IAIS proposes plan for first ever global capital standard

The U.S. states can adopt these standards state by state, but if they do not there will be a lot of places where the IAIS and other countries can apply pressure, including in the reviews of the U.S. regulatory system, such as the Financial Sector Assessment Program (FSAP), which provides in-depth examinations of countries’ financial sectors and in trade negotiations. A federal legislative approach is not out of the question. At any rate, the FIO, the NAIC, the Federal Reserve as it gains IAIS membership, and IAIS observers are all expected to work together on these standards.

An NAIC response came from CEO Ben Nelson who stated that “although U.S. state insurance regulators continue to have serious concerns about the timing, necessity and complexity of developing a global capital standard given regulatory differences around the globe, we intend to remain fully engaged in the process to ensure that any development augments the strong legal entity capital standards in the U.S. that have provided proven and tested security for U.S. policyholders and stable insurance markets for consumers and industry.”

NAIC staffer Elise Liebers, who now heads the IAIS Financial Stability Committee, stated that “a risk-based capital standard for global insurance groups has been established as a priority for the IAIS as part of its work to promote financial stability.” The NAIC has railed against FSB directives recently, worrying it is guiding the IAIS into the banking supervisory realm. Two state insurance commissioners – Kevin McCarty of Florida and Tom Leonardi of Connecticut – are on the IAIS executive committee. This plan was approved by the Executive Committee, which is composed of 24 members, including McRaith.

“It is undeniable that the business of insurance is global, and global issues demand global responses,” said Peter Braumüller, chair of the IAIS Executive Committee.

A spokesman for the Federal Reserve Board in Washington, D.C., said the agency would not comment on the IAIS initiative at this time. 

At the same time, a spokesman for Rep. Randy Neugebauer, R-Texas, chairman of the Housing and Insurance Subcommittee of the House Financial Services Committee, pointed to comments he made at a hearing on the issue held by his subcommittee in June.

At the hearing, Neugebauer voiced concerns that a bank-like model for insurance regulation favored by the IAIS “could disproportionately impact U.S. insurance policyholders and insurers.”

Neugebauer pointed to the IAIS proposal and said it confirmed that adoption would “create a one-size-fits-all regulatory regime for global insurers,” including group-wide capital assessments and prescriptive credential standards. “Given the uniqueness of our regulatory model, this proposal has a potential to increase the cost for U.S. insurers which would be borne by the policyholders themselves,” Neugebauer said.

The June hearing predates the FSB mid-July announcement that IAIS should develop a “quantitative capital standard” by year-end.

The industry was by turns, both circumspect and a little defiant. 

The life insurance industry under the aegis of the American Council of Life Insurers (ACLI) said that the “U.S. insurance regulatory system has strong and vibrant solvency and capital requirements. We look forward to participating in discussions with the IAIS.”

John H. Fitzpatrick, secretary general of The Geneva Association and AIG board member, stated that while the association of global insurers remain committed to working with standard setters such as the IAIS on important initiatives, “it is clear that there will be significant challenges to the creation of a global capital standard for insurers, particularly within the timeframe proposed.” Fitzpatrick went on to say, “We acknowledge that the IAIS may need to take incremental steps towards achieving this overall goal.”

Dave Snyder, international supervisory vice president with the Property Casualty Insurers Association of America (PCI), questioned the very foundation of this project as he said there was no evidence that this direction is needed, and no benefit to consumers has been shown. 

Snyder said if the wrong standards are implemented, they could lead to systemic risk within the industry “that does not now exist within our sector,” by creating one model that does away with the “diversity of our regulation and diversity of our business models,” which acts to spread risk.

Stef Zielezienski, general counsel for the American Insurance Association (AIA), said the development of a global insurance capital standard should “take a well-reasoned and risk-focused approach to capital assessment that can be applied consistently to internationally active groups without compromising their ability to compete.” Zielezienski  added that, “We will be anxious to see how an insurance capital standard evolves and how it aligns (or does not align) with [other ComFrame ]workstreams…Any standard should be workable for insurance companies and not result in additional regulatory layers.”

The news comes as the IAIS is scheduled to meet starting next week in Taipei with committee meetings Oct. 14-16 and the annual conference and general meeting Oct. 16-19. The  U.S. government  budgetary shut down if it continues might effect some U.S. government members’ attendance.