The Federal Reserve (FRB) has released new information on proposed capital rules for insurers that own a depository institution.
In a speech before the American Council of Life Insurers (ACLI) Executive Roundtable on January 9, 2019, Federal Reserve Vice-Chairman Randal Quarles, further defined the FRB’s approach to implement regulatory capital requirements for insurance holding companies that include a bank. This proposal brings forward capital standards for insurers first announced by the FRB in 2016.
The Dodd-Frank Act of 2010 expanded FRB insurer supervision to those that own a federally insured bank or thrift and insurance companies designated as “systemically significant” by the U.S. Financial Stability Oversight Council (FSOC). Insurers previously considered a Systemically Important Financial Institution (SIFI) have all been de-designated.
This latest building block approach requires insurance companies owning a bank or thrift to aggregate the capital of subsidiaries with consideration for certain adjustments and scaling to a common capital regime, likely the NAIC capital framework. Once the aggregation is completed, a minimum capital requirement will be determined with the objective to ensure the safety and soundness of the depository institution. The goal is to leverage existing legal entity capital standards.
Vice Chairman Quarles underscored an FRB position presented in 2016 that an Insurance Capital Standard (ICS) being developed abroad does not align with U.S. domestic needs. The U.S. remains engaged in developing international standards and specifically an ICS that is suitable for the U.S. market.
The deepest effect of the FRB supervision of insurers will be applying bank regulatory capital requirements to the depository institution building block. In addition bank capital requirements would apply to non-bank and non-insurance entities. Therefore insurers can expect to be subject to additional FRB reporting and rules regarding capital aggregation.
Insurance companies subject to the FRB should remain engaged in discussions on capital requirements. In considering these developments, they should review their holding company structure and how to best align their affiliated entities and required capital. The FRB supports the benefits and coordinated efforts between the FRB and the NAIC in mutually supervising common firms and looks to avoid conflicting regulation.