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WASHINGTON — The secretary general of the International Association of Insurance Supervisors welcomed comments made by the U.S. Treasury secretary on the organization’s efforts to develop a 2.0 version of a global international capital standard despite concerns expressed by the secretary about its approach.
The IAIS is currently developing a second version of a risk-based global ICS for internationally active insurance groups, with a planned adoption scheduled for its annual general meeting in November and a monitoring period that can start in 2020 and last for five years.
The U.S. Treasury Department is committed to continued engagement with the international standard setting work at the IAIS, Treasury Secretary Steven Mnuchin said at the National Association of Insurance Commissioners’ International Insurance Forum in Washington on Monday.
“The ICS is an ambitious project that aims to develop global risk-based capital standards for supervisors around the world to use in assessing the financial health of insurance groups,” he said. “Treasury appreciates the efforts on this project. However, we have concerns about certain areas of how it is being developed. Treasury recognizes that many large insurance companies have significant operations in foreign jurisdictions that may adapt some version of this.”
“I think they were very helpful,” Jonathan Dixon, secretary general of the IAIS, said of Mr. Mnuchin’s remarks during a Tuesday session at the NAIC’s forum. “That is very helpful because unless you know the concerns, you can’t address them. It was very positive to hear the remarks about the U.S.’ continued commitment to engagement on the development of a global insurance capital standard.”
Meanwhile, a group of 42 U.S. senators advocated in favor of a public statement that a global capital standard for insurers is not necessary in a letter sent on Monday to the vice chairman for supervision of the board of governors of the Federal Reserve System.
In advance of the November meetings, the Treasury Department will work to develop “a strong and coordinated position on the upcoming adoption of 2.0 and subsequent five-year monitoring period from 2020 to 2024,” Mr. Mnuchin said.
“Treasury is working to improve the design so that it more appropriately reflects the unique business model of insurers,” he continued. “One area we’ve identified is the market valuation approach and the negative effects it could have on the ability of insurance companies to provide long-term savings products, which are important to insurers and policyholders in the United States.”
The IAIS is committed to examining unintended consequences of version 2.0, Mr. Dixon said.
“We recognize, we accept, that regulatory frameworks if not well designed can introduce risk,” he said. “That’s why I think we’ve set out that in the monitoring period we will be actively looking at unintended consequences and parts of the ICS that need review. We haven't been very specific as yet about what that would look like, what it would cover. I, in previous remarks, have said it will need to look at things like the impact of long-term products. That is a key unintended consequence that is in the minds of people.”
The Treasury Department “believes it is important the IAIS create a defined structure and process for further work and revisions of the ICS during the monitoring period from 2020 to 2024,” Mr. Mnuchin said. “The reference ICS adopted in November 2019 will most likely need further development and revision. Therefore, it needs to develop a process that ensures appropriate confidentiality while allowing the IAIS, its members and other important stakeholders to continue evaluating, revising and improving the ICS over the next five years.”
“Team USA must also remain actively engaged during this period and advocate for U.S. interests so the US insurance sector remains competitive overseas,” he added.
The issue of ensuring the ICS accounts for comparable outcomes was also raised as a concern by the treasury secretary.
“The ICS should recognize and accommodate the diverse approach to solvency regulations taken by various jurisdictions around the world, including our state-based regulatory system,” Mr. Mnuchin said. The Federal Insurance Office “will continue to advocate that the IAIS increase its focus on the important issues of comparability of outcomes in order to enhance compatibility with the U.S. insurance regulatory regime.”
“We hear very clearly the remarks about making sure that it takes into account jurisdictional differences in insurance business models, in national supervisory regimes,” Mr. Dixon said in response. “It’s about a balance because how do you on the one hand take those differences into account while still achieving our objective for ICS, which is achieving a common language to help supervisors do group-wide supervision better. If you have something that is too principles based, too high level, you’re going to fail on the comparability.”
Mr. Mnuchin also raised a concern about the November target for adoption of version 2.0.
“Getting the ICS right is more important than meeting any fixed schedule that mandates completion at a specific point in time,” he said.
Total direct premiums earned for property/casualty lines of business increased by more than $25 billion from 2016 to 2017, according to the National Association of Insurance Commissioners’ latest profitability report.