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VI. Principal Regulatory Developments Affecting Insurance Companies
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the Federal Reserve Board to develop a valuation and capital standard “speedily.” The 2015 FSAP further recommended that the Federal Reserve Board should “continue to increase its insurance expertise (particularly in the area of actuarial methods, insurance accounting and underwriting risk), including in senior positions, to ensure the effectiveness of its insurance group supervisory work.”
Mr. Sullivan said that the Federal Reserve Board has been highly deferential to the work of the states and suggested that he does not expect to see conflict between state-based insurance regulation and the proposed rulemaking. Mr. Sullivan stated that because the Federal Reserve Board became a member of IAIS in 2013 and recently joined the IAIS Executive Committee, it has been and will continue to be engaged in the development of global regulatory standards that are consistent with the domestic regime to be proposed by the Federal Reserve Board. Similarly, FIO Director McRaith testified before the Senate Committee on Banking, Housing and Urban Affairs in April and stated that FIO, the Federal Reserve Board and state insurance regulators “work together extensively and regularly coordinate,” as the U.S. participants of IAIS. Finally, a House Appropriations Committee report accompanying the federal omnibus appropriations bill, which was signed into law on December 18, 2015 as the Consolidated Appropriations Act, 2016 (the “Appropriations Act”), noted the importance of developing a domestic capital standard for insurance SIFIs pursuant to the Dodd-Frank Act “that is based on the existing domestic regulatory structure,” and that is established “before approval of any international standard that will or could ultimately be applied to U.S. insurers.”
It remains to be seen how the Federal Reserve Board’s domestic capital standard will interact with both the IAIS global capital standard and the group capital calculation being developed by the NAIC, which is discussed below.
2. IAIS and FSB
The IAIS’s Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”) is intended to provide basic standards for internationally active insurance groups (“IAIGs”) and a means through which
supervisors of IAIGs around the world may cooperate in the process of group supervision. The two main areas of work currently underway by the IAIS with respect to ComFrame are field testing and the development of a global insurance capital standard (“ICS”) for IAIGs. Along with ComFrame, a key focus of the IAIS, in consultation with the FSB, is identifying international global systemically important insurers (“G-SIIs”), which will be subject to enhanced supervision and capital standards.
The following group capital standards are being developed with ComFrame: (i) Basic Capital Requirements (“BCR”), which was approved by the IAIS and the G-20 last year, and is scheduled to go into effect for G-SIIs in 2019; (ii) Higher Loss Absorbency (“HLA”), which is also scheduled to go into effect for G-SIIs in 2019; and (iii) ICS, which will serve as the base group capital standard applicable to all internationally active insurance groups.
HLA is intended to require higher loss absorbency for G-SIIs to reflect the greater risk that these institutions pose to the global financial system compared to other IAIGs. On October 5, 2015, the IAIS released an initial methodology for HLA, which was subsequently endorsed by the G-20. In 2016, HLA will be reported by G-SIIs on a confidential basis and will be shared with the IAIS for purposes of approving a final HLA.
From 2019, G-SIIs will be expected to hold regulatory capital that is not less than the total required by the sum of the BCR and HLA requirements. ICS will eventually replace the BCR component of the standard for G-SIIs. In December 2014 the IAIS released a preliminary document for consultation as a first step toward developing ICS, and is expected to develop an initial version of ICS by June 2017.
As noted, federal regulators and the NAIC have engaged with the IAIS in the development of the global capital standards. However, concerns remain about how such global standards will interact with the existing U.S. regulatory regime and the proposed rulemaking being developed by the Federal Reserve Board. For instance, the House Appropriations Committee report accompanying the Appropriations Act stated that the Committee “believes the U.S. agencies party to those
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review