U.S. Collaboration on International Insurance Capital Standards Could Be Enhanced, Government Accountability Office Reports
Aug 3, 2015
Above: Colodny Fass’ Donovan Brown Notes U.S. Government Accountability Office Report on Insurance Capital Standards Development
With large, internationally active insurance companies accounting for 28 percent of the aggregate insurance premiums underwritten in the United States in 2014, the U.S. Government Accountability Office (“GAO”) was asked to review the international group-level insurance capital standards currently under development by the International Association of Insurance Supervisors (“IAIS”). Given concerns expressed by some regulators and insurers, the GAO specifically examined the need for international standards, the extent of U.S. regulators’ involvement in developing a U.S. position on the standards, how the standards might be implemented and their ultimate potential effects.
In a report published July 27, 2015, the GAO found that, although collaboration among U.S. stakeholders in regard to the standards’ development has improved, it could be enhanced. To accomplish this goal and thereby ensure U.S. involvement in the IAIS development process, the GAO recommended that the U.S. members of the IAIS-the Federal Insurance Office, U.S. Federal Reserve and National Association of Insurance Commissioners, should take steps to sustain leadership over the long term and publicly report on their collaborative efforts.
To access the GAO report, click here.
While the IAIS finalizes the methodologies that will be used to determine insurers’ required capital levels, it remains unclear which U.S. regulator would implement and enforce the standards or how they would compare with current U.S. capital standards, the GAO explained. Further, implementing the standards at the group level in the United States could be challenging since states, the primary regulators, focus on individual insurance entities rather than on group-level entities or holding companies.
With so many unknowns, some stakeholders told the GAO that they agreed that it was too early to determine the effects of the proposed standards. However, they said that any effects could be minimal, since U.S. insurers generally hold high levels of capital.
Other stakeholders that were interviewed said that potential positive effects could include the promotion of comparable standards across jurisdictions and the removal of incentives for companies to select locations based on regulatory differences. Yet others also mentioned potential negative effects, including higher costs for insurers required to hold additional capital that could create incentives to stop offering some products or to raise prices.
Generally, mixed views were expressed on the need for international capital standards to address systemic risk. Many said that traditional insurance activities were not likely to pose systemic risk, which has been described as a key reason for pursuing the standards. But others said that nontraditional noninsurance activities, such as credit default swaps and guaranteed investment contracts could increase insurers’ interconnectedness with other financial market participants and cause systemic effects should an insurer fail.
IAIS officials and others said that international capital standards could help address risks from these activities. But some state regulators and industry representatives noted that current U.S. risk-based capital standards and other regulatory tools adequately protected U.S. policyholders and that regulators were coordinating to address potential group-wide risks.
The GAO concluded that fully adopting collaborative practices would allow U.S. IAIS members to better advocate for standards that reflect the interests of U.S. insurance regulators, insurance industry and consumers. According to the members, these types of efforts are still in the early stages.
NAIC International Insurance Relations Committee To Review IAIS, U.S. Group Insurance Capital Standards Development Progress
At the upcoming National Association of Insurance Commissioners’ (“NAIC”) 2015 Summer National Meeting, the NAIC’s International Insurance Relations Committee’s ComFrame Development and Analysis Working Group will review the IAIS’ progress on development of the insurance capital standards, among other agenda items.
In addition to providing ongoing technical review of the IAIS’ progress and facilitating the input and participation of U.S. insurance regulators in the IAIS’ field-testing process, the Working Group’s charge includes development of a possible approach for a U.S.-based group capital standard for internationally active insurance groups and collaboration in its development with other parties, including the U.S. Department of the Treasury, the Federal Reserve Board and key industry stakeholders, as appropriate.
To view the U.S. Group Capital Methodology Concepts Discussion Paper, click here.
To view comprehensive information on the IAIS’ insurance capital standards development activities, click here.
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