WASHINGTON—The International Association of Insurance Supervisors (IAIS) on Thursday unveiled what it envisions as a uniform capital framework for internationally active insurers, or global systemically important insurers (G-SIIs).
Called the "Basic Capital Requirement," or BCR, analysts see it as the likely template for the future capital standard framework the Federal Reserve will impose on domestic insurers it regulates or SIFIs, systemically important financial institutions.
David Snyder, vice president international policy for the Property Casualty Insurers Association of America (PCI), said PCI is still reviewing the policy unveiled by the IAIS.
"It's too early to determine the outcome but it looks like some elements are consistent with industry comments," Snyder said. "It is important to remember that this only applies to the global systemically important insurers."
Philip L. Carson, associate general counsel and director of financial regulatory policy for the American Insurance Association, said that, that it is important to recognize that the BCR only applies to G-SIIs while the IAIS' forthcoming development of an insurance capital standard (ICS) will apply to internationally active insurance groups (IAIGs).
Carson said that, "Although the BCR was originally intended to 'inform' the development of the ICS, the two capital measures have very different objectives."
Therefore, he said, "it is critical that the IAIS proceed cautiously and not confuse the distinct purposes of the BCR and ICS which would in turn blur the lines between G-SIIs and IAIGs."
U.S G-SIIs are currently American International Group and Prudential Financial, as well as MetLife, which is challenging its designation as a SIFI.
Others amongst the nine designated as G-SIIs that do business in the U.S. are Allianz and AXA. Others are Aviva, Assicurazioni Generali, Ping An Insurance and Prudential PLC.
"U.S. regulators have indicated that they see this is the first step toward the global agenda of higher capital standards for all insurers," said Howard Mills, the chief advisor to Deloitte's insurance industry group and a former Superintendent of the New York Insurance Department.
Mills, who is attending the IAIS conference in Amsterdam, said U.S. insurers are concerned because they fear "there will be negative consequences for higher global capital standards," specifically, "fewer products going to market and higher costs for policyholders."
Mills said the U.S. industry, both property and casualty and life, has urged the IAIS "to slow down, and be more sensitive to local regulatory systems." Mills said the U.S. companies and trade group said the IAIS should "acknowledge the success of the U.S. regulatory policy, based on what happened during the financial crisis," as well as "be mindful of the impact of BCR on policyholders."
Ryan Schoen of Washington Analysis said that while the global standards are likely to be tweaked by U.S. regulators, "we view the IAIS proposal as manageable for the group, and even an incremental positive, as it is tailored to insurance and similar in many ways to existing Risk Based Capital (RBC) requirements."
Schoen said he thinks the Federal Reserve could propose domestic capital requirements on the SIFIs as early as the first quarter of 2015, with final rules possible before the end of next year.
The main categories of an insurer's activities that are measured by the BCR include: (1) traditional life insurance; (2) traditional non-life insurance; (3) non-traditional insurance; (4) assets; and (5) non-insurance activities.
Casualty insurance, mortgage insurance, and equity, real estate and non-credit investment assets carry the highest risk-factor values under the capital requirements.
"While we believe the Fed is likely to follow the lead of global regulators in crafting a BCR for domestic insurers, we think it will take a heavier-handed approach to crafting capital requirements for non-core insurance activities," Schoen said.
The non-binding IAIS framework is slated to be approved by international regulators at the G20 meeting on November 15-16 in Brisbane, Australia, Schoen said.
According to Schoen, the G-SIIs outperform other smaller globally active insurers in that they maintain an average level BCR ratio of 75%, compared to 67% for the tested globally active insurers.
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