An international insurance regulator group today adopted a capital standards approach that horrifies U.S. life insurers — but it said it might let the United States and other countries use an alternative promoted by the U.S. Chamber of Commerce.
The International Association of Insurance Supervisors (IAIS) approved the Insurance Capital Standard Version 2.0 standard at the IAIS annual meeting in Abu Dhabi, along with two other major sets of guidelines for regulating multinational insurers.
One is the Common Framework, or ComFrame, which addresses how regulators should work together to oversee insurers that do business in more than one country.
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The other is a Holistic Framework for dealing with the possibility that problems at a specific insurer could crash the world financial system.
Victoria Saporta, IAIS executive committee chair, said in a statement that the three measures will help regulators support the stability and sustainability of the insurance sector, protect policyholders, and promote global financial stability.
Tom Quaadman, a U.S. Chamber executive vice president, said in a statement of his own that he’s happy to see the IAIS continuing to look at the U.S. capital standards proposal — the Aggregation Method proposal. U.S. supporters of the Chamber proposal, which was developed by U.S. regulators, say the Aggregation Method would be more flexible, and friendlier to the U.S. state-based insurance regulatory system.
“The IAIS made the right decision by not closing the door on the state-based regulatory system that has an established record of benefitting consumers in the U.S.,” Quaadman said.
The outcome of how the IAIS and the U.S. insurance community resolves the conflict could affect how eager U.S. insurers are to continue to sell investment-supported products such as life insurance, annuities, and long-term disability insurance.
The IAIS has no direct ability to make the United States or any other country do anything. But, if most other major jurisdictions adopted the U.S. standards and the United States did not, that might hurt efforts by the big U.S. insurers to continue to operate overseas.
U.S. life insurers might be especially unhappy about any loss of ability to compete overseas, because many of the world’s hottest life and annuity markets are in Asia.
The ICS Version 2.0 Standard
The new IAIS ICS Version 2.0 standard would set standards that, in some ways, resemble U.S. bank capital standards and U.S. capital standards.
The IAIS would classify some types of investments as being riskier than others, and some types of benefits promises as being riskier than others.
An insurer would have to consider matters such as geographic diversification, management quality, interest rate risk, real estate risk, credit risk, and catastrophe to determine if it had enough capital.
The insurer would end up with an ICS ratio. The ICS ratio would equal an insurer’s total, risk-adjusted capital resources divided by its ICS capital requirements.
The standard would apply only to larger insurance organizations that were active in more than one country.
The IAIS has been working on international insurance financial standards for decades. Member regulators began focusing on financial standards projects even more intently after the 2007-2009 Great Recession, after problems with some financial instruments used by arms of some insurance companies led to big, urgent demands for cash, and appeared to threaten the ability of some of those insurers to carry on with their normal operations.
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Many U.S. insurers and regulators have argued that the liquidity problems were caused by the insurers’ capital management and trading affiliates, not by the ordinary insurance operations, and that the designers of the ICS Version 2.0 approach have put too much emphasis on “run on the insurance company risk,” or the risk that policyholders might rush to withdraw their assets in a crisis.
Because ICS Version 2.0 would apply mainly to big, multinational insurers, it would favor some types of companies over others, and it gives too little support for the principle that insurers ought to try to match how long specific investments will last with how long specific insurance policy or annuity obligations will last, U.S. critics say.
The ICS Version 2.0 also calls for countries to set the same insurance company capital requirements. That could run into problems in the United States, because each state sets its own insurance capital requirements, the Chamber says.
The Chamber and U.S. insurance groups have contended that the ICS Version 2.0 standards are similar to Europe’s Solvency II standards, and that the Solvency II standards seem to have chased a number of established European insurers out of the life and annuity markets.