Financial Stability Oversight Council Releases 2016 Annual Report; Reviews Insurance Industry

Sep 23, 2016


Monitoring the regulatory treatment and transparency of captive reinsurers and their transactions should be a continued focus by state insurance regulators, the Financial Stability Oversight Council said in its 2016 Annual Report released yesterday, September 22.  

To view the report, click here.

In its only direct recommendation to the insurance industry, the FSOC left that task up to state regulators and the National Association of Insurance Commissioners (“NAIC”), however, suggesting that they continue their ongoing work toward improving additional financial statement information of captive reinsurers. 

The states, through the NAIC, are moving toward establishing a more consistent regulatory framework for life insurance affliated captive reinsurance transactions entered into after 2014 relating to certain term and universal life insurance products. This framework provides for the public disclosure of the reserves and assets related to those transactions, the FSOC explained. 

This year, state insurance regulators, through the NAIC, continued the implementation of the framework and further enhanced the supplemental disclosure.  In addition, the NAIC is currently studying the regulatory-related incentives that encourage insurers to engage in variable annuity reinsurance transactions with captives and formulating potential adjustments to the NAIC solvency framework required by the accreditation program.  The FSOC noted that a quantitative impact study is currently underway to determine the adjustments that are necessary to be made to the solvency framework. 

Yesterday’s FSOC report also reviewed the financial status of the U.S. insurance industry, noting that licensed insurance companies earned $98.5 billion in 2015 measured by net income–down 4.4 percent from the previous year.

Insurance companies and related businesses contributed $469.2 billion to U.S. GDP in 2015, approximately 2.6 percent of the total.  Total revenues received by insurance companies from premiums and deposits on policies and annuity products totaled $1.2 trillion in 2015.  Insurers continue to rank among the largest U.S. financial corporations based on total assets.  In each of the property and casualty (“P&C”) and life insurance sectors, the 10 largest firms constitute roughly half of the market, as measured by total assets and premiums from contracts written. 

Licensed U.S. P&C companies reported $58.3 billion in net income for 2015, and the life insurance sector reported $40.2 billion. The P&C sector saw continued growth in premiums, offset in part by an increase in paid and incurred losses, resulting in lower net income than in 2014. 

In a review of insurance industry activities during 2015, the FSOC said that state insurance regulators, through the NAIC, continue work on updating the NAIC’s insurance financial solvency framework and refining existing NAIC accounting, actuarial, reporting, valuation and risk-based capital standards. 

All 50 states, the District of Columbia, and Puerto Rico have adopted key amendments to the Insurance Holding Company System Regulatory Act, including provisions requiring the submission of a new enterprise risk report.  In addition, revisions to the Model Act are being adopted by states to clarify their legal authorities to act as group-wide supervisor for certain Internationally Active Insurance Groups.  States continue to enact new and updated NAIC model laws related to the Solvency Modernization Initiative, including the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act (requiring the ORSA filing), and the revised Standard Valuation Law to implement principle-based reserving, both of which have been adopted in a majority of states. 

In his testimony before the House Financial Services Committee yesterday, U.S. Treasury Secretary Jacob J. Lew discussed the FSOC report, touching on 12 themes he said warrant additional scrutiny by policymakers this year.  Those are:

  • Cybersecurity: Government agencies and the private sector should continue to work to improve and enhance information sharing, baseline protections such as security controls and network monitoring, and response and recovery planning.
  • Risks Associated with Asset Management Products and Activities: The asset management industry’s increasing significance to financial markets and to the broader economy underscores the Council’s ongoing consideration of potential risks to U.S. financial stability from products and activities in this sector, including further analysis of the activities of hedge funds
  • Capital, Liquidity and Resolution:  Regulators should continue working to ensure that there is enough capital and liquidity at financial institutions to reduce systemic risk, including finalizing rules setting standards for the minimum levels of total loss-absorbing capacity and long-term debt maintained by certain large banking organizations operating in the United States.
  • Central Counterparties (“CCPs”):  FSOC member agencies should continue to evaluate whether existing rules and standards for CCPs and their clearing members are sufficiently robust to mitigate potential threats to financial stability, and also should continue working with international standard-setting bodies to implement more granular guidance with respect to international risk management standards in order to enhance the safety and soundness of CCPs.
  • Reforms of Wholesale Funding Markets:  Counterparty risk exposure has been significantly reduced in the tri-party repurchase agreement (repo) market, though the potential for fire sales of collateral by creditors of a defaulted broker-dealer remains an important risk.  Better data are needed to assist the understanding policymakers have of how the aggregate repo market operates.  Furthermore, regulators should continue to monitor and evaluate the effectiveness of structural reforms of money market mutual funds.
  • Reforms Relating to Reference Rates:  Regulators and market participants should continue their efforts to develop alternative benchmark interest rates and implementation plans to achieve a smooth transition to these new rates.
  • Data Quality, Collection and Sharing:  While FSOC members have made progress in filling gaps in the scope, quality, and accessibility of data available to regulators, regulators and market participants should continue to work together to improve the scope, quality and accessibility of financial data.
  • Housing Finance Reform:  While regulators and supervisors have taken great strides to work within the constraints of conservatorship to promote greater investment of private capital and improve operational efficiencies with lower costs, federal and state regulators are approaching the limits of their ability to enact wholesale reforms that are likely to foster a vibrant, resilient housing finance system.  Housing finance reform legislation is needed to create a more sustainable system that enhances financial stability.
  • Risk Management in an Environment of Low Interest Rates and Rising Asset Price Volatility:  Depressed energy and metals commodities prices, large swings in equity valuations, and upward movement in high-yield debt spreads underscore the need for supervisors, regulators, and managers to remain vigilant in ensuring that firms and funds maintain robust risk management standards.
  • Changes in Financial Market Structure and Implications for Financial Stability:  The growing importance in certain markets of proprietary trading firms and automated trading systems may introduce new vulnerabilities, including operational risks associated with the very high speed and volume of trading activity.  Increased coordination among regulators is needed to evaluate and address these risks.
  • Financial Innovation and Migration of Activities:  Financial regulators will need to continue to work hard to monitor new and rapidly growing financial products and business practices, even if those products and practices are relatively nascent and may not constitute a current risk to financial stability.
  • Global Economic and Financial Developments:  Market participants and regulators should be vigilant in identifying and responding to potential foreign shocks that could disrupt financial stability in the United States.

To read Secretary Lew’s complete written testimony, click here.


Should you have any questions or comments, please contact Colodny Fass.


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