After the financial crisis of 2008, regulators intensified their scrutiny of capital for financial institutions. Regulators reviewing the capital of life insurers include the NAIC, the Federal Reserve Board and the International Association of Insurance Supervisors (IAIS).
The NAIC is working to develop a group capital calculation. It has not yet determined the scope of the calculation, but it has stated that the calculation will not become a requirement and that it will not be incorporated in any model law or regulation. In November 2018, the NAIC voted to seek public comment on a field-testing template for a group capital calculation. Field testing is intended to begin in 2019. ACLI has advised the NAIC that any state-based group capital calculation must support the bedrock principle of policyholder protection. It also must be consistent with the NAIC’s own framework on captives and with approved permitted practices.
Federal Reserve Board
Through authority provided in the Dodd-Frank Act, the Federal Reserve Board now regulates at the holding company level a number of companies that are primarily life insurers. The Dodd-Frank Act granted the Federal Reserve Board new supervisory authority over Savings & Loan Holding Companies (SLHCs), many of which are, or own, life insurers. The Dodd-Frank Act also authorized the Fed to supervise nonbank financial companies, which may include insurance companies, that are designated systemically important by the Financial Stability Oversight Council. President Obama signed the Insurance Capital Standards Clarification Act of 2014 into law on December 18, 2014. The Act allows the Federal Reserve Board the flexibility to apply insurance-based capital standards to insurance companies. ACLI looks forward to working with the Federal Reserve as it develops appropriate capital standards for insurance companies.
Among the points conveyed by ACLI to the Federal Reserve Board were:
- Insurance risk-based capital (RBC) requirements are the appropriate standards to apply to an insurance company. Life insurance companies have a need for long-term assets that match long-term, guaranteed life insurance and annuity products.
- If life insurers are required to hold excessive amounts of short-term assets by bank-based capital rules, the availability and affordability of financial security products could be affected. Misapplication of bank-based standards would disrupt the insurance business model and the industry’s ability to provide long-term, guaranteed retirement products and financial protection to customers.
The IAIS is developing an insurance capital standard (ICS), expected to apply to internationally active insurance groups (IAIGs) through the Common Framework for Insurance Supervision (ComFrame).
The IAIS published Version 1.0 of the Insurance Capital Standard in July 2017 for field testing by about 50 volunteers worldwide. In August 2018, the IAIS released its ICS Version 2.0 consultation. ACLI and other interested parties submitted comments in October 2018.
ACLI noted that the ICS needs further assessment and policy evaluation. Important elements of the ICS remain inadequately tailored for long-term insurance products. In many instances, the ICS does not fairly or appropriately reflect the manifestation of risk, especially for long-term products
The IAIS workplan calls for IAIGs to report confidentially from 2020 to 2025. The IAIS will be in a position to determine by 2025 whether the U.S.’s method of determining group capital will be considered ‘outcome-equivalent’ to the ICS. ICS Version 2.0, with a standard calculation method based on a market-adjusted valuation, will be incorporated into ComFrame and the IAIS Insurance Core Principles.
The IAIS also created an enhanced capital requirement for called the “High Loss Absorbency” (HLA). Initially, the HLA was intended to be an extra capital buffer requirement for globally systemically important insurers (G-SIIs). However, in November 2018, the IAIS said it would only be applied on a case-by-case basis by supervisors. The IAIS added that the HLA would not be implemented before the start of 2022.
Any global capital benchmark must result from a deliberate, thoughtful and transparent step-by-step process, and it must not discourage the availability or affordability of long-term products. This is particularly critical in the United States where the private markets fulfill an acute need that may not exist in certain other countries with broader social welfare nets or public pensions.