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A soon-to-be-adopted global capital standard is “unfit for purpose” and “unworkable” for the U.S. insurance regulatory system, according to U.S. regulators.
The International Association of Insurance Supervisors is scheduled to adopt a proposed global insurance capital standard at its annual conference in mid-November despite objections from the National Association of Insurance Commissioners, the Federal Reserve Board and the Federal Insurance Office of the U.S. Department of the Treasury. The standard would be instituted for a five-year monitoring period and is expected to be adopted by IAIS member countries within their respective jurisdictions.
“Let me be clear, we will not be implementing the current ICS in the United States,” Eric Cioppa, president of the NAIC and Maine Superintendent of Insurance, told members of the Senate Committee on Banking, Housing, and Urban Affairs on Thursday.
The standard is “not only technically flawed but also contrary to key policy initiatives in the U.S. such as retirement security, long-term care, infrastructure investment, and disaster resiliency,” he said. “Further, rather than developing a standard that has an appropriate level of flexibility to recognize the realities of jurisdictional differences and to provide a basis for enhanced supervisory cooperation and coordination, the ICS work to date largely reflects Europe’s approach to regulation and will be unworkable to our system.”
But Ranking Member Sherrod Brown, D-Ohio, questioned whether the Financial Stability Oversight Council’s “failure to regulate” the largest international insurers has made foreign regulators “less sympathetic” to smaller U.S. insurers. He cited the U.S. government’s bailout of New York-based American International Group Inc. during the 2008 financial crisis.
“I don’t know if it made it less sympathetic to our smaller domestic insurers, but I think Europe fundamentally doesn’t understand our system,” Mr. Cioppa said. “We do a lot at the group level in regulating insurers, including insurers like AIG, that … Europe needs to focus on.”
An AIG spokesman declined to comment on the hearing.
The U.S. insurance market is “as robust as it’s ever been,” said Thomas Sullivan, associate director, Board of Governors of the Federal Reserve System. “Also, some of the larger insurers who you would have looked at as being more risky, have gone through quite a large degree of de-risking over time.”
“There’s much more discipline today in how insurers behave,” he continued.
Steven Seitz, director of the FIO, said the Treasury Department has a number of concerns about certain aspects of standard development and is working to improve the design of the standard so that it “more appropriately reflects the unique business model of insurers.”
There are concerns that the standard currently includes a valuation method and other requirements that may not be optimal for the U.S. insurance market, Mr. Sullivan said.
“Insurers generally operate with a buy-and-hold, long-term approach to investing, yet the ICS, as proposed, uses a market-based valuation method, whose volatility could ultimately reduce the availability of insurance products with long-term guarantees,” he said in his written testimony.
“Because of these concerns, the Board has proposed applying a building block approach to the insurers we supervise rather than the ICS in its current formulation,” Mr. Sullivan continued. “The BBA builds on existing state-based insurance standards, while also establishing minimum capital requirements that are specific to the business of insurance. The Board specifically sought to leverage the well-known insurance capital standards from state regulators to establish minimum requirements.”
The current version of the standard is “unfit for purpose” for many reasons, including because the approach does not identify where capital weaknesses and available capital exist within a group, there is no recognition of the restraints or costs related to moving capital within a group, regulators would need authority that extends beyond their home jurisdictions to apply the standard, and the valuations used under the market-adjusted valuation approach are unaudited, David Sampson, president and CEO of the American Property Casualty Insurance Association, said in submitted testimony.
“Rather than attempting to develop a system that builds upon and complements current, well-established regulatory systems, the IAIS decided to develop a one-size-fits-all global group standard modeled after the nascent European banking-style Solvency II regulatory system,” he said. “As a result, the ICS produces a single group ratio that does not provide sufficient information on how group-wide risks impact the legal entity insurers within the group.”
Zurich Insurance Co. Ltd. CEO Martin Senn said the insurance sector needs global capital standards that are similar to the banking sector's Basel III standards, Reuters reported.