The end game draws closer for new insurance capital regimes

Posted by Andrew Mais, senior manager, Deloitte Services LP, on June 28, 2016

Who is Leon Lett? He is the football player who almost got the record for the longest fumble return in Super Bowl history – 64 yards. But Lett started celebrating just before reaching the end zone, Don Beebe knocked the ball out of his hand and the play ended as a fumble, not a touchdown.

After an unexpected and spectacular play, there may be an all too human tendency to start celebrating before crossing the goal line. Some US insurers have watched with concern over the years as it seemed international supervisors were about to impose non-US influenced supervisory regimes on their operations. Now they may feel like the beneficiary of a Hail Mary pass after the Federal Reserve’s (Fed) recent issuance of its Advance Notice of Proposed Rulemaking on capital standards for insurance systemically important financial institutions (SIFIs) and for the other insurers it supervises, those with savings and loan holding companies (SLHCs).

Insurers truly may have reason to celebrate. The non-SIFIs seem poised to be covered by what the Fed called a “building block” approach. That approach would largely rely on aggregating existing capital standards and thus should add a relatively low regulatory burden.

As expected, SIFIs will be subject to a proportionally more complex regulatory regime. However, as with the non-SIFIs, the proposed regulatory structure — in accordance with the Collins fix — reflects the specific nature of the current US insurance system as opposed to proposals seen elsewhere in the world.

SIFIs will get a GAAP-based consolidated approach (CA). As Federal Reserve System Governor Daniel Tarullo summarized it at an NAIC event, the CA will “categorize all of the consolidated insurance group’s assets and insurance liabilities into risk segments, apply risk factors to the amounts in each segment, and then set a minimum ratio of required capital comparing the consolidated capital requirements to the group’s consolidated capital resources. However, the CA would use risk weights or risk factors that are more appropriate for the longer-term nature of most insurance liabilities.”1

The end result will be a system that, at least in Tarullo’s view, provides the requisite supervision while keeping compliance costs lower than they would have been had the Fed simply applied its bank holding company capital regime.2

The CA is remarkably simple in theory, but in practice the risk segments and weightings still need to be determined and could have a significant impact on insurer operations. For insurance SLHCs, the Fed is asking if the larger and more complex of these organizations should be subject to a more complex capital regime than the basic “building block” in order to avoid concerns such as regulatory arbitrage.

For insurers affected — directly or indirectly — by the Fed’s proposed rulemaking, August 2 is the deadline to submit comments. The Fed has been remarkably transparent and welcoming in this process, starting with using an Advanced Notice of Proposed Rulemaking instead of a regular notice, allowing for more input from stakeholders.

Yes, the goal is in sight, but industry still needs to stay engaged to ensure all US stakeholders win.

1Governor Daniel K. Tarullo, “Speech at the National Association of Insurance Commissioner’s International Insurance Forum,” Washington, D.C. on May 20, 2016


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