Industry, NAIC Official Criticize IAIS Time Line for Testing Global Capital Standard
December 17, 2013 by Jeff Jeffrey
WASHINGTON – Insurance industry representatives and experts for the National Association of Insurance Commissioners were united in their opposition to the time line laid out by international regulators for the creation of a global capital standard, as well as the one for proposed changes to the way insurance contracts are accounted for, during a committee meeting at the NAIC’s national meeting in Washington.
Several industry representatives said that the International Association of Insurance Supervisors is moving too quickly in its effort to impose a capital standard for global systemically important insurers by way of the Common Framework for the Supervision of Internationally Active Insurance Groups. The IAIS aims to have the global capital standard, sometimes referred to as “basic capital requirements,” in place by 2016, following two years of field testing (Best’s News Service, Oct. 30, 2013).
At the same time, the International Accounting Standards Board is conducting field tests of proposed changes to the Generally Accepted Accounting Practices guidelines that would affect how insurance contracts are accounted for on company balance sheets. The IASB’s push to have the changes implemented in the near future has drawn criticism from industry representatives and regulators alike.
During the NAIC meeting, Robert Esson, a senior policy fellow for international affairs at the NAIC, said he worried the IASB may have “lost perspective” on the impact the proposed changes would have on the insurance industry.
“I’m worried they are just going to ram through what they have proposed without paying attention to the numerous comment letters enumerating considerable problems with the IASB draft,” Esson said.
Esson also said the IAIS has failed to answer a number of questions related to the proposed global capital standard that are “vital to ensuring the standard works.”
The primary question that needs answering, Esson said, is how the standard will be calculated, given that there is no global accounting standard that is accepted in all jurisdictions where the capital standard will be applied.
“Without a global accounting standard, many of the calculations will be based on a ‘best estimate,'” Esson said. “But you have to be careful with ‘best estimates’ because different parties, especially in the U.S., have different interpretations for how that is calculated.”
Esson’s concerns were echoed by Jeff Alton, vice president of global regulatory policy and affairs at CNA Financial, who said the time line laid out by the IAIS to field test the proposed capital standard will place an undue burden on companies that volunteer to participate.
Field testing for one part of the capital standard is scheduled to take place between March and May 2014. Alton said the field tests require companies to apply four separate calculation bases to their balance sheets to test for four different scenarios. Alton said that would require participating companies to evaluate 16 different stress scenarios.
“We have significant concerns about the workload being placed on companies that volunteer and whether the workload is even going to provide results that are critical to the development of the standard” Alton said.
He said much of the information collected by the field testing may be “interesting” but will not help regulators to achieve their goals.
“ComFrame is supposed to provide horizontal comparability of international insurance companies,” Alton said. “But I think it is safe to say that each company’s internal [business] model is unique and isn’t easy to compare to other models.”
Esson said he was “sympathetic” to Alton’s concerns and that some of the information being sought by the IAIS may be optional. “But I don’t know whether that is more of a theory because companies are likely to view the requests as mandatory,” Esson said.
The IAIS proposal for a global capital standard has the support of the U.S. Federal Insurance Office.
In October, FIO Director Michael McRaith said the global financial crisis of 2008 showed the international regulatory regime should be “more robust and comprehensive in scope, and jurisdictions should share a commitment to global standards.”
However, some state regulators have opposed the idea of a global capital standard, saying the IAIS has failed to describe the problem the standard is supposed to fix.
Connecticut Insurance Commissioner Thomas Leonardi said in October that the timeline of the standard’s implementation was “incredibly ambitious” and the IAIS must still decide how the standard would be enforced, where the capital should be held and how the capital would be allowed to flow among companies within a group.
Leonardi said the proposal could also complicate international negotiations over ComFrame because previous proposals for a global standard have been a major sticking point in talks (Best’s News Service, Oct.30, 2013).
(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)