Proposed Capital Rule Builds on State-Based Insurance Standards

Last week, the Federal Reserve published a long-awaited proposed rulemaking to establish capital requirements for certain insurance companies. As part of the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, insurance holding companies that fall under Fed oversight must follow new minimum risk-based capital requirements.

The rulemaking will impact the following insurers that own banking institutions: USAA, TIAA, State Farm, Ameriprise, Mutual of Omaha, AAA, Ohio Farmers and First American. According to the Fed release, their insurance activities include life, title and property-casualty. The firms range in size from less than $10 billion in total assets to more than $250 billion.

The proposal establishes minimum capital requirements that are specific to the business of insurance. Under Dodd-Frank rules, each bank is required to have a total risk-based capital ratio of 8%. Under the proposed rule, the insurance companies would also be subject to a 2.5% buffer on top of the 8% floor, and they would see their capital distributions and discretionary bonus payments limited if they dip into that buffer.

Under the proposed framework—known as the Building Block Approach (BBA)—the Fed would aggregate the capital positions of “building blocks” or groups of entities in a firm that are covered under the same capital regime. For instance, insurance subsidiaries, which are already subject to state-based or foreign-based standards, would constitute one such block and be treated in the BBA as they are currently treated by their functional regulator. These “building blocks” would then be combined to calculate enterprise-level capital resources to determine how much additional capital must be held to meet the holding company standard.

The Fed does not anticipate any of the firms will need to raise additional capital under the proposal and it plans to conduct a quantitative impact study of the BBA to better inform the framework.

Heather Eilers-Bowser is Big “I” federal government affairs counsel.