The Federal Reserve just released a proposed rule for the new group capital standard applicable to US insurers with bank affiliates. These rules will impact a handful of insurers directly, but may also affect all US insurers indirectly:
- Insurers with banks that are under Federal Reserve Board (FRB) supervision will be directly impacted. While the proposed Building Block Approach (BBA) anchors to existing statutory rules, it introduces adjustments and capital criteria that may lead to more stringent overall requirements than today. In particular, the need to unwind captives and eliminate grandfathering for principle-based reserving (PBR) could impact the capital ratios and will add an operational burden. Further, restrictions on qualifying capital – along with the introduction of capital tiers – may change how insurers raise capital and debt in the future.
- Other US insurers may be indirectly impacted via the BBA’s influence on other capital rules under development, namely the NAIC Group Capital Calculation (GCC) and the international Insurance Capital Standard (ICS). The NAIC will need to contemplate potential differences between the GCC and BBA, including the treatment of permitted and prescribed practices, grandfathering rules and scalar calibration. On the ICS front, the FRB along with the NAIC, FIO and state insurance supervisors have been advocating for an Aggregation Method (AM) to be outcome-equivalent to the ICS Market-Adjusted Valuation (MAV) approach. The BBA effectively puts a stake in the ground for what the FRB deems to be an appropriate aggregation framework for US insurance groups.