Thomas Sullivan, Associate Director, Division of Banking Supervision and Regulation for the Federal Reserve (Fed), has highlighted the current status and efforts regarding the Fed’s new responsibility in Insurance supervision before the Subcommittee on Housing and Insurance, Committee on Financial Services, U.S. House of Representatives on September 29, 2015.1
A new role as consolidated supervisor of Insurance Holding Companies
With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Fed became the consolidated supervisor of many insurance holding companies, accounting for a third of US insurance industry assets. They addressed this new role by developing a specific supervision framework for scopes companies, building dedicated internal supervision teams (currently counting 90 full time equivalents) and initiating recurring supervision processes with insurers’ teams. The supervisory framework seeks to strengthen insurers’ governance, risk management and internal control practices to both protect supervised groups and mitigate any risk for financial stability.
Development of Domestic Capital Standards for Insurance Holding Companies
The Fed is constructing a domestic regulatory capital framework for supervised insurance groups, grounded legally in the Capital Standards Clarification Act of 2014 (S. 2270). They have invested significant efforts in understanding specific insurance requirements and partnered with key stakeholders (insurance groups, state supervisors, independent experts) including the National Association of Insurance Commissioners (NAIC). The development of domestic capital standards is matched by the joint efforts of the Fed and the NAIC to influence the International Association of Insurance Supervisors (IAIS) on the ongoing definition of international capital standards in a way that is consistent with the requirements of the US market. Sullivan highlights notably that no standards recommended or developed by the IAIS (or any other international body) should apply in the United States unless they are consistent with applicable US law and are adopted in accordance with US law.
A nationwide architecture for Insurance Supervision
The consolidated supervision and capital requirements is expected to supplement legal entity supervision in fostering an overarching, group-wide perspective of risks and capital issues, notably through the evaluation of companies’ Own Risk and Solvency Assessment (ORSA). The ORSA process is the responsibility of the NAIC and state supervisors, but the Fed intends to use it as a cornerstone tool in its consolidated oversight. The operational manner in which companies provide insurance to their markets remains under the remit of state-level supervision, and the consolidated supervision is built on a subsidiarity principle. The Fed is also coordinating with international supervisors on a number of areas, such as resolution planning for systemically important entities.
Take-aways for clients
The Fed is in the process of building its supervisory framework and domestic capital requirements for insurance holding companies under its supervision scope. With this new supervisory layer, the architecture of US insurance supervision is being revised to allow for a better alignment between legal entity and group level.
1. “Thomas Sullivan, Associate Director, Division of Banking Supervision and Regulation, Before the Subcommittee on Housing and Insurance, Committee on Financial Services, U.S. House of Representatives, Washington, D.C.,” Testimony, Board of Governors of the Federal Reserve System, September 29, 2015. Access at: http://www.federalreserve.gov/newsevents/testimony/sullivan20150929a.htm
Newsletter Author: Sebastien de la Lande
Newsletter Contact Person: Craig Unterseher
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