The U.S. Chamber of Commerce is trying to persuade an international insurance group to adopt a U.S. Chamber approach to determining whether insurers have enough capital to support the insurance policies and annuity contracts they’ve sold.
The outcome of the fight, at the International Association of Insurance Supervisors (IAIS), could eventually have a big effect on what life insurers charge for products in the United States and what kinds of products life insurers can offer.
The IAIS wants regulators around the world to have one benchmark insurer financial health number they can use to get a rough idea of how strong any particular insurer is. IAIS members are eager to avoid a repeat of the problems that occurred before and during the 2007-2009 Great Recession.
The Basel, Switzerland-based group is preparing to start a five-day meeting Nov. 11 in Abu Dhabi, in the United Arab Emirates.
In many of the jurisdictions that belong to the IAIS, companies often offer banking services and insurance at the same time, and the same regulators oversee both banking and insurance. U.S. insurers and insurance groups often complain that the standards developed by the IAIS and similar groups are based on hand-me-downs from bank regulators, and not well-suited to fit insurers.
U.S. insurers and groups say the Insurance Capital Standards benchmarking proposal the IAIS is considering would give a distorted picture of how healthy U.S. insurers are, and make life insurers that have sold many annuities and savings-oriented life insurance policies look sicker than they really are, partly because the solvency standards would focus on risks related to short-term fluctuations in investment returns, and the possibility that customers might run to take their product value out all at once.
U.S. annuities and savings-oriented life insurance policies usually come with product features that lock the customers’ money in for money years and limit the potential impact from any customer “runs on the insurance company,” many U.S. insurers and insurance groups say.
The U.S. Chamber is lobbying hard for a proposal, for an “Aggregated Method,” that would create a different kind of insurer financial health benchmark number.
The Chamber’s “scaled capital ratio” benchmark figure would factor in how much excess capital an insurer has, by its country’s standards; how well capitalized the top-level parent company is; and how big the insurer in question is when compared with its parent.
U.S. regulators use a risk-based capital (RBC) ratio benchmark number to summarize how healthy an insurer is.
The Chamber gives an example that shows that a company with a U.S. RBC ratio of 400% would have a scaled capital ratio of 1,295% using the Chamber’s Aggregation Method approach.
Europe’s Solvency II System
The authors of a Chamber discussion paper promoting the proposal note that the IAIS Insurance Capital Standards strategy closely resembles the European Union’s Solvency II insurer health standards system.
“The insurance industry has already experienced product availability impacts from the implementation of Solvency II,” according to the Chamber discussion paper. “In a survey of insurers from across Europe, 58% of insurers offering long-term saving products with guarantees noted a negative effect of Solvency II on their products.”
The Aggregation Method would work better, because it would let an insurer set capital levels to suit the requirements and standards in a particular jurisdiction, rather than imposing the same rigid requirements in markets with drastically different rules and conditions, the Chamber says.
Tom Quaadman, the executive vice president in charge of the U.S. Chamber Center for Capital Markets Competitiveness, helped lead the Aggregation Method discussion paper effort.
““This report can help inform the International Association of Insurance Supervisors (IAIS) as it continues its deliberations on insurance capital standards so that consumers can continue to access the insurance products they need and so there is no disruption to investment through the capital markets,” Quaadman said in a statement about the report.
The Chamber promoted the discussion paper, and the proposal, Wednesday at an event that included speakers from Travelers, MetLife and Allstate. Joel Engelhard represented MetLife.
The Actual Impact
Both Democratic senators and Republican senators appeared to support the idea of shielding U.S. insurers from burdensome new IAIS standards at a Senate Banking Committee hearing in September. But that committee is dominated by Republicans and centrist Democrats. It’s possible that the November 2020 elections could increase the likelihood that IAIS standards could end up applying in the United States, or influencing updates of U.S. standards.
A link to the Chamber of Commerce proposal is available here.
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