The International Association of Insurance Supervisors (IAIS) today unveiled what it envisions as a uniform capital framework for internationally active insurers, or global systemically important insurers (G-SIIs).
Called the “Basic Capital Requirement” or BCR, analysts see it as the likely template for the future capital standard framework the Federal Reserve will impose on domestic insurers it regulates or SIFIs, systemically important financial institutions.
These are currently American International Group and Prudential Financial, as well as MetLife, which is challenging its designation as a SIFI.
Others amongst the nine designated as G-SIIs that do business in the U.S. are Allianz and AXA. Others are Aviva, Assicurazioni Generali, Ping An Insurance and Prudential PLC.
“U.S. regulators have indicated that they see this is the first step toward the global agenda of higher capital standards for all insurers,” said Howard Mills, the chief advisor to Deloitte’s insurance industry group and a former Superintendent of the New York Insurance Department.
However, BCR substantively conflicts with a more flexible reserving policy, Principles-Based-Reserving (PBR), that life insurers are seeking to persuade state legislators and regulators to support.
Mills, who is attending the IAIS conference in Amsterdam, said U.S. insurers are concerned about BCR because they fear “there will be negative consequences for higher global capital standards,” specifically, “fewer products going to market and higher costs for policyholders.”
Mills said the U.S. industry, both property and casualty and life, has urged the IAIS “to slow down, and be more sensitive to local regulatory systems.” Mills said the U.S. companies and trade group said the IAIS should “acknowledge the success of the U.S. regulatory policy, based on what happened during the financial crisis,” as well as “be mindful of the impact of BCR on policyholders.”
Mills said the BCR standards conflict with the PBR standard being pushed by the life insurance industry. “Basic BCR is a statutory policy that offers less flexibility than PBR,” Mills said. “PBR is contrary to the basic BCR initiative,” he said.
Mills said action on PBR has been stalled because of opposition by New York and California.
But Bruce Ferguson, senior vice president, state relations, for the American Council of Life Insurers, voiced different views at the legislative session Tuesday that was part of the ACLI annual conference.
He predicted that life insurers may be able to have enough state support to implement PBR by 2016 or 2017. He said 18 states are currently on board, another is expected to sign on later this year, and 17 to 18 additional states have indicated support. A total of 42 states are required to sign on before PBR can be implemented, Ferguson said.
Ryan Schoen of Washington Analysis said that while the global standards are likely to be tweaked by U.S. regulators, “we view the IAIS proposal as manageable for the group, and even an incremental positive, as it is tailored to insurance and similar in many ways to existing Risk Based Capital (RBC) requirements.”
Schoen said he thinks the Federal Reserve could propose domestic capital requirements on the SIFIs as early as the first quarter of 2015, with final rules possible before the end of next year.
“While we believe the Fed is likely to follow the lead of global regulators in crafting a BCR for domestic insurers, we think it will take a heavier-handed approach to crafting capital requirements for non-core insurance activities,” Schoen said.
The main categories of an insurer’s activities that are measured by the BCR include: (1) traditional life insurance; (2) traditional non-life insurance; (3) non-traditional insurance; (4) assets; and (5) non-insurance activities.
Casualty insurance, mortgage insurance, and equity, real estate and non-credit investment assets carry the highest risk-factor values under the capital requirements.
The non-binding IAIS framework is slated to be approved by international regulators at the G20 meeting on November 15-16 in Brisbane, Australia, Schoen said.
According to Schoen, the G-SIIs outperform other smaller globally active insurers in that they maintain an average level BCR ratio of 75%, compared to 67% for the tested globally active insurers.