Insurance Industry Groups React Positively to Fed Reserve Plans for Domestic Capital Standard
May 23, 2016 by Thomas Harman
WASHINGTON – Insurance industry groups are reacting positively to the Federal Reserve Board’s announcement it is set to offer a domestic capital standard for insurers that rejects a host of European and international proposals.
Daniel Tarullo, member of the Fed’s Board of Governors, previewed the Fed’s plans during a May 20 speech at the National Association of Insurance Commissioners’ International Insurance Forum in Washington.
Tarullo’s plan said the Fed will propose a two-tiered, risk-based approach toward a domestic capital standard in an Advance Notice of Proposed Rulemaking to be issued “in the coming weeks.” The Fed’s capital requirement plan is expected to be issued in two parts — a building block approach to cover insurance companies that own thrifts and are not systemically important; and a consolidated approach for systemically important firms (Best’s News Service, May 20, 2016).
The American Insurance Association was encouraged by the Fed’s proposal, according to a statement from AIA President and Chief Executive Officer Leigh Ann Pusey.
Pusey’s statements backed Tarullo’s conclusion that a Solvency II approach embraced by the European Union was unpromising and a cash-flow testing approach needed long-term development. She noted Tarullo refused to use the International Association of Insurance Supervisors’ insurance capital standard because it lacked globally consistent accounting standards, valuation approaches and product definitions. And she also cited Tarullo’s concerns about the IAIS’ basic capital requirement because it used a valuation approach not recognized by U.S. companies or regulators. “AIA is encouraged by [Tarullo’s] analysis, particularly as it recognizes the challenges presented to the U.S.-based groups that the Fed prudentially supervises,” she said.
She said its approach toward insurers with depository institutions would aggregate existing legal entity capital and then apply a scalar for compatibility. This “would leverage risk-based capital standards that are already employed by our state regulators.” For systemically important insurers, Pusey said the Fed proposal would be based in U.S. Generally Accepted Accounting Principles that will be tailored to reflect the insurance industry business model. “AIA has long asserted that any approach must reflect the insurance business model and we support using well-tested tools already in place in the U.S.,” Pusey’s statement said.
The American Council of Life Insurers said in a statement it welcomed Tarullo’s comment that capital standards under Europe’s Solvency II and capital standards being developed by the IAIS would be inappropriate for the Fed to use domestically. Also, the ACLI statement said Tarullo appears to be aware that those standards would fail to build on the U.S.’s state-based regulatory system.
However, the ACLI voiced some concern about the Fed’s proposal. “We have questions about an approach that would put in place two distinctly different capital regimes for insurance entities overseen by the Board, and so we will be looking extremely closely at the details of the proposals once they are released,” the statement said.
The Property Casualty Insurers Association of America supported Tarullo’s comments. “The Federal Reserve recognized the differences between the insurance industry and other financial sectors, including the benefits of our current state risk-based capital for insurers,” said Robert Gordon, PCI senior vice president of policy development and research, in a written statement. “This is particularly true in contrast to several of the problematic international standards being proposed.” Final details of the Fed’s plan are under development, Gordon’s statement said.
(By Thomas Harman, Washington Bureau manager, BestWeek: Tom.Harman@ambest.com)
