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
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Last Updated 1/10/19
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). These insurers were identified on the belief 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 IAIS assessment and FSB identification became an annual process, with the FSB and IAIS developing a framework of policy measures to be applied to G-SIIs with the objective of reducing the negative externalities stemming from the potential disorderly failure posed by a G-SII.
This framework of G-SII policy measures consisted of three main elements: (a) higher loss absorbency (HLA) requirements which; (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.
While there have been some changes to the original 2013 list, the three insurers based in the U.S. remained on the list. In 2017 and 2018 the FSB, in consultation with the IAIS and national authorities announced it decided not to publish a new list of G-SIIs saying it welcomes work of the IAIS being undertaken to develop an activities-based approach to systemic risk.
In November 2018, the IAIS released a consultation document on a proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector. The framework moves away from taking solely an entities-based approach (EBA) and sets out an activities-based approach (ABA) for sector-wide risk monitoring and management, as a key component of the framework, and tools for dealing with the build-up of risk within individual insurers or groups of insurers. The IAIS will review consultation comments and further refine the proposed elements in order to finalize by the end of 2019 and begin implementation in 2020. The goal is that an appropriately implemented framework will provide an enhanced basis for mitigating systemic risk in the insurance sector.
The FSB will assess the IAIS's recommendation to suspend G-SII identification from 2020 once the holistic framework is finalized in November 2019. In November 2022, the FSB will, based on the initial years of implementation of the holistic framework, review the need to either discontinue or re-establish an annual identification of G-SIIs.
Status: The NAIC will be actively engaged through its IAIS representatives as the holistic framework is further refined to help ensure new policy measures and their scope are appropriate for addressing systemic risk in the insurance sector. 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. In 2017 the NAIC launched the Macro Prudential Initiative (MPI), reflecting the global shift to viewing systemic risk from an EBA to more of an ABA basis. The MPI is considering a range of new or improved tools to monitor and respond to risks in the insurance sector.