On Sept. 12, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing, “Developments in Global Insurance Regulatory and Supervisory Forums.” The members of “Team USA” testified including: director of the Federal Insurance Office in the Treasury Department Steven Seitz; associate director at the Board of Governors of the Federal Reserve System Thomas Sullivan; and superintendent of the Maine Bureau of Insurance Eric Cioppa on behalf of the National Association of Insurance Commissioners (NAIC).
As required by recently enacted federal law to encourage unity and greater transparency, the Treasury and Federal Reserve discussed annual reports released earlier this month regarding their efforts in international forums.
Much of the discussion focused on the multi-year effort by the International Association of Insurance Supervisors to develop a group-wide, risk-based insurance capital standard (ICS 2.0) as a part of its Common Framework for the Supervision of Internationally Active Insurance Groups. ICS 2.0 is set to be implemented in two phases, including a five-year “monitoring period” at the end of which the IAIS will assess whether it considers the U.S. approach to be “outcome equivalent.”
All three witnesses expressed major concerns with ICS 2.0 as proposed primarily because it is not compatible with the U.S. system and would result in negative consequences for U.S. consumers. One seemingly insurmountable difference between the U.S. regulatory regime and ICS 2.0 is over “market-adjusted valuation.”
Federal Reserve Vice Chairman for Supervision Randy Quarles recently stated, “A capital standard that uses market-based valuation can introduce volatility and procyclicality, and one that is excessively volatile or procyclical can influence a firm to veer away from a long-term perspective and concentrate instead on the short term. This can have undesirable consequences, including diminishing product availability.”
ICS 2.0 is concerning for independent agents and brokers because of its potentially negative impact on U.S. markets resulting in fewer company and product options.
Separately, the NAIC continues its work on a Group Capital Calculation compatible with the U.S. system and, as reported in News and Views, the Federal Reserve issued its proposed rule on risk-based capital requirements earlier this month.
Heather Eilers-Bowser is Big “I” counsel of federal government affairs.