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.