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. 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 also created an enhanced capital requirement for globally systemically important insurers (G-SIIs), the “High Loss Absorbency” (HLA) capital requirement. The HLA requirement is an extra capital buffer that G-SIIs will eventually be required to hold over and above the ICS.
The IAIS published Version 1.0 of the Insurance Capital Standard in July 2017 for field testing by about 50 volunteers, worldwide. The IAIS workplan calls for adoption of ICS Version 2.0 in 2019. ICS Version 2.0 will be incorporated into ComFrame and the IAIS Insurance Core Principles.
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.
ACLI is actively engaged in all of the life insurer capital initiatives discussed above. ACLI is guided by Board-approved policy that, among other things, calls for an insurer or group to be subject to no more than one group capital calculation or requirement. In addition, ACLI urges communication among regulators, and the utilization of existing regulatory tools in any measurement of life insurer capital, notably insurance RBC standards.
Insurance RBC standards are a proven, reliable, and comprehensive measure of an insurance company’s financial strength. Insurance RBC standards, which have been developed over many decades by state insurance supervisors, provide the best measure of the capital needs of a U.S. insurer and are an accurate tool to assess a U.S. insurer’s capital adequacy.