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NAIC to work with Federal Reserve on capital standards for US insurers

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PHILADELPHIA — The National Association of Insurance Commissioners will be working more closely with the Federal Reserve on the development of insurance group capital calculations.

In June 2016, the Federal Reserve Board approved an advance notice of proposed rule-making on conceptual frameworks for capital standards that could apply to systemically important insurers and to those that own a bank or thrift. The rule-making presented one approach — called the consolidated approach — that would apply to systemically important insurers, and a second approach — called the building block approach — for less complex insurers that also own a bank or thrift.

“They have recently decided to accept our offer to work together to try to develop something that falls into much more of a coordinated effort,” NAIC CEO Michael Consedine said in an interview with Business Insurance on Saturday at the NAIC summer meeting in Philadelphia. “I think that has tremendous benefits for the marketplace in terms of achieving greater efficiencies if you have standards that are aligned. It has huge benefit in strengthening the position of the United States when we’re negotiating on global capital standards if we’re able to demonstrate a common U.S. approach that should be recognized. That’s an approach that the Federal Reserve, state regulators and presumably the Treasury (Department) are all on board with. It would be difficult to reject that as a part of an international discussion. Even if it’s not absolutely a consolidated approach, it certainly does demonstrate a commitment to developing a framework that is an improvement from where we all started. For some audiences, having the Federal Reserve agree to work with the states on that issue is going to be a big development and opportunity for us.”

For systemically important insurers, the consolidated approach would categorize an entire insurance company’s assets and insurance liabilities into risk segments, apply appropriate risk factors to each segment at the consolidated level, and then set a minimum ratio of required capital, according to the reserve. The board currently supervises two systemically important insurers: American International Group Inc. and Prudential Financial Inc.

For insurers that own a bank or a thrift, the building block approach would aggregate existing capital requirements across a company’s different legal entities to arrive at a combined, group-level capital requirement, subject to adjustments to reflect the board's supervisory objectives. The board currently supervises 12 insurers that own a bank or thrift.

“As the federal government potentially looks to step back from some areas of financial services regulation, we must step forward to advance a credible, rational and robust state-based approach,” NAIC President and Wisconsin Insurance Commissioner Ted Nickel said during the NAIC meeting on Sunday. “While these (Federal Reserve) discussions have just begun, I’m hopeful that this partnership will result in efficiencies for market participants. Perhaps more importantly, it will signify the efforts to develop a unified U.S. approach to group capital. Our coordinated efforts should further strengthen our position at the (International Association of Insurance Supervisors) for a U.S. approach to be recognized as a part of the international capital standard.”

The news was announced as part of the NAIC’s still-developing “State Ahead” strategic road map for the next five years, which will focus on the evolution of the state insurance regulatory system and reducing the need for federal and international intervention.

“Our message to Washington, D.C., and the world is: ‘We’ve got this,’” Mr. Nickel said.