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US insurance reps approach new draft of international capital standard with caution

In the wake of the release of an updated for an international capitalstandard for insurers, some in the U.S. insurance industry are stillquestioning the approach of the standard-setting body that is creating it.

The International Association of Insurance Supervisorsreleased a 175-page public consultation document July 19, its second take on aglobal capital standard. In 2013, it first announced that "a sound capital and supervisory framework for the insurance sector isessential for supporting financial stability and protecting policyholders," and started developing a standard that would apply tointernationally active insurance groups.

These groups would be identified by their supervisorycolleges, not by the IAIS. About 40 companies are said to be undergoing fieldtesting of a developing version of the ICS, which is expected to be adopted inits fuller version, in late 2019. The current comment period set forth by thenew consultation document runs through Oct. 19, with the first ICS rolloutexpected by mid-2017.

The approach that the IAIS is taking is not the same as theapproaches being taken by the Federal Reserve or the NAIC, according to SteveBroadie, vice president of financial policy for the Property Casualty InsurersAssociation of America.

He explained that the Fed and the NAIC are not taking aconsolidated financial approach, but will be basing or have based their capitaland solvency requirements on an aggregation of risk-based capital. Anaggregated approach adds up the regulatory capital requirements of the variouscompany-level entities in an insurance group's holdingcompany rather than requiring a minimum at the holding company level.

Broadie, who participates in the IAIS stakeholder meetingsabroad and domestically, said the Fed wants to stick with the U.S. GAAP-basedapproach as a valuation method. The Fed on June 3 its so-called building-blockapproach for the insurers it regulates that are not designated as systemicallyrisky.

Regulators have no experience working with something like theICS, Broadie said in an interview. Even Solvency II in Europe isnew for insurers there, he pointed out.

Neil Alldredge, senior vice president for state and policyaffairs for the National Association of Mutual Insurance Companies, said theassociation is "still generally skeptical of the need" for an ICS, noting that the current U.S. standard andNAIC approach under development are adequate.Although NAMIC has suggested many substantive changes to the ICS developmentprocess, "it's clear that the IAIS seems to be intent on moving forwarddespite our numerous concerns," Alldredge said.

NAMIC would prefer that the IAIS hold off on a finalizedversion of the ICS in 2017 and make it into a third consultation draft instead.

NAMIC was encouraged by certain points in the newconsultation draft relating to mutual insurers, according to Alldredge.

"Specifically in relation to mutual insurers, weare encouraged to see the discussion and inquiry about differences betweenmutual and stock insurer capital resources," he said in an email. "Severalquestions in the ICS consultation draft indicate a desire to honestly addressthese differences. We are also very encouraged by the recognition that U.S.mutuals may only report on a Statutory Accounting Principles basis and not on aGAAP basis."

The American Council of Life Insurers said itwould be reviewing the consultation document closely.

There are more than 200 questions aimed atstakeholders including the global insurance industry listed in the consultationdocument. They include questions on the scope of the ICS calculation and askfor responses gleaned from companies'field-testing experience. Others delve into specifics on the methodology usedby the IAIS to determine such things as diversification of interest rate riskbetween currencies.