Jeb Hensarling,R-Texas,  thanked members for voicing their opposing views while noting that the bill has been debated for over a year, and all sides heard. Carolyn B. Maloney (D-NY) was among  the first out with a statement from the Democrats opposing the  bill, even though she sad it was a “significant improvement over previous drafts.” Her concerns  are increasing the trigger for the government backstop from $100 million to $500 million; and treating “conventional” terrorist attacks differently from so-called “NBCR attacks” – nuclear, biological, chemical, and radiological attacks.

“These changes would drive small- and medium-sized insurers out of the market entirely – which would actually reduce the amount of terrorism insurance available to businesses,” Maloney stated.

There have been a number of changes in TRIA over the past dozen years, Hensarling said, to parry complaints about the proposed rise of the trigger to $500 million, along with increases in the recoupment and co-pay amounts.

However, the increase to $500 from $100 million is 500%, not the incremental percentage changes of earlier increases in industry cost amounts, several lawmakers  on both sides of the aisle argued. Hensarling said that the bill, sponsored by Rep. Randy Neugebauer, R Texas, chair of the Housing and Insurance Subcommittee,  is not an end to TRIA at all, as seems to be the theme among  some of his his colleagues,  as he said.  “To amend it is not to end it, he said.

But with the current legislation, “You have a program but no one can afford it,” said Rep. Michael Capuano, D-Mass. Rep. David Scott, D-Ga.,  even went as far as to suggest a $500 million trigger would be fodder for terrorists now watching Congress’ every move on TRIA, including one that would be “foolish” and “irresponsible” by placing the U.S. “on its knees” in its ability to regain its footing and rebuild after a terrorist event by effectively getting rid of the federal backstop, as he believes the  legislation’s higher trigger amount would do.

One significant addition is the inclusion of NARAB II, a non-profit clearinghouse, the National Association of Registered Agents and Brokers (NARAB) that would streamline non-resident market access for insurance agents and brokers by allowing full multi-state uniformity and reciprocity while keeping state  market conduct authority “to police bad actors,” as the National Association of Insurance Commissioners (NAIC) puts it. Rep. Ed Royce, R-Calif., did  question the need with an amendment for a review of NAIC governance pursuant to NAIC’s role in NARAB 2, and its authority to  recommending board members to the President, who would make the appointments. Another attempted amendment was the addition of the so-called Collins Amendment fix.

Like the FSOC, the Collins (Sen. Susan Collins, R-Maine) Amendment is a part of the Dodd Frank Act (DFA.) This amendment, DFA Section 171, does require minimum capital standards on all thrifts and bank holding companies as well as on nonbank systemically important financial institutions regulated by the Federal Reserve.

The fix offered by Rep. Gary Gene Miller, R-Calif, and Rep.  Carolyn McCarthy, D-N.Y.,  and supported by the Senate by and large, would free insurers as such from the minimum leverage capital requirements and minimum risk-based capital requirements on a consolidated basis.

For further coverage, see http://www.carriermanagement.com on Friday with information on the final House vote on TRIA and on legislation to put the brakes on, and allow more oversight of, the U.S. Financial Stability Oversight Council (FSOC.)

“We look forward to the Committee reconvening tomorrow to vote on the TRIA reauthorization provisions pending before the Committee. We are also very pleased that NARAB II was adopted by the Committee and will be included in the House TRIA Reform Act,” stated Nat Wienecke, senior vice president, federal government relations, of the Property Casualty Insurance Association of America.

Congress passed the Terrorism Risk Insurance Act of 2002 in the aftermath of 9/11 for fear that the lack of available terrorism insurance could harm economic development and since 2002 the market has stabilized, risk management has improved, modeling has advanced, and premiums have decreased by 70%, according to Neugebauer.

TRIA renewal teed up in House but legislation sharing the day may put brakes on FSOC

The House Financial Services Committee (HFSC) has a full agenda Thursday, June 19, with a mark up  and likely passage of the Terrorism  Risk Insurance Act Reform Act of 2014, which will extend the program for five years, albeit with an increased co-pay, and higher  program trigger amounts, through Dec. 31, 2019, along with consideration of  bills to slow down and open up to Congressional eyes  the Financial Stability Oversight Council (FSOC).

Housing and Insurance Subcommittee Chairman Randy Neugebauer is introducing the bill before the full committee.

The ease with which the House bill has been accepted, although it is more austere in what is provided for the insurance industry  than the Senate TRIA version, combined with the support for action, likely means the House legislation will sail through with broad Republican support,  until it meets the softer Senate version in conference committee. Then, real tussling could begin.

How the House Democrats will vote on Thursday is said to be a major factor in how the bill moves forward.

If the Democrats on the HFSC are led in a  vote against the TRIA renewal bill, there could be a floor fight. If they vote for it, the bill could go forward on the suspension calendar next week on two-thirds of a vote.

A key question is the Thursday vote of Rep. Carol Maloney, D-NY,  ranking member of the House Financial Services Subcommittee on Capital Markets and GSEs.

Maloney stated in May that raising the program trigger for conventional terrorist events from $100 million to $500 million  and increasing the recoupment of federal payments to 150 percent, which are both features in the Neugebauer bill, “are changes that go far beyond what the market will bear. The economic consequences of these proposed changes to TRIA for metropolitan areas like New York, which continue to be at risk of another attack, would be disastrous.”

However, her office pointed out that since key components have changed, this statement does NOT apply to the current draft.

Another major consideration the industry is concerned about is how  the Congressional Budget Office (CBO) scores the bill, and for how much, given the proposed recoupment level.

Beginning on January 1, 2016, the House bill increases the amount that the Treasury Secretary is required to collect through terrorism loss risk-spreading premiums from 133 to 150 percent of the federal payments made subject to mandatory recoupment. The bill clarifies that the amount of federal payments subject to mandatory recoupment shall be equal to the lesser of the total of federal payments made or the insurance marketplace aggregate retention amount.

But so far the insurance industry is on board to get this bill quickly  through Chairman Jeb Hensarling’s, R-Texas,  committee.

“Any sign of progress is a welcome one,” said Jimi Grande, political affairs senior vice president for the National Association of Mutual Insurance Companies (NAMIC) of the bill that would bifurcate nuclear, biological, chemical or radiological type (NBCR) of attacks from the conventional terrorism trigger amounts.

The American Insurance Association (AIA) praised the growing momentum for TRIA reauthorization in the House but cautioned that certain provisions of the bill could decrease market capacity, citing the bifurcation of conventional terrorism acts with the NBCR attacks. This differentiation “falsely assumes that the insurance market operates based on the same distinctions,” stated AIA president and CEO Leigh Ann Pusey.

Ken Crerar, president and CEO of the Council of Insurance Agents and Brokers (CIAB) stated the organization which represents the largest commercial insurance brokerage firms is “so gratified to see great legislative progress…”

“We hope the Committee and the full House act swiftly so that the Congress can send TRIA legislation to the President for his signature before the August recess,” stated Nat Wienecke, senior vice president, federal government relations at the Property Casualty Insurers Association of America (PCI).

PCI and its member companies applauded what they said were several improvements that have been made in the legislation, including the “reasonable reauthorization duration, maintenance of the “20% insurer deductible,” and incorporation of  “very important technical corrections to the terrorism certification process.”

The Senate bill, S. 2244, contains a seven-year reauthorization and is awaiting a full vote by the Senate.

“We echo the calls of all the key stakeholders for the Financial Services Committee to advance the legislation which has been authored by Chairman Neugebauer. We’re particularly grateful for the Chairman’s decision to seek a five-year extension of the program—just one of many substantive improvements that have been made after close and deliberate consultation with all of the major interests in recent weeks,” Crerar stated.

As Crerar noted, the appropriate federal role in the terrorism insurance marketplace has been debated for 13 years —  and this is the fourth Congressional debate.

There are industry exposure concerns with the House bill but not many were voiced today, in advance of the mark-up.

The House bill increase of trigger amounts to $500 million at the end of five years, can be absorbed by large companies if their coverage as one company does not saturate the marketplace or have too great an area of concentration, but smaller insurers, who may be able to opt out of offering coverage, cannot absorb the higher amounts readily. The tilt in  terrorism risk exposure to only a few, large companies could  skewer the marketplace and raise prices, insurers worry.  And some in the insurance industry remain skeptical of the large co-share or co-pay on top of an already sharply increased trigger amount for federal coverage.

Congress, by and large, wants the industry to fend for itself more in underwriting terrorism risk but almost all of the insurance industry, although conceding the point, says it is not ready to fully expose itself to known and unquantifiable future losses because they are almost impossible now to underwrite and the capacity for full exposure is not there.

With regard to other proposed  insurance reform measures, many in the industry hope that Neugebauer can attach the ‘NARAB II’ legislation to facilitate interstate agent/broker nonresident licensure to the TRIA legislation. NARAB has support from almost all quarters, including the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO.)

The full HFSC will also mark up legislation to place a six-month moratorium on the authority of the FSOC to make financial stability decisions under section 113 of Dodd Frank. Asset managers and mammoth insurer MetLife, which has been under intensive review by the FSOC for almost a year as a systemically important financial institution, have resisted the suggestions that they are systemically risky  the financial markets.

Both the FSOC and the global Financial Stability Board (FSB) have begun examining whether regulated funds or their managers could pose risk to the overall financial system and thus should be deemed SIFIs.

U.S. mutual funds designated as SIFIs would be subject to new, bank-style prudential regulation that could significantly harm funds and the investors who rely upon them. Singling out individual mutual funds for inappropriate regulation or supervision would raise costs for fund investors and distort competition, among other harmful effects, according to the Investment Company Institute Viewpoints blog.

The HSFC will also be marking up H.R. 4387, the FSOC transparency and Accountability Act.

This bill would open up to varying degrees of participation  the FSOC processes to members of Congress, and to the boards and commissions of the agencies that serve on the FSOC, from the Securities and Exchange Commission (SEC)  to the National Credit Union Administration (NCUA.)  It would also make the FSOC subject to both the Sunshine Act and  the Federal Advisory Committee Act. It was introduced by Capital Markets and GSEs Subcommittee Chairman Scott Garrett, R-N.J.

The U.S. Treasury, which houses FSOC, did not comment on the FSOC measures but rarely comments on the particulars of  legislation. Treasury and the Obama Administration have acknowledged their support of TRIA renewal.

“I should add that we, Treasury, applaud the strong bipartisan action by the Senate Banking Committee to preserve the long-term availability and affordability of property and casualty insurance for terrorism risk.  A report of the President’s Working Group on Financial Markets recently affirmed the importance of TRIA to the national economy.  We look forward to swift action by the full Senate and the House to extend the program,” FIO Director Michael McRaith stated in a recent speech in New York this month.

How this will play  out if  the somewhat-hobbling FSOC legislation is attached to the TRIA renewal bill is another story. The next closed FSOC meting is next week, on June 24.