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International Capital Standards Could Kill Annuities: NAIC President to Senate

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The leader of the National Association of Insurance Commissioners (NAIC) today asked members of Congress to keep an international capital standards proposal from applying in the United States.

Eric Cioppa — the Maine insurance superintendent and the NAIC’s president — told members of the Senate Banking, Housing and Urban Affairs Committee that letting the current draft of the standards take effect would keep U.S. insurers from matching their investments and their insurance and annuity obligations in a sensible way.

(Related: NAIC Forms Top-Level Long-Term Care Insurance Task Force)

“This potentially jeopardizes the ability of insurers to offer retirement products such as life insurance and annuities and make long-term investments,” Cioppa said at the hearing, which was streamed live on the Web.

“I’m hearing that, over in some markets, insurers are actually abandoning these products,” Cioppa said.

The Senate Banking Committee organized the hearing to look at global insurance regulatory standards.

The Standards

State insurance regulators now use a risk-based capital (RBC) figure and other statistics to keep tabs on insurers.

The International Association of Insurance Supervisors (IAIS) has been trying to develop new capital standards for ”internationally active insurance groups,” in an effort to keep the kinds of investment unit surprise that nearly killed American International Group Inc. in 2008 from leading to a sequel to the 2008 financial crisis.

Cioppa, who serves on the IAIS policy development committee, said at the Senate Banking hearing that the London-based group is moving toward completing preliminary work on its International Capital Standards (ICS) project and putting the ICS rules through a five-year “monitoring period,” or test period.

The ICS project designers want to know when insurers have big investment losses.

The ICS approach would make big changes in how insurers treat the riskiness of certain types of assets in capital calculations, and it would ban the use of some tools insurers now use to finance their operations, Cioppa said.

The current ICS approach could also lead financial services groups with insurance company units to move capital from the insurance company units into other units, Cioppa said.

“It’s critical that insurers are able to match their assets and liabilities in a prudent fashion,” Cioppa said. “The current construct seems to inhibit that.”

Another witness, Thomas Sullivan, said the ICS asset valuation approach is poorly suited to the needs of insurers.

Sullivan, a Federal Reserve associate director and former Connecticut insurance commissioner, said the current version of the ICS rules would put too much emphasis on how an insurer’s assets were doing in a single year, even though the assets were supporting insurance policies and annuities that might stay in place for 30 or 40 years.

Sen. Mike Rounds, R-S.D., accused the IAIS of trying to impose the European Union’s Solvency II capital standards framework on the rest of the world through the ICS project.

(Related: Solvency II: What It Means in Europe and U.S. Today)

Sullivan said that the IAIS should avoid adopting a capital standards regulation that the United States will refuse to adopt.

“We are the world’s largest insurance market,” Sullivan said.

An IAIS standard “won’t be viewed as an international standard if it disrespects the world’s largest insurance market,” Sullivan said.

Steven Seitz, the director of the U.S. Treasury Department’s Federal Insurance Office, said the Treasury Department agrees with the NAIC that the current ICS approach would be a poor fit for the U.S. insurance market.

The NAIC’s Approach

Cioppa said the NAIC is trying to develop an alternative approach to regulating internationally active insurance groups based on how U.S. insurance regulators calculate risk-based capital (RBC) levels for U.S. entities.

The NAIC is also developing new “macroprudential surveillance” methods to watch for systemic risk, and that effort could help U.S. regulators find common ground with other regulators, Cioppa said.

Sherrod Brown’s Perspective

Sen. Sherrod Brown, D-Ohio, said he worries that European insurance regulators may have lost sympathy with U.S. policymakers because of U.S. regulators’ retreat from Dodd-Frank Act standards, and because of their refusal to classify even the largest insurers as important to the stability of the financial system.

Brown noted that executives from AIG turned to the Federal Reserve Bank of New York with the company’s credit default swaps problems exactly 11 years ago today.

(Related: Greenberg: AIG Survival In National Interest)

Brown grimaced when none of the three hearing witnesses would say that any U.S. insurer should be treated as being systemically important.

“You’re not using the tools we gave you to combat systemic risk,” Brown said.

Cioppa and Sullivan on Systemic Risk

Cioppa told Brown that state insurance regulators are doing a lot to monitor entire insurance groups.

Sullivan said he has seen de-risking.

“There’s much more discipline today in how insurers behave,” Sullivan said.

Sullivan gave variable annuities as an example. ”No one’s writing variable annuities with the kind of unfettered risk that they used to write pre-crisis,” Sullivan said.


Links to information about the hearing, including a video recording of the hearing, are available here.

— Read Solvency II Wins Final Approvalon ThinkAdvisor.

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