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Top US regulators at odds with international capital standard for insurers

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Top US regulators at odds with international capital standard for insurers

U.S. insurance regulators appear to be deeply discontented with the current construction of an international capital standard that will be voted on in just two months.

National Association of Insurance Commissioners President Eric Cioppa during a Senate hearing made it clear that the international capital standard, dubbed ICS 2.0, will not be implemented in the U.S. in its current form.

"The ICS remains not only technically flawed, but also contrary to key policy initiatives in the U.S. such as retirement security, long-term care, infrastructure investment and disaster resiliency," Cioppa told the Senate Committee on Banking, Housing and Urban Affairs, adding that he has "significant concerns" about both the "direction and the construction" of the ICS.

Among the list of issues causing concern for "Team USA" are the proposed use of a "market-based valuation approach" and lack of clarity about the process moving forward.

The market valuation approach is of particular concern because it "takes risk and puts it in a one-year prism," said Thomas Sullivan, associate director of the Board of Governors of the Federal Reserve System. That approach may undermine product offerings such as annuities and life insurance, which have durations that extend decades, he said.

In his remarks, NAIC's Cioppa noted that the work done on the standard to date largely reflects Europe's approach to regulation; he called it "unworkable" for the U.S.

"A regulatory standard that cannot be adopted by the world's largest jurisdictions does not create safer insurance markets globally and is not an international standard regardless of the label applied to it," Cioppa said.

In light of these differences, the U.S. has also been developing what it calls the Aggregation Method, which is separate from the ICS but is intended to provide comparable outcomes for the groupwide supervision of internationally active insurance groups. Some large U.S. companies that do business internationally, however, may still be subject to the ICS or similar standards. That is another reason why U.S. regulators continue to push for design changes to the ICS, Cioppa said.

Some U.S. insurance executives, including American International Group Inc. CEO Brian Duperreault and Hamilton Insurance Group CEO Pina Albo, previously expressed dissatisfaction over a "one-size-fits-all" approach and questioned the need for an international standard to begin with.

The International Association of Insurance Supervisors' vote to move forward with ICS 2.0 will take place in Abu Dhabi in November, but Cioppa and the other witnesses at the hearing said they viewed that vote as a "milestone" and not a final adoption. If the vote passes, a five-year monitoring period would begin, which U.S. regulators hope they can use as an opportunity to test the Aggregation Method.

When that monitoring period ends, the IAIS will decide whether the method the U.S. plans to use is "outcome equivalent," but exactly how the international body will decide that is not clear.

"It's critically important that we have definitions of comparability and principles upon which we can continue to develop the Aggregation Method," Cioppa said. "The NAIC and Team USA are pushing very hard for comparability guidelines going forward."

Toward the end of the hearing, several senators were not given a clear answer as to whether Cioppa and the other witnesses would vote against the standard in November.

"Disengagement is not going to help anyone," the Fed's Sullivan said.

Cioppa said a lot could happen before November as several meetings are supposed to take place in that timeframe. Things could also change during the monitoring period.

"I think if there's a viable path forward, we have to seriously consider going along," Cioppa said. "But we have to stay engaged ... by voting 'no,' do we disengage prematurely?"