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Life Health > Annuities

Fed Sets Annuity-Friendly Capital Rules for Insurers It Regulates

By Allison Bell

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What You Need to Know

  • The board adopted a U.S.-style Building Block Approach.
  • It avoided adopting a system developed by an international standards group.
  • Bowman argues that tighter restrictions on what staff can do would make the system more fair and more transparent.

The Federal Reserve Board has given U.S. annuity issuers a boost by deciding to draw its insurance capital standards from U.S. regulators, rather than applying standards from overseas.

The board agreed last week to apply U.S.-style capital standards to federally insured banks that are “significantly engaged in insurance activities.” The board has posted a draft of the final rule on its website.

The Fed adopted the “Building Block Approach,” which is a strategy for using rules based on the current U.S. risk-based capital ratio system to determine how prepared an insurer is to meet its obligations. The Building Block Approach won out over the International Association of Insurance Supervisors’  Insurance Capital Standard approach.

The board’s decision will have a direct effect on only four “supervised insurance organizations,” but it could end up having a direct or indirect influence on broader insurance capital standards rules.

What it means: By going with the Building Block Approach, the Fed addressed concerns around annuities.

The American Council of Life Insurers told the Fed in 2021 that the IAIS approach, which involves regular market-value adjustments of an insurer’s assets and benefits liabilities, is “inherently punitive to long-term savings-oriented products with financial guarantees.”

If U.S. regulators adopted the IAIS’ Insurance Capital Standard, “the industry would be forced to shift to shorter-term products and investments, and we believe the overall insurance market would shrink,” the ACLI warned.

The Fed and insurance: The Fed has been working on the new final rule since 2016.

It noted that it now supervises just four bank insurance organizations. The only life and annuity issuer that will be directly affected is Ameriprise.

The regulation: Regulators using the new rule, which takes effect Jan. 1, will measure how strong a supervised insurance organization is by adding up the capital and capital needs for each of the organization’s “building block parent” subsidiaries.

The Building Block Approach ratio, or BBA ratio, will be the “ration of the aggregated available capital to the aggregated required capital.”

An affected organization must have a BBA ratio of 400%, including a minimum ratio of 150% and a 150% “capital conservation buffer.”

The board plans to publish supervised organizations’ BBA ratios.

The Fed board delegates authority to the staff to power the standards-setting process.

One governor, Michelle Bowman, issued a statement saying that she supports the substance of the rule but believes the way the board gave the authority to its staff was overly broad.

“Including appropriate parameters around the use of delegated authority is important to support the values of transparency, fairness and accountability,” Bowman said.

Reactions: Mariana Gomez-Vock, an ACLI vice president, said in a comment about the new final rule that the ACLI appreciates the time the Fed put into the capital standards effort.

“While we are still reviewing it, we are encouraged by the Fed’s intent to adopt a final rule that is appropriate for the U.S. market,” Gomez-Vock said. “This approach is important to ensuring U.S. consumers can continue to access long-term financial products they want and need for their financial and retirement security.”

Allison Bell

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