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World Regulator Group May Let U.S. Have Its Own Capital Standards

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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.

(Related: Chamber Standards Fight Could Affect Life and Annuity Prices, Product Menus)

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.

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.

(Related: Manulife Names Gori President and Million Dollar Round Table Brings the World to Los Angeles)

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.

(Related: USA To Acquire AIG)

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.

AXA S.A. executives, for example, said they were spinning off the AXA Equitable unit partly because of concerns about Solvency II.

(Related: AXA Talks More About US Life Spinoff)

In September, both Democrats and Republicans at a Senate Banking Committee hearing on the matter supported the idea that Congress should act to keep the Insurance Capital Standards rules from applying in the United States, if the IAIS adopted the standards without making changes.

The ICS Version 2.0 guidelines adopted today will not lead to formal implementation of the standard. Instead, insurance regulators will begin a five-year monitoring period, starting in January 2020, IAIS officials said in a press release announcing the framework document adoptions.

IAIS officials said the IAIS will simply collect confidential data and listen to stakeholders’ confidential reactions to the new approach during the five-year period, not use the information gathered to trigger any supervisory action.

“Feedback from supervisors, ongoing data analysis, public consultations and an economic impact assessment during the monitoring period will aid the further refinement of the ICS prior to its implementation as a group-wide prescribed capital requirement,” officials said.

The IAIS and the U.S. Aggregation Method

The IAIS said it has agreed on a definition of comparable outcomes and an approach for developing criteria to decide whether the Aggregation Method produces results that are similar to the ICS Version 2.0 results.

If the Aggregation Method ends up producing similar results, it will be “considered an outcome-equivalent approach” for implementation of the IAIS Insurance Capital Standards System, IAIS officials said.

Quaadman, the U.S. Chamber official, said the Chamber believes the Aggregation Method is a superior approach that reflects local social and economic needs.”

The Aggregation Method “could be implemented easily given it is built on existing jurisdictional frameworks,” Quaadman said.

The Chamber wants to see how the IAIS will compare the outcomes of different capital standards approaches, and it’s hoping “there will be transparent opportunities for stakeholder engagement,” Quaadman said.

“We also appreciate the recognition that the ICS requires significant changes during the five-year monitoring period that should be informed by public consultations and an economic impact assessment,” Quaadman said.

The ACLI’s Reaction

Susan Neely, president of the American Council of Life Insurers (ACLI), responded to the IAIS actions with praise for the work of the negotiators representing the United States.

“Their efforts are committed to preserving consumer access to products that provide long-term protection and financial security to 90 million American families,” Neely said. “While more work is needed, U.S. regulators addressed key concerns ACLI expressed earlier this year regarding the International Capital Standard. Moving forward, ACLI shares U.S. regulators’ support for a risk-based capital standard that has proven to be effective in protecting policyholders.”

Other Reactions

Canada’s Office of the Superintendent of Financial Institutions (OSFI) said it does not believe the ICS Version 2.0 capital standards are fit for use in Canada.

“Specifically, the proposed capital requirements for long-term products are too high to be compatible with OSFI’s mandate of allowing Canadian insurers to compete and take reasonable risks,” the agency said. “During the five-year monitoring period, OSFI will continue its work in trying to achieve an international capital standard for insurance companies that works for all jurisdictions.”

Federal Reserve Vice Chair Randy Quarles sent video remarks praising the work of the IAIS and contending that many of the changes that have taken place since the 2007-2009 Great Recession should make the world financial system more stable.

But financial stability work needs to advance in a few important areas, and especially in the area of “resolution plans,” or plans for what to do if a company must shut down, Quarles said.

“While resolution plans are in place for the global, systemically important banks, more work is needed to build effective resolution regimes for insurers,” Quarles said. “We have to keep up the momentum to ensure that markets have confidence that bailouts using taxpayer funds are a thing of the past.”


A link to a package of IAIS framework documents is available here.

Correction: An earlier version of this article described the origins of the Aggregation Method incorrectly. The approach was developed by U.S. regulators.

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