Global Capital Standards: Implications for the U.S.
Michael F. Consedine
Testimony Before the Subcommittee on Housing and Insurance Committee on Financial Services Regarding: The Impact of International Regulatory Standards on the Competitiveness of U.S. Insurers
Senator Ben Nelson, NAIC CEO
FSB publishes 2016 G-SII list
Averting Systemic Risk Issue Brief
Navigating the Regulatory Alphabet Soup
July 2014, CIPR Newsletter
International Regulatory Developments on Group Capital Standards
April 2014, CIPR Newsletter
Emerging Regulatory Issues in 2014
January 2014, CIPR Newsletter
Policy Measures to Address Systemically Important Financial Institutions
November 2011, FSB
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Last Updated 12/29/17
Issue: State insurance regulators interact with several international organizations in much the same way as they do the various federal agencies. The Financial Stability Board (FSB) was established to coordinate at the international level the work of national financial supervisors and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. It is sponsored by the Group of Twenty (G-20) countries with a broad charge to promote financial stability throughout the world. The FSB’s purpose is similar to that of the Financial Stability Oversight Council (FSOC) in the U.S.
The severity of the 2008 global financial crisis underscored the interconnected nature of financial institutions, as well as the risks they pose to the financial system when they are in distress. Phrases like “too big to fail” and “systemically important” continuously made news headlines in the midst of the crisis. While the insurance industry was not the root cause for of the financial crisis, insurance markets have become increasingly global and interconnected, and activities they engage in have become increasingly tied to the financial markets. As such, the FSB asked the International Association of Insurance Supervisors (IAIS) to set up a process to assess insurers’ systemic risk, and to recommend policy measures designed to prevent catastrophic failure in the sector.
Overview: In July 2013, the FSB identified an initial list of nine multinational insurance groups it considers to be global systemically important insurers (G-SIIs), including three based in the United States (American International Group, MetLife, and Prudential Insurance). The FSB chose these insurers because it believes that should one of them become insolvent and fail in a disorderly manner, it could have negative impacts on the stability of the global financial system. The G-SII list is updated annually, based on information provided by the IAIS and published by the FSB each November. Furthermore, the FSB and IAIS have been developing a framework of policy measures that will be applied to G-SIIs with the objective of reducing the negative externalities stemming from the potential disorderly failure posed by a G-SII. For 2014, there were no changes to the list and the FSB decided to postpone a decision on the G-SII status of reinsurers, pending further development of the methodology. In November 2015, the FSB, as part of its annual identification process of G-SIFIs published an updated G-SII list which again composed of nine total insurers, although they were not all the same insurers as the previous years. In comparison to the 2014 cohort, one insurer has been added and one removed from the list. The three insurers based in the U.S. remained on the list.
In November 2016, it was announced the insurers on the 2016 G-SII list remain the same as those on the 2015 list. In November 2017, the FSB, in consultation with the IAIS and national authorities announced it decided not to publish a new list of G-SIIs for 2017, saying it welcomes work of the IAIS being undertaken to develop an activities-based approach to systemic risk. The FSB will review the situation in November 2018 based on IAIS' progress on its approach.
G-SIIs will be subject to the following internationally agreed standards: (a) higher loss absorbency (HLA) requirements which are scheduled to be applied starting from January 2019 to those G-SIIs identified in November 2017; (b) enhanced group-wide supervision, including for the group-wide supervisor to have direct powers over holding companies and to oversee the development and implementation of a Systemic Risk Management Plan and a Liquidity Management Plan; and (c) group-wide recovery and resolution planning and regular resolvability assessments.
It is important to note that FSB's G-SII list is advisory only and non-binding. State insurance regulators and the NAIC have been engaged with the IAIS Executive and Financial Stability Committees in this work, and domestic state regulators have been involved on a company-by-company basis. In the U.S. the FSOC, established under the federal Dodd-Frank Wall Street Reform and Consumer Protection Act, is authorized to address systemic risk and has its own process for evaluating and designating domestic systemically important insurers. The FSOC has designated all three U.S.-based G-SII-listed insurers as systemically important. The FSOC statutory and regulatory process makes no reference to the FSB or G-SIIs, so it is not clear how the FSOC could consider a G-SII unless that firm would otherwise be considered a domestic systemically important financial institution (SIFI). In March 2016, the U.S. District Court in D.C. rescinded MetLife designation as a SIFI. According to the ruling by the federal judge, the FSOC made an "arbitrary and capricious" decision when it designated MetLife Inc. as a SIFI. The U.S. Department of the Treasury has said it would appeal the federal judge's decision.
Insurance regulation in some other nations is approached from the group rather than the entity level as it is here in the U.S. Other nations also tend to have consolidated regulators covering insurance, banking and securities. Therefore, it is not surprising the FSB is pushing the IAIS to adopt international insurance group capital standards to apply to G-SIIs. The IAIS is developing backstop capital requirements (BCRs) which will eventually serve as a basis for work on higher loss absorbency (HLA) capital measures for G-SIIs. More information can be found on the NAIC Capital Position Statements.
Status: The NAIC Financial Stability (EX) Task Force mission is to consider issues concerning domestic or global financial stability as they pertain to the role of state insurance regulators and serve as a forum to coordinate state insurance regulators' perspective on a wide variety of issues arising from the designation of U.S. insurance groups as “systemically important” both pre- and post-designation, including analyzing proposed policy measures regarding supervisory standards for global systemically important insurers.