Industry Issues | ERM & Emerging Risks

PCI Meeting with Fed Vice Chair Stresses Support for Insurance Reforms

PCI is pleased that today, Federal Reserve Vice Chairman Randal Quarles testified before the Senate that Fed officials "haven't got the balance right" as it relates to insurance supervision.

Governor Quarles appeared before the Senate Banking Committee and committed to seeking reforms to prevent excessive burden on insurers, calling it a "high priority" during an exchange with Senator Tim Scott (R-SC).

Quarles also testified before the House Financial Services Committee earlier in the week where he commended the effectiveness of the state-based insurance system during an exchange with Representative Sean Duffy (R-WI). He stated to the House that the Federal Reserve has been a voice for the building block approach to capital regulation.

 

From: david.a.sampson@pciaa.net [mailto:david.a.sampson@pciaa.net]
Sent: Thursday, April 12, 2018 4:31 PM
Subject: PCI Follow-Up on Quarles Meeting

I am reaching out to you directly to provide more information about PCI's meeting this week with Federal Reserve Board Governor Quarles on international capital standards negotiations, given your company's interest in global issues. We are at a pivotal time in international standard setting discussions and PCI is continuing our aggressive outreach to key stakeholders to protect the state-based insurance regulatory system.

In this week's meeting, Governor Quarles and I discussed that non-U.S. jurisdictions have taken control of the global financial regulatory agenda, both in terms of substance and timing, especially at the International Association of Insurance Supervisors (IAIS), where some supervisors are trying to globalize their insurance standards through the proposed Solvency II-based Insurance Capital Standard (ICS). I underscored that the ICS is based on a largely untested non-US accounting and solvency measurement system that would create excess volatility, require substantial changes, and impose additional costs without benefit to U.S. markets or consumers.

I shared that PCI is leading an effort with the rest of the property casualty industry to accelerate the NAIC's development of its Group Capital Calculation (GCC), which is based on the same aggregation concept as the Fed's Building Block Approach (BBA) for insurance S&L holding companies, and that these are much more appropriate for the U.S. legal, regulatory, and market environment.

I stressed that the Fed should develop its approach in coordination with the NAIC's work on its Group Capital Calculation so that, giving due consideration to their separate mandates, the BBA and the GCC are as similar as possible. I pointed out that, if there are significant differences, it will be harder for the U.S. representatives at the IAIS (Team USA) to argue that the U.S. approach to group capital is "outcomes-equivalent" to the ICS, or for mutual recognition of our regulatory system by other jurisdictions. In developing these approaches, the Fed and NAIC should concentrate first on their appropriateness for the U.S.

I emphasized that while coordination among the Fed, FIO, and NAIC has improved, Team USA must provide a stronger, more consistent voice advocating for U.S. regulators - both the Fed and the states - and the U.S. industry and its interests. I specifically mentioned that the Fed and the rest of Team USA must urge the IAIS to find that the BBA and GCC are outcomes-equivalent approaches to implementation of the ICS, recognizing this will be a multi-year fight. In doing so, Team USA should keep in mind that the U.S. solvency regulation with its different tools and resources is best-in-class and should not be hesitant to say so when appropriate.

I also recommended that the Fed should use its role in the Financial Stability Board and other venues to re-assert the leading role of the U.S. in international financial regulation, and to reverse the trend of purportedly neutral international organizations being used (as the IAIS is) by non-U.S. interests to globalize their interests. I pointed out that a better model for international forums such as the IAIS is to respect sovereignty and different--but still effective--systems, such as that of the U.S. The IAIS could then better use its resources to improve coordination and cooperation among regulators and assist underdeveloped countries to develop private insurance markets.

Federal Reserve Governor Quarles seemed largely receptive to PCI's messages. Quarles appears to have even stronger resolve to support the U.S. system and develop a BBA approach than his predecessors and a desire to be very engaged and aggressive in reshaping the international agenda and constructively influencing favorable outcomes. Quarles has been nominated by the U.S. to chair the Financial Stability Board and become a critical voice in international standard setting discussions. The Fed reinforced their desire to work toward strong Team USA unity, and shared interest in finishing timely development of a largely parallel BBA and GCC.

I look forward to your input and guidance on PCI's efforts on behalf of the industry.

Sincerely,

David A. Sampson