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NAIC may require liquidity stress testing for some large life insurers

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NAIC may require liquidity stress testing for some large life insurers

The National Association of Insurance Commissioners is mulling whether to require liquidity stress testing for large life insurance companies as part of a wider effort to strengthen and expand regulatory tools to assess liquidity and capital strength.

The NAIC unveiled the plan, called the Macro-Prudential Initiative, at a conference in Philadelphia. The initiative focuses on four areas of potential enhancements: liquidity, capital stress testing, exposure concentrations to other parties, and recovery and resolution.

Certain companies already do capital stress testing for themselves under an existing NAIC solvency modernization effort, but the Financial Stability Task Force will look at the value of establishing baseline stresses, and whether there is value in having the companies perform specified tests. The task force would coordinate with the NAIC group currently working on a group capital calculation.

With regard to any future liquidity stress testing, the NAIC is considering creating a universe of companies to test, which would likely include large life insurers.

In a draft of the proposed framework for the Macro-Prudential Initiative, the NAIC said that while liquidity is an issue for every company, "from a macro prudential perspective there is the additional concern, particularly for larger insurers, of how the company reacts to liquidity strains and the spill over impacts to financial markets."

At the task force meeting, representatives of several large U.S. life insurers, including MetLife Inc., American International Group Inc., Prudential Financial Inc. and New York Life Insurance Co., were generally supportive of the effort. One representative of a life insurer said after the meeting described the idea of liquidity stress testing as a continuation of what has been developing for awhile at the NAIC.

This initiative grows out of work the NAIC has been doing to build up regulatory oversight since the financial crisis and address the sustained low interest-rate environment, an aging population and rapid technological changes. NAIC President Ted Nickel also said that a number of the group's initiatives are aimed at ensuring that there are no gaps in oversight if the federal government loosens regulations.

"As the federal government potentially steps back in some areas of financial services regulation, we must step forward to advance a credible, rational and robust state-based approach," Nickel said in an Aug. 6 speech.

The proposed new work on macro-prudential measures reflects state insurance regulators' commitment to make sure that insurance companies can protect policyholders and be a stabilizing force, even in stressed financial markets, according to the draft document. Common bases for all of the initiatives will be the identification and utility of existing data, and proposals for how to address data gaps that may exist, according to the NAIC.