Mark E. Van Der Weide, Deputy Director, Division of Banking Supervision and Regulation has provided his testimony on Federal Reserve involvement in the Insurance Industry Capital Standards, before the Committee on Banking, Housing, and Urban Affairs, US Senate, Washington, D.C. as well as the Subcommittee on Housing and Insurance, Committee on Financial Services, US House of Representatives, on April 28 and 29, 2015.1  

The Federal Reserve, a major overseer of insurance firms and a significant shift for an industry long regulated by states

With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Federal Reserve assumed expanded responsibility as the consolidated supervisor of a significant number of insurance holding companies. As a result of the Dodd-Frank Act, the Federal Reserve is responsible for the consolidated supervision of:

  1. Insurance holding companies that own an insured bank or thrift, as well as
  2. Insurance holding companies designated for Federal Reserve supervision by the Financial Stability Oversight Council (FSOC), also known as systemically important financial institutions (SIFIs); to date, AIG, MetLife and Prudential Financial have been designated as systemically important by the FSOC

The Federal Reserve is currently strengthening its supervisory team for insurance holding companies while building a new dedicated regulatory regime for these firms, in cooperation with:

  • The Federal Insurance Office (FIO) of the US Treasury
  • The National Association of Insurance Commissioners (NAIC)
  • Independent insurance members of the Financial Stability Oversight Council (FSOC)
  • State insurance supervisors

The principal supervisory objectives for insurance holding companies are protecting the safety and soundness of the consolidated firms and their subsidiary depository institutions while mitigating potential risks to the stability of the financial system.

The Federal Reserve conducts its consolidated supervision efforts in a manner that is complementary to, and coordinated with, state insurance regulators, who continue their established oversight of subsidiary insurance legal entities. The Federal Reserve does not regulate the manner in which insurance is provided by these companies or the types of insurance that they provide. Those important aspects of the actual business of providing insurance are the province of the relevant state insurance supervisors.2

The Federal Reserve to develop Domestic Capital Standards for Insurance Holding Companies

With the Insurance Capital Standards Clarification Act of 2014 (S. 2270) amendment to the Dodd-Frank Act, the Federal Reserve will now focus on constructing a domestic regulatory capital framework for supervised insurance holding companies that is well-tailored to the business of insurance.

The Federal Reserve is committed to following formal rule making processes to develop the insurance capital framework, which will allow for an open public comment period on a concrete proposal.

The Federal Reserve also participates in international standards setting

The Federal Reserve is, since 2013, an active member of the International Association of Insurance Supervisors (IAIS) and is participating in the development of three initiatives:

  1. An enhanced regulatory and supervisory framework global systemically important insurers (G-SIIs)
  2. A Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)
  3. Insurance Core Principles (ICPs) standards and guidance that will apply to all insurers and insurance groups, regardless of size, international activities or systemic importance.

These frameworks will strengthen capital standards for all insurance companies with different sets of requirements.

View the image.
View the image.

Source: 10th Annual Insurance Public Policy Summit, Confronting New Challenges in US and International Regulation, Institute of International Finance, March 12, 2014.3

Van Der Weide acknowledged that further, consistent global financial regulatory standards could help limit regulatory arbitrage and jurisdiction shopping and promote financial stability.

He also insisted on the fact that international regulatory standards could not be imposed on US firms by an international body and would not be binding on the Federal Reserve, the FIO and state insurance regulators.

The Federal Reserve would only adopt IAIS regulatory standards after following the well-established rulemaking protocols under US law, which include a transparent process for proposal issuance, solicitation of public comments, and rule finalization.4

Take-aways for insurers

The forthcoming federal capital requirements introduce a new concept for US insurance companies. State law includes capital adequacy at the legal entity level, measured by the regulators’ risk-based capital (RBC), but does not include a group-wide or consolidated capital requirement for insurance groups.5

As a result of the Federal Reserve now overseeing each designated insurance firm’s holding company, it can impose an additional layer of requirements for risk management, and capital and reporting requirements to existing insurance requirements. These would be in addition to new obligations like Own Risk and Solvency Assessment (ORSA) standards from the NAIC or Solvency Modernization Initiative (SMI) from the FIO.

Even if US systemic insurers are already impacted by the Federal Reserve’s stress tests, the main supervisory framework is not yet designed and is still in discussion between the college of US regulators and US insurance companies and will not be a direct application of international standards.

The Federal Reserve is fortifying its team with insurance capabilities to better understand insurance business specificities and prepare for embracing its new supervision activities.

References

  1. “Mark E. Van Der Weide, Deputy Director, Division of Banking Supervision and Regulation, full testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington D.C.,” Board of Governors of the Federal Reserve System, April 28, 2015. Access at: http://www.federalreserve.gov/newsevents/testimony/vanderweide20150428a.htm
  1. Ibid
  1. “Confronting New Challenges in U.S. and International Regulation,” 10th Annual Insurance Public Policy Summit, March 12, 2014. Access at: http://indstate.edu/business/NFI/events/10AIPPS/docs/Insurance%20Portilla%20IIF.pptx
  1. “Mark E. Van Der Weide, Deputy Director, Division of Banking Supervision and Regulation, full testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington D.C.,” Board of Governors of the Federal Reserve System, April 28, 2015. Access at: http://www.federalreserve.gov/newsevents/testimony/vanderweide20150428a.htm
  1. Ibid

Newsletter Author: David Gane

Newsletter Contact Person: Craig Unterseher

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