Prepared Remarks - Superintendent Cioppa

NAIC International Forum

Thank you very much Secretary Mnuchin for those remarks. We could not agree more with Treasury's position that international standards, particularly, the ICS must take into account some measure of jurisdictional flexibility. Your attendance here today is also a vivid example of the strong relationship among Team USA at this critical juncture for the IAIS more than a decade following the last financial crisis.

As noted in my opening remarks this morning, I thought I would take the opportunity following Secretary Mnuchin and provide the NAIC's current position with regards to the IAIS' Insurance Capital Standard (ICS) project.

As President of the NAIC this year, I have a greater appreciation for the magnitude of important challenges the supervisory community confronts on a daily basis, from long term care, to natural disasters, cyber-attacks, the use of new technology and consumer data, and responding to the needs of an aging population among so many others. The panels at this year's Forum are focusing on a number of these issues. While we wrestle with these challenges, it can be easy to get lost in the technical details, actuarial science, accounting terminology, and risk management principles. As a community of insurers, academics, consumer advocates, and supervisors, it's important to pause, step back, and remember to ask the big questions about why we are pursuing a particular course of action. If sight is the ability to see what's in front of you, then vision is the ability to imagine what lies ahead, and it's there we must keep our attention especially as we work across borders to strengthen regulatory norms.

The NAIC strongly believes in international cooperation and the importance of working together towards international standards. We are a founding member of the IAIS and have been among its most active contributors in its first quarter century of work. But more and more many of the conversations that occur on our most important projects at the IAIS confuse sight for vision; a single-minded focus on validating particular approaches or perspectives instead of a collective appreciation on outcomes or objectives about which we all fundamentally agree. Such is the state of our work on the ICS.

The concept of the ICS has utility for providing a means of assessing the capital adequacy of Internationally Active Insurance Groups (IAIGs). The ICS is being developed as a component of ComFrame, which was part of the IAIS's response to the last financial crisis to improve coordination and communication among supervisors and make group-wide supervision of IAIGs more effective and efficient. Most major economies, having weathered the Great Recession, have already responded with a decade of near-constant improvement of group supervision, enterprise risk management, resolution procedures, investment insight and oversight, and yes, capital.

The US built out the Dodd Frank Act and the states' accelerated their Solvency Modernization Initiative and are advancing a Macroprudential Initiative and Group Capital Calculation; Europe implemented and continues to refine Solvency 2; and Latin America and Asia responded with improvements to solvency, data, and technology. Many of these efforts are ongoing, and many were influenced by international standards and international cooperation. We have learned from the past and have created an even safer, more robust insurance system and in doing so also given regulators across the globe, tools that enhance our collective coordination and solvency oversight. Similarly, for many of jurisdictions, the ICS holds promise not as an entirely new approach to solvency, but rather as a shared marker with other jurisdictions to build confidence in what amounts to collective supervision across borders. That at least was the vision.

The ICS is a key project for the IAIS and scheduled to reach a major milestone later this year with adoption of ICS Version 2.0 for the monitoring period in November. Field testing is currently underway, and we hope the data will inform some of the outstanding design decisions that need to be resolved. There are questions about how the monitoring period will operate and how the ICS will continue to evolve during this time. Additionally, discussions are underway within the IAIS about defining comparable outcomes and criteria that would be used to make such an assessment. All of these are important and intertwined issues that the IAIS membership will need to collectively address this year in order to keep the ICS moving forward.

This is a heavy lift and the outstanding issues are not necessarily easy to answer. The NAIC has been active in this project from the beginning and we have been open and honest about our concerns with the project while working to find solutions.

At our recent NAIC Spring National Meeting, we took the opportunity to engage with stakeholders to get their views and concerns on the current state of the ICS. A number of you were at that session, but I wanted to summarize some of the comments we received, recognizing you may or may not agree with all of them:

  • The ICS is currently not fit for purpose; with many believing that no amount of technical tweaks can address the fatal design flaws within the ICS.
  • Alternatives to the ICS need to be recognized, such as an aggregation method.
  • As currently designed, the ICS will negatively impact the ability of insurers to offer long-term products and make long-term investments.
  • The idea of the ICS providing a "level playing field" is unrealistic and unnecessary for assessing an IAIG's group capital position, nor is it reflective of the strength of any particular supervisory approach.
  • The assessment of comparable outcomes needs to focus on qualitative elements and the overarching objective, not simply a quantitative exercise that compares one number to another.

Whether you identify with or accept this feedback or not, those most impacted by the ICS are near unanimous in highlighting concerns, whether due to design, perception, communication or future implementation. If ICS Version 2.0 is to be launched smoothly at the end of this year, the IAIS will need to address these concerns, and the clock is ticking.

Another comment made at our Spring National Meeting used the analogy of the IAIS focusing its ICS work on fine tuning the engine when the car is still missing two wheels. I think the car analogy is a good one, so bear with me as I put a different spin on it. As a standard setting organization, the IAIS is effectively in the highway safety business for the insurance sector. Its supervisory material like the Insurance Core Principles and ComFrame provide rules of the road that supervisors should follow to ensure a sound supervisory system. The IAIS keeps an eye out for and tries to help regulators fix potholes that may pose risks such as governance or misconduct practices. It provides bulletins on driving conditions by looking at and monitoring trends through its current and planned macroprudential surveillance efforts. It builds bridges that connect and bring supervisors together.

But somewhere along the way of developing the ICS, rather than guiding our journey to arrive at our agreed-upon destination, the ICS seems to have gotten into the car building business, stipulating the acceptable chassis, engine, and paint color as well. Henry Ford, who once famously said you can have any color of Model T you want so long as it's black, would be proud, but such rigid specificity ignores the point of international standards, and the evolution of complex solvency regimes around the world.

It would be the height of hubris to suggest that we have somehow nailed the perfect design of the ICS at this early stage, or that another jurisdiction down the road isn't going to find a better approach. I'm sure if Henry Ford sat behind the wheel of a Tesla, he would have to admit that it offered advancements beyond his comprehension. And yet with the ICS we seem to be going into the monitoring period with the delusion that we have reached the pinnacle of capital solvency evaluation.

The NAIC and US industry are not the only ones with concerns about the direction of the ICS. Earlier today, a bipartisan group of 42 U.S Senators agreed with the NAIC and our Team USA partners, that the IAIS should commit to "pursuing an ICS that recognizes aggregation approach to group capital." We have heard similar sentiments from Vice-Chairman Quarles earlier this year.

And just moments ago we heard it from the Treasury Secretary himself. The collective voice of the US Congress, Federal Reserve, Treasury and state insurance regulators representing the largest single insurance market on the planet cannot be ignored.

As I noted earlier, there is much for the IAIS to do in 2019 on the ICS and key decisions need to be resolved soon. IAIS members and the Secretariat have put a lot of time and resources into the ICS and need to be practical and realistic as decisions are made in order to reach the major milestone in November. The NAIC will continue to actively contribute to this project and continue to develop our own approach to group capital, which we feel will provide comparable outcomes to the ICS. We look forward to continuing to work with our IAIS colleagues, to reach our shared goal of a successful ICS. However, an ICS that is not implementable in the United States - the world's largest insurance market and a quarter of the IAIS membership - is not a true global standard. As everyone in this room engages on the important work before the IAIS this year, I would again encourage all of us to step back, look up, and keep our eyes focused squarely on the destination not the journey. Thank you.