Fed to mobilize its insurance capital proposal in campaign to modify global plan

The US Federal Reserve will try to leverage its upcoming proposal on insurance capital requirements in an effort to make an international plan more suitable for the US market, Fed Governor Randal Quarles said.

Quarles, the vice chairman for supervision, said yesterday that the Fed and US insurance regulators are seeking an alternative to the insurance capital standard, or ICS, proposed by the International Association of Insurance Supervisors.

“The current core proposal in the ICS would face implementation challenges in the United States,” he said at an American Council of Life Insurers event.*

The global framework, he said, “may fail to adequately account for US accounting frameworks.” It also may “introduce excessive volatility and involve excessive reliance on supervised firms’ internal models".

Quarles added that the upcoming Fed proposal, which has been coordinated with US and state insurance regulators, will provide “a tangible example [that] can assist in our collective advocacy” with other jurisdictions.

The US will seek inclusion of an alternative to the international plan for aggregating capital within an insurer.

— Fed proposal —

Quarles said yesterday that the Fed would propose “in the not-too-distant future” capital requirements for insurers that own federally insured banks.

The proposal would aggregate the capital of subsidiaries of insurance holding companies. Capital requirements for life insurance units would differ from those for depository institutions and for firms that are neither banks nor insurers, he said.

A minimum requirement for insurance holding companies would be imposed by the Fed.

The goal, Quarles said, “is to capture all material risk of each supervised organization, leverage existing legal-entity standards and minimize burden.”

Fed-regulated insurers include TIAA, State Farm Mutual Auto Insurance, Nationwide Mutual Insurance, United Services Automobile Association and Mutual of Omaha Insurance.

— Global proposal —

The International Association of Insurance Supervisors’ goal is a single capital standard with a common methodology that achieves comparable outcomes across jurisdictions.

In the summer of 2017, the Switzerland-based group released its first version of the international capital standard for field testing.

This approach has since been revised as members called for greater clarity on what the proposal would mean in practice.

IAIS’ goal is to adopt the standard this year, with the first implementation phase to kick in at the start of 2020. The group is made up of insurance regulators from over 200 jurisdictions, including the US, Europe and Japan.

*American Council of Life Insurers Executive Roundtable; Naples, Florida; Jan. 9, 2019.