April 2012

NAIC Capital Markets Bureau: Enhances Services to Regulators and Public

In October 2010, the NAIC formed the Capital Markets Bureau to expand the regulatory support services provided by the organization. The group monitors developments, trends and activity in the global financial markets and analyzes the potential impact on the insurance industry and their investment portfolios. Its mission is to support state insurance departments and other NAIC staff on matters affecting the regulation of investment activities at state-regulated insurance companies. The Capital Markets Bureau is located in the NAIC‘s Capital Markets and Investment Analysis Office in New York City. Edward Toy, a capital markets veteran, is director of the Capital Markets Bureau. He is supported by a team of eight experienced capital markets professionals.

To help fulfill their charge, the group communicates the latest capital markets developments directly to state insurance regulators. The group produces the Capital Markets Special Report, which focuses on current market issues and areas of market risk that could impact insurance company investment portfolios. The Special Reports track insurance industry financial performance based on insurer statutory filings and provide analysis on a variety of topics, including insurer use of derivatives, the impact of the low interest rate environment on insurance companies, and insurer investment exposures in Europe.

In addition, the NAIC‘s sophisticated financial databases allow the Capital Markets Bureau to provide timely research and analysis on events that could have a material impact on the investment profile of the insurance industry. The group is able to promptly react to current events, such as the Japanese earthquake and tsunami, the Eurozone sovereign debt crisis, and the U.S. sovereign credit rating downgrade by Standard & Poor‘s. This research and analysis is fed into the group‘s Special Reports, as well as into other areas at the NAIC and the NAIC committee structure (e.g., Valuation of Securities (E) Task Force and Financial Analysis (E) Working Group).

The Special Reports are released periodically, depending, in part, on the discussion topics. They are available to regulators and the public by email subscription.[1] There are approximately 900 subscribers to the Special Report. Subscribers include state insurance regulators, NAIC staff, federal regulators (e.g., the Federal Reserve and the Federal Deposit Insurance Corporation), other federal entities (e.g., the U.S. Department of the Treasury and the Federal Insurance Office), international regulators and agencies (e.g., the International Monetary Fund and the Financial Stability Board), industry and trade associations, and broker-dealers and investment banks. Because many of these entities redistribute the Special Reports to others within their organizations, the Special Reports reach a much wider audience than just the Capital Markets Bureau‘s subscriber database. All Special Reports are archived and available on the NAIC website.[2]

The Capital Markets Bureau also produces a Capital Markets Daily Regulator Newsletter. The Newsletter is a collection of news summaries aggregating significant daily market events that affect insurers and regulators. It is supplemented with a snapshot of global financial market statistics and developments that impact their performance. The Newsletter is available to regulators only and is distributed via email at the conclusion of each business day.[3]

The Capital Markets Bureau recently created The Hot Spot on its Web page that features brief descriptions of capital market developments or trends that could potentially impact the performance of insurance industry investments. Hot Spot alerts will be issued as often as deemed appropriate and are accessible through a link within the Capital Markets Daily Regulator Newsletter, as well as on the NAIC website.[4]

In addition to the aforementioned research reports, the Capital Markets Bureau provides investment analysis services to regulators upon request.[5] These services include: 1) Investment Analysis Reports; 2) Detailed Asset Reviews; 3) Derivative Use Plans Reviews; and 4) On-Site Examination Support. Investment Analysis Reports are much more risk-focused than in the past and consist of three primary stages: 1) the Preliminary Assessment, where the Capital Markets Bureau staff and the state insurance examiners discuss the insurer‘s investment portfolio and other relevant information; 2) the Analysis and Written Report, which provides a detailed analysis of the investment portfolio and focuses on potential credit and market risks, as well other areas of concern; and 3) the Follow-Up Discussion, where the Capital Markets Bureau staff discusses analysis findings and addresses any additional questions raised by the state insurance examiners.

The Capital Market Bureau also provides expert education and training support to state regulators. On-site investment seminars and training at state insurance departments, as well as webinars, are available to state regulators through the NAIC Education & Training Department.[6] The group also conducts quarterly regulator-to-regulator conference calls, where current capital market trends are thoroughly discussed.

The Capital Markets Bureau provides staff support to the NAIC committee structure. One example is the C-1 Factor Review (E) Subgroup, a joint subgroup of the Capital Adequacy (E) Task Force and the Valuation of Securities (E) Task Force, which was formed in 2011. The C-1 Factor Review (e) Subgroup is charged with reviewing the C-1 component of the current risk-based capital (RBC) factors and delivering a recommendation for new factors to its parent committees.

The group also aids federal and international policymakers in understanding the interaction between the insurance sector and the broader capital markets. Last December, Edward Toy was one of the NAIC representatives at a meeting with the Federal Insurance Office discussing modernization and improvement of financial regulation.

• Conclusion

The Capital Markets Bureau has taken on an increased role in helping the states monitor investment risk. The expanded capabilities of the organization will provide added benefits to state insurance regulators. The research and analyses conducted by the Capital Market Bureau helps NAIC members fulfill their regulatory mission by providing important information on how external events in the insurance or other financial markets could impact insurers.

* Special thanks to Michele Lee Wong and Jennifer Johnson for their contributions to this article.

Copyright © 2012 NAIC, All rights reserved.