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

Fed hires Tom Sullivan as its insurance chief

The Federal Reserve Board has hired an insurance regulatory chief after a long search for an insurance expert to fill the new position. Former Connecticut insurance regulator and industry consultant Tom Sullivan has accepted a position as the senior advisor for insurance to the Board of Governors.
A Fed spokesperson for the board said he starts the high-profile post June 9.
As such, Sullivan will be representing the Fed at all domestic and international insurance forums, he stated in an email to colleagues in the insurance sector.
Sullivan has most recently been a partner at PricewaterhouseCoopers. Word was that the well-regarded insurance regulatory expert was also once on the short list for NAIC CEO before the organization hired Sen. Ben Nelson, D-Neb., for the post a year and a-halfago.
The Fed, as a prudential regulator of systemically important insurers (non-bank SIFIs) and insurers with thrift holding companies (SLHCs), has an ever-more powerful voice in insurance regulation. The Fed is well as a member of the Financial Stability Board (FSB), has a seat at every table now, including at the International Association of Insurance Supervisors, in Basel.
The Fed has been seeking an insurance leader for some time, and several names have come up on the short list.
“I am excited to be joining the Fed and there is a lot of work to be done given their statutory authority as consolidated regulator for the designated insurer non-bank SIFI’s and the insurer owned SLHC’s,” Sullivan said in an email.
Sullivan will be working with insurance supervisory cohorts the NAIC’s international team of state regulators Kevin McCarty (Florida), Tom Leonardi (Connecticut) and Michael Consedine (Pennsylvania), among others, as well as the Treasury’s Federal Insurance Office (FIO.)
Sullivan takes the helm of the key insurance official title at a critical time. Controversial proposed capital standards are under development globally for insurers that are not only systemically important but that are also internationally active, and these standards must be translated to and put up for acceptance by local jurisdictions like the United States.
Congress, the Fed and U.S. insurers are struggling with what to do with seemingly inflexible strict minimum requirement capital standards that would also hammer down on insurance  SIFIs and thrift holding companies under Sections 165 and 171 of the 2010 Dodd Frank Act. Legislation is pending, with the American Council of Life Insurance (ACLI) taking out a full-page ad last week “highlighting the life insurance industry’s support for critical legislation (S. 2270 and H.R 4510) that would clarify the Federal Reserve Board’s authority to apply insurance-based capital standards to insurance companies under the Fed’s supervision.”
 Indeed,  a similar ad from the ACLI will run in Politico on June 4.
Sullivan served as Connecticut insurance commissioner throughout the 2008 financial crisis and AIG’s downfall. He was appointed by Republican Gov. Mary Jodi Rell in 2007. As chair of the NAIC’s LIfe Insurance and Annuities Committee  and has testified before Congress as a state regulator that prudential oversight of insurers by the states works, citing solvency and capital standards that “have ensured that policyholder commitments are met  and that companies remain stable.”
Sullivan is a lifelong Connecticut resident who graduated from Western Connecticut Sate University and got his MBA from the University of Connecticut.
Early reaction was positive from those who have worked with the amiable, well-seasoned executive.
“The Federal Reserve Board has made a solid appointment in choosing Thomas Sullivan, who has keen regulatory and industry insight. He understands the importance of state-based regulation, and the difference between banking and insurance. This is a great step forward that will benefit consumers and insurers,” stated current Connecticut commissioner and IAIS Executive Committee member Tom Leonardi.
Leonardi sits on numerous supervisory colleges as commissioner and is extraordinarily active in international insurance supervision,and will be working closely with Sullivan on capital standards for  and oversight discussions embedded in the IAIS’ ComFrame initiative and in higher loss absorbency standards for global systemically important insurers and reinsurers. The latter group, the reinsurers, is expected to be identified this summer by the IAIS.
NAIC President and North Dakota Insurance Commissioner Adam Hamm stated,”Tom’s strong regulatory experience, comprehension of the insurance sector, and thorough understanding of America’s national system of state-based insurance regulation will be a tremendous asset to the Board on both domestic and international issues.We look forward to working with Tom in his new position as we continue to enhance our working relationship with the Federal Reserve.”

 

Author: Liz Festa,  June 2, 2014