Global Insurance Capital Standard

The International Association of Insurance Supervisors (IAIS), whose members constitute nearly all of the world's insurance supervisors including the United States Treasury's Federal Insurance Office (FIO) and the National Association of Insurance Commissioner (NAIC), has committed to develop and implement the first-ever risk based global insurance capital standard (ICS), according to Peter Braumüller, chairman of the IAIS Executive Committee.

This development was reported by the Duane Morris law firm in an October 11, 2013 Alert which also identified a 2016 target date for development of the ICS with full implementation expected in 2019 following two years of testing and refinement.

Established in 1994, IAIS is "the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector", according to its website.

IAIS' mission is "to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability."

The Duane Morris Alert additionally reported conflicting reactions to the ICS from representatives of the FIO and the NAIC.

• FIO - Michael T. McRaith, director of the FIO and chairman of the IAIS Technical Committee, offered this assessment: "[f]rom the [2008] financial crisis, we learned that our global financial regulatory regime should be more robust and comprehensive in scope, and jurisdictions should share a commitment to global standards."
• NAIC - Ben Nelson, CEO of the NAIC, issued this response to the IAIS's announcement: "Although U.S. state insurance regulators continue to have serious concerns about the timing, necessity, and complexity of developing a global capital standard given regulatory differences around the globe, we intend to remain fully engaged in the process to ensure that any development augments the strong legal entity capital standards in the U.S. that have provided proven and tested security for U.S. policyholders and stable insurance markets for consumers and industry."

The United States structured settlement industry played an important historical role influencing the development of risk based capital requirements for insurance companies and will likely be impacted by related national and international developments.

Historical Background

• The United States insurance industry historically has been regulated almost exclusively by the states whose regulatory responsibility was reaffirmed in 1945 when Congress passed the McCarran-Ferguson Act.
• Following the collapse of First Executive Corporation and its two Executive Life subsidiaries in 1991, which had invested heavily in "junk bonds" and had sold a substantial number of structured settlement annuities, the NAIC adopted several model reforms including risk based capital (RBC) requirements.
• RBC requires insurance companies with higher amounts of risk to retain higher amounts of capital and surplus.
• Prior to the Executive Life collapse, state insurance regulators had used fixed capital standards to monitor the financial solvency of insurance companies.
• Under fixed capital standards, depending upon the state and its line of business, insurance companies were required to maintain the same minimum amount of capital, regardless of the financial condition of the company.
• As a result of the 2008 global financial crisis and huge exposures to subprime real estate mortgages incurred by one its non-insurance subsidiaries, American International Group, Inc. (AIG), a significant structured settlement annuity provider, required a $182 billion government bailout to avoid collapse.
• The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in response to the 2008 global financial crisis, created changes in the United States financial regulatory system that impact all aspects of the financial services industry including insurance.
• Among many provisions, Dodd-Frank, according the U.S. Treasury website, "vested FIO with the authority to monitor all aspects of the insurance sector ... and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors [IAIS]."
• The Financial Stability Board (FSB),an international body that monitors and makes recommendations about the global financial system, published a list of nine insurers on July 18, 2013 that it identified as “global systemically important”.
• The FSB list includes three United States insurers, AIG, MetLife and Prudential - each of which currently sells structured settlement annuities in the U.S. market.
• Although these insurers insist they are nothing like banks in terms of insolvency risks, "regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities", according to a July 27, 2013 article in The Economist titled "Global Systemic Insurers".
• "But it is not clear", The Economist article adds, "which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers."
• The Duane Morris Alert also reported the IAIS announcement "that by late 2014 it will have finalized and made ready for implementation 'straightforward, backstop capital requirements' for insurers that are designated as global systemically important insurers."