U.S. state insurance regulators have come close to ending a 15-year battle over capital-counting rules by hammering out a deal with the International Association of Insurance Supervisors.
The deal would let U.S. regulators stick with capital-counting rules that are similar to the rules they now use to calculate "risk-based capital ratios," or financial health grades, for "internationally active insurance groups."
Under the IAIS rules, an internationally active insurance group is a big company that writes a large amount of insurance in three or more jurisdictions.
Countries that agree to the IAIS deal would count the U.S. standards as producing outcomes comparable to the outcomes produced by the new IAIS Insurance Capital Standard rules.
The IAIS executive committee today approved the final version of the Insurance Capital Standard. All IAIS members are set to vote on final adoption Dec. 5.
The IAIS executive committee also concluded that the U.S. alternative method, the Aggregation Method, is comparable to the Insurance Capital Standard.
U.S. regulators have argued that adopting the Insurance Capital Standard would hurt any U.S. life and annuity issuers affected by forcing them to use unrealistically low investment return assumptions.
What it means: In the short run, some big U.S. life and annuity issuers could avoid having to make the kinds of investment and capital-counting changes that big insurers in countries that adopt the Insurance Capital Standard will have to make.
In the long run, countries that adopt the Insurance Capital Standard may find that they have put unnecessarily tight restrictions on their life and annuity issuers, or countries that adopt the Aggregation Method may find that they let issuers use overly optimistic investment return assumptions.
The backdrop: World insurance regulators began working with the IAIS to develop the new Insurance Capital Standard in 2009, in response to the global financial crisis that hit from 2007 through 2009.
U.S. life and annuity issuers assume that their products may stay in place for many years, pay benefits far after the purchase date, and, in the case of annuities, pay benefits over long periods.
U.S. issuers emphasize investments in high-grade bonds and in other instruments that appear to be secure but may be difficult to sell quickly.
