Attachment A
ComFrame Development and Analysis (G) Working Group
3/28/15
Draft: 3/24/14
ComFrame Development and Analysis (G) Working Group
Conference Call
December 30, 2014
The ComFrame Development and Analysis (G) Working Group of the International Insurance Relations (G) Committee met
via conference call Dec. 30, 2014. The following Working Group members participated: Kevin M. McCarty, Chair, and
David Altmaier (FL); Steve Johnson, Vice Chair, and Michael F. Consedine (PA); John Loughran (CT); Cindy Donovan
(IN); John Turchi and Gary Anderson (MA); John Rehagen (MO); Christy Neighbors (NE); Peter Hartt and Steve Kerner
(NJ); Martha Lees and Michael Sheiowitz (NY); Julie Mix McPeak (TN); Mike Arendall (TX); and Edward J. Buyalos Jr.
(VA).
1.
Heard a Summary of Comments on the NAIC Group Capital Methodology Concepts Discussion Paper
Commissioner McCarty noted that during the Fall National Meeting in Washington, DC, the Working Group spent time
walking through a group capital methodology concepts discussion paper, which provided some further thinking on options
for a U.S. group capital requirement—an RBC plus and a cash flow approach—with advantages and drawbacks of each. The
paper also included the idea of a potential hybrid approach. Commissioner McCarty stated that regulators and interested
parties were asked to submit any additional comments by Dec. 5 and asked Elise Liebers (NAIC) to provide a summary of
the comments received.
Ms. Liebers commented that approximately 10 interested parties provided comments on a variety of topics, including:
preferences between a factor-based, cash flow or hybrid approach; potential advantages and challenges for each approach;
capital resources; fungibility of capital; and the need for ongoing collaboration with the Federal Reserve and the Federal
Insurance Office (FIO).
Commissioner McCarty commented that the next steps on the group capital methodology concepts will include focusing on
looking more into a potential hybrid approach. However, given the substantial amount of attention and resources required for
the consultation on the International Association of Insurance Supervisors (IAIS) insurance capital standard (ICS), this work
will not pick up until after the IAIS consultation has concluded in mid-February. Commissioner McCarty added that the ICS
consultation process, as well as the ongoing coordination with the Federal Reserve and the FIO on the various capital
developments, will continue to inform the work on the Working Group’s methodology concepts.
2.
Heard an Update on the IAIS Insurance Capital Standard Consultation Document and Process
Commissioner McCarty stated that the IAIS had released for consultation the draft ICS with comments due by Feb. 16; the
consultation draft is a substantial document with 159 pages, which includes 169 questions on the document. Commissioner
McCarty noted that NAIC staff were in the process of reviewing the document and have focused on some specific questions
that are seen to be main issues within the consultation on the ICS. Ramon Calderon (NAIC) provided a summary on the
details of the consultation document and an overview of the specific questions, which related to valuation, capital resources
and capital requirement.
Commissioner McCarty described the timing for the review and drafting of comments on the draft ICS and potential dates for
conference calls in order to refine and ultimately approve the NAIC comments to be submitted to the IAIS.
Having no further business, the ComFrame Development and Analysis (G) Working Group adjourned.
w:/national meetings/2015/Spring/Cmte/G/G_CDAWGmin_Dec 30 2014.docx
© 2015 National Association of Insurance Commissioners
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Attachment B
U.S. Insurance Regulators’ Views: IAIS Common Framework for the
Supervision of Internationally Active Insurance Groups “ComFrame”
December, 2013March, 2015
Purpose:
The purpose of this document is to articulate the views of U.S. state insurance regulators toward the
IAIS Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)
and to help guide their ongoing work and input during its development. This document is also intended
to identify the characteristics of ComFrame that are necessary for U.S. state insurance regulators to
support its implementation in our national system of state-based insurance regulation.
Background:
ComFrame has the goal of establishing a comprehensive framework for supervisors to address groupwide activities and risks of internationally active insurance groups (IAIGs) and also lay the groundwork
for better supervisory cooperation and coordination. The IAIS initiated ComFrame to build on individual
member efforts to improve group supervision and provide better insights to regulators on how IAIGs
operate. In recognition of the growing presence of IAIGs as part of the global insurance market and the
evolving nature of their supervision, the IAIS determined that a more integrated, multilateral framework
for group-wide supervision of IAIGs was needed and thus decided to develop ComFrame.
U.S. Regulator Views:
U.S. insurance regulators support the development of ComFrame to the extent that it results in an
outcomes-focused framework that enhances supervision of IAIGs. We would oppose ComFrame to the
extent that it results in prescriptive and duplicative layers of global requirements that mandate changes
to U.S. supervision inconsistent with the best interest of U.S. insurance companies or consumers.
The following general views guide U.S. state insurance regulators’ overall approach and expectations
for ComFrame:
•
There is great potential for ComFrame as a framework for international supervisory cooperation
based on the IAIS Insurance Core Principles (ICPs) and used by supervisory colleges to improve
the effectiveness and efficiency of international group supervision.
•
ComFrame does not exist in a vacuum and should leverage, not duplicate or contradict, the existing
foundation of the IAIS ICPs.
•
The purpose of fostering global convergence should be to arrive at a common degree of regulatory
effectiveness and understanding for IAIGs without necessarily creating a need for identical rules.
•
Given the different regulatory approaches and legal systems among IAIS members, ComFrame
must be a dynamic and flexible framework focused on regulatory collaboration.
Identification of an IAIG:
•
The criteria used to identify IAIGs should be clear and focused on identifying those entities which
have a large presence internationally. The criteria should be simple and allow the involved
supervisors to adjust using their discretion if circumstances necessitate a different answer.
Corporate governance:
•
ComFrame should allow an IAIG the flexibility to structure corporate governance functions and
processes in a manner that best suits the specific needs of the IAIG. The objectives of a group-wide
corporate governance framework are to ensure that systems, policies and procedures are in place
to effectively and efficiently provide for sound management and oversight of a group’s business. An
IAIG’s corporate governance framework should take into account and manage specific and/or
additional risks to which it may be exposed due to its international activities.
Enterprise Risk Management:
•
ComFrame should identify the main components of effective ERM that addresses all relevant and
material risks without prescribing a particular form to the IAIG. An IAIG should have an enterprisewide risk management framework which addresses all relevant and material risks.
Own Risk and Solvency Assessment (ORSA)
•
The ORSA should be sufficiently flexible in its form and content to accurately reflect the IAIG’s
nature, scale, and complexity. The ORSA should reflect a clear assessment of the IAIG’s risk
management and its current (and likely future) group solvency position. The ORSA should provide a
clear understanding of the material exposures of the group.
Group Capital:
•
The IAIS has committed to develop a risk based global insurance capital standard (ICS) within
ComFrame and to build the ICS on the foundations set out in the current draft of Module 2 Element
5, Capital Adequacy Assessment. While U.S. state insurance regulators continue to have serious
concerns about the timing, necessity, and complexityurgency of developing a global group capital
standard, we believe that an ICS should be risk-based in substance and appropriately reflect the
risk characteristics of the underlying business; it must not undermine the legal entity capital
requirements as established by the individual jurisdiction’s supervisors. While a global ICS should
contain various components of a group capital requirement, its construction should not be overly
detailed and prescriptive, and must allow for some flexibility in its implementation and overall
monitoring. In the development of the ICS, the IAIS should consider the usefulness of stress and
scenario-based testing (as originally intended in ComFrame), an assessment of intra-group
transactions, and real-world considerations regarding the nature and fungibility of capital. As has
been the case over the past three years offor the development of all of ComFrame, it is critically
important that the development of an ICS include as many appropriate participants as practicable
(e.g., supervisors, insurance groups, professional organizations) and meetings be conducted in an
open and collegial manner, not in a closed process.
Accounting and Valuation:
•
Jurisdictional accounting and valuation frameworks are important features of insurance supervision
and prudential regulation. U.S. state insurance regulators believe that a “GAAP Plus Adjustments”
valuation approach should be explored for purposes of the ICS and can be developed to achieve
similar outcomes (as the market adjusted approach) for purposes of prudential supervision. The
IASB & FASB have both issued exposure drafts (EDs) on insurance contracts with comment
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periods ending October 2013 and are both estimating new standards by the end of 2014. The two
Boards have publicly committed to working towards greater convergence of the two sets of
proposals after the comment period. Both EDs contain a degree of constrained market consistency.
Since IAIGs will need to begin implementing the proposals in the EDs and the standards during the
period up to 2018, testing these bases would be less disruptive and more useful for ComFrame.
Group Supervision:
•
Insurance group supervision in the U.S. is a multi-jurisdictional approach that leverages a groupwide perspective on risk with legal entity level application of regulation. Under such an approach, a
single all-powerful group regulator is neither advantageous nor necessary. ComFrame must
respect different jurisdictional approaches to group supervision and focus on a common outcome of
providing group-wide information and perspective to all relevant supervisors.
•
The group-wide supervisor must obtain a clear understanding of the IAIG’s group-wide business
activities and risks posed to the insurance group. The group-wide supervisor must obtain an
understanding of the IAIG’s strategies, which includes among other things, the business model,
market share and geographic emphasis, capital allocation plan, and non-insurance business
activities.
Role of Home/Host Supervisors:
Home and host supervisors should be proactive in their interaction and coordination of supervisory
activities. Home and host supervisors cooperate on cross-border issues in an effort to effectively
address issues that may adversely impact the group.
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U.S. State Insurance Regulators’ Views: International Capital Proposals
December, 2013March, 2015
Purpose:
The purpose of this document is to articulate the views of U.S. state insurance regulators toward the
uses of capital within prudential regulation and to help guide their ongoing work and input during the
development by the International Association of Insurance Supervisors (IAIS) of a risk-based global
insurance capital standard (ICS) for internationally active insurance groups (IAIGs), as well as
straightforward, basic capital requirements (BCR) and higher loss absorbency (HLA) requirements for
global systemically important insurers (G-SIIs). This document is also intended to identify the
characteristics of such developments that are necessary for U.S. state insurance regulators to support
their implementation in our national system of state-based insurance regulation. As these
developments continue to evolve, this document will be updated and evolve as well.
Background:
In 2010, the IAIS began developing the Common Framework for Supervision of Internationally Active
Insurance Groups (ComFrame) as a comprehensive framework for the supervision of IAIGs. In 2013,
Tthe IAIS has now agreed to develop a risk-based global ICS and to include it within as a component of
ComFrame, which has always included a capital component within its solvency assessment. This
component will be used as a starting point for development of the ICS. In 2014, the IAIS will also
developed the BCR, which is applicable to G-SIIs and will serve as the basis for the HLA
requirementswhich is planned to be finalized and ready for implementation by G-SIIs in late-2014. The
BCR will serve as the foundation for HLA requirements for G-SIIs, which are to be implemented in
2019; it is anticipated that their development and testing will also inform development of the ICS.
In early 2014, the NAIC formed the ComFrame Development and Analysis (G) Working Group
(CDAWG) to provide ongoing review, and technical as well as expedited strategic input on ComFrame
and the international group capital developments. In line with its mandate, the CDAWG helped review
the first IAIS Consultation Draft on the ICS, which was issued in December 2014; comprehensive
comments on a number of key issues were submitted by U.S. state insurance regulators 1. Additionally,
the CDAWG has been exploring group capital concepts that would be appropriate for U.S. based
internationally active insurance groups. It is expected that a fully developed U.S. group capital proposal
will be in agreement with the IAIS ICS principles and will result in comparable outcomes. The CDAWG
is collaborating in these efforts as well as on IAIS group capital deliberations with the U.S. Treasury
(Federal Insurance Office) and Federal Reserve Board and other key stakeholders, as appropriate. The
communication among all parties is dynamic, occurs frequently, and helps to inform state insurance
regulatory views.
U.S. Regulator Views:
1
These comments are posted on the NAIC International Insurance Relations (G) Committee webpage.
Although U.S. state insurance regulators continue to have serious concerns about the timing, necessity,
and complexityurgency of developing a global capital standard given legal, and regulatory and
accounting differences around the globe, we intend to remainare fully engaged in the process. Our
primary objective is to ensure that should this standard be implemented, it appropriately reflects the risk
characteristics of the underlying business and does not undermine legal entity capital requirements in
the U.S. While we recognize the role and importance of group supervision, legal entity capital
requirements are necessary to protect U.S. policyholders and promote a stable market, particularly
given the structure of U.S. financial regulation. As U.S. insurance regulators work within the IAIS to
develop and consider implementing the various capital proposals, we will be mindful of the cost/benefit
of the proposed standards, the impact on insurance product availability and affordability or other market
impacts, and the compatibility of the proposed standards with the U.S. insurance regulatory system.
The following general views guide U.S. state insurance regulators’ overall approach and expectations
towards the development of capital standards and the various international proposals:
Capital standards:
•
U.S. state insurance regulators support the need to assess capital adequacy as part of coordinated
solvency oversight and recognize that insurance supervisors in emerging markets are calling for
basic international capital standards or benchmarks of some kind; however, a single uniform capital
standard is not the silver bullet solution, but rather should be seen as one of many tools used to
achieve more effective regulation and/or greater financial stability.
•
The business model for insurance is significantly different than the business model for banking and
even the business models and risk management approaches amongst insurers are unique. The
track record in the banking sector of a reliance on capital standards did not prevent a system-wide
banking collapse during the recent financial crisis. Development of an ICS needs to reflect the
distinct characteristics of the insurance business model and its supervision.
•
The risks inherent in insurance products, even for the same business line, can be very different
jurisdiction to jurisdiction. A single risk charge for that business line may well lead to incorrect
assessments of the relative capital strength of IAIGs.
Fungibility:
•
U.S. state insurance regulators are also concerned with a reliance on the assumption that capital
can be freely moved within an insurance group. It is critical that the free flow of capital (i.e. assets)
across a group should not jeopardize the financial strength of any insurer in the group. As such, the
flow of capital out of an insurance legal entity within the group should remain subject to required
approvals by that entity’s domiciliary regulator. Ultimately, whatever is implemented at the group
level, this should be in addition to jurisdictional capital requirements. For the U.S., it will be in
addition to, and not a replacement for, the U.S. Risk-Based Capital (RBC) that applies at the legal
entity level.
•
Other jurisdictions may allow for greater discretion of capital movement within a group if they
believe it is appropriate for their markets and regulatory regimes. However, international standards
should not favor one regulatory approach over another but rather focus on ensuring an outcome of
appropriately capitalized insurance groups on the whole.
Regulatory diversity and coordination:
•
There are stabilizing benefits to retaining diversity in regulatory approaches even as greater
consistency is achieved. An over-reliance or over-confidence in a single capital standard or single
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regulatory approach could actually increase systemic risk as all insurers and regulators model their
behavior around those standards.
•
Supervisory colleges should serve as the central coordinating forum regarding the setting and
assessment of group capital standards. The group-wide supervisor must actively communicate with
other involved jurisdictions and coordinate decisions regarding the assessment of capital shortfalls.
Accounting and Valuation:
•
There remain major differences among jurisdictions in accounting systems and approaches to
valuation of assets and liabilities, as well as differences in regulatory objectives. As long as these
differences exist, the development of an ICS, BCR and HLA will need to take this into account.
•
U.S. insurance regulators support the development of a “GAAP Plus” valuation approach that can
be utilized by insurance groups and which can result in comparable outcomes across jurisdictions.
It achieves sufficient comparability, and differences between other approaches can readily be
understood by the group-wide supervisor for purposes of prudential supervision.
•
U.S. insurance regulators do not support market adjusted as the sole approach for valuation for the
ICS due to concerns related to volatility swings in the balance sheet as a result of using market
values and its failure to adequately address the long-term business largely written by life insurers.
Additionally, as the market adjusted valuation approach has little or no connection to U.S. public
financial reporting and it would require new systems to be implemented at a significant cost.
Timelines:
•
In February 2015, the IAIS Executive Committee agreed on the following ultimate goal of the ICS
(without specifying a date):
The ultimate goal of a single ICS will include a common methodology by which one ICS
achieves comparable, i.e. substantially the same, outcomes across jurisdictions. Ongoing
work is intended to lead to improved convergence over time on the key elements of the ICS
towards the ultimate goal. Not prejudging the substance, the key elements include valuation,
capital resources and capital requirements.
Additionally, the IAIS will be considering interim goals for the end of 2016 and the end of 2018,
balancing the need to be ambitious while acknowledging the need to focus on what is realistically
achievable given the different starting points in different jurisdictions.
•
U.S. state insurance regulators recognize these developments at the IAIS and have committed to
work constructively towards the goal of developing an ICS that works for all jurisdictions.
Nevertheless, all IAIS Members shouldDevelopment of these goals recognizes that these objectives
of the ICS are not easily achieved and will require significant resources over many years. Timelines
for the various goals should continue to be driven by the IAIS Members based on resources
available and achieving high-quality results. U.S. state insurance regulators remain committed to
work constructively towards the goal of developing an ICS that works for all jurisdictions.
•
Related to these goals is the role of the ICS in minimizing regulatory capital arbitrage. While we
support this idea, we also recognize that given the variety of differences between jurisdictions one
tool alone (such as the ICS) cannot completely eliminate arbitrage, nor should the idea of
minimizing regulatory capital arbitrage be used to push for a one-size-fits-all approach.
Backstop Capital Requirements (BCR):
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•
The goal of the BCR is to develop provide a common metric across various jurisdictional capital
requirements at the group level for purposes of applying Higher Loss Absorbency (HLA), which will
be the additional capital requirement for G-SIIs. Given the intention of the ICS to ultimately replace
the BCR as a basis to apply HLA, the form and role of the BCR will evolve.
•
The BCR will need to strike a balance between simplicity and risk sensitivity, with focus on
achievability given the short timeframe for development. A factor based approach and/or the use of
a leverage ratio should be considered.
Higher Loss Absorbency (HLA):
•
The HLA should be developed for application to G-SIIs as a way to address systemic risk issues; as
it has a very specific purpose, HLA should not be applied to insurers which are not designated as
systemically important. As it is specific activities that are the focus of assessing potential systemic
risk within the insurance sector, not traditional insurance business itself, the HLA should be
developed in a manner that addresses those specific activities which may pose potential systemic
concerns.
Insurance Capital Standard (ICS):
•
A global ICS for IAIGs should continue to be developed as a supplement something in addition to
jurisdictional capital requirements. For the US, it would be in addition tosupplement the U.S. RBC
that applies at the legal entity level; we do not intend for RBC to be replaced by any new group
capital rules but rather augment our existing approach.
•
It is important to have adequate capital at the group level, but this cannot be a substitute for having
adequate capital at the legal entity level. Measurement of a global ICS should be against available
capital resources (rather than existing jurisdictional requirements) on either an aggregated entity
basis (bottom up approach) or a consolidated basis (top down approach). It should not be used to
adjust jurisdictional entity requirements.
•
A primary objective of a global ICS should be enhancing the efficacy of capital requirements in
order to help facilitate solvency systems in developing markets be on par with, though not
necessarily identical to, such systems in developed markets.
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