General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
January 09, 2019

While speaking at the American Council of Life Insurers (ACLI) Executive Roundtable in Florida, Randal K. Quarles of FED provided some updates on the forthcoming proposal on insurance holding company capital requirements, often referred to as the Building Block Approach. He also discussed the importance of insurance sector to the economy and the role of FED in the consolidated supervision of insurance firms.

After stating that Dodd-Frank Act gave FED regulatory responsibilities for insurance holding companies that choose to own a federally insured depository institution and those designated by FSOC, Mr. Quarles moved on to discuss the advance notice of proposed rulemaking (ANPR) on insurance capital requirements, which FED had issued in June 2016. The ANPR had set out two frameworks for capital standards that are each unlike the capital rules for bank holding companies: a "consolidated approach" applicable to systemically important insurance companies and a "Building Block Approach" to be applied to savings and loan holding companies or bank holding companies with significant insurance activities. The Building Block Approach, as set out in the ANPR, was fashioned as a framework that builds on the regulatory capital rules of subsidiaries' functional regulators—state or foreign insurance regulators for insurance subsidiaries and federal banking regulators for insured depository institutions—to provide a consolidated capital requirement. He mentioned that FED appreciates the comments received, including from the ACLI and other interested parties, and has worked hard to reflect the perspectives of commenters in developing the framework. FED expects to publish a formal proposal in the "not-too-distant future."

He then explained that, for various reasons, in designing the Building Block Approach, FED had decided against applying the bank holding company capital rules to supervised insurance firms, the "capital approach akin to the European Solvency II framework," and the Insurance Capital Standard (ICS) by IAIS. He added that for any form of an ICS to be implementable globally, it needs to be suitable for the U.S. insurance market. The current core proposal in the ICS would face implementation challenges in the United States. For instance, such a framework may fail to adequately account for the U.S. accounting frameworks, both Generally Accepted Accounting Principles (GAAP) and the NAIC's Statutory Accounting Principles, can introduce excessive volatility, and may involve excessive reliance on the internal models of supervised firms. This motivates FED's advocacy of an aggregation alternative and the use of an alternative valuation method that derives from U.S. GAAP in the ICS. 

The proposed Building Block Approach is an approach to a consolidated capital requirement that considers all material risks in the enterprise by aggregating the capital positions of companies under an insurance holding company, after making some adjustments and scaling them to a common capital regime. These building blocks are then used to calculate combined, enterprise-level capital resources and requirements. In each building block, the Building Block Approach generally applies the capital regime for that block to the subsidiaries in that block. For instance, in a life insurance building block, subsidiaries within this block would be treated in the Building Block Approach the way they would be treated under life insurance capital requirements. The Building Block Approach would apply insurance capital rules consistently, without regard to permitted accounting practices granted by an individual state, thus uniformly applying statutory accounting principles as set forth by NAIC. Measures to avoid double-counting, including double-leverage, that could arise from intercompany transactions would be built into the approach's aggregation process.

Other areas where adjustments would be made include provisions to comply with the Collins Amendment of the Dodd-Frank Act—for instance, allowing only instruments meeting the criteria under the FED's bank capital rules to qualify as capital for an insurance holding company—and technical adjustments. Two building blocks under two different capital regimes cannot simply be added together if, as is frequently the case, each regime has a different scale for its ratios and thresholds. The Building Block Approach proposes to scale and equate capital positions in different regimes through analyzing historical defaults under those regimes. In conclusion, Mr. Quarles reinforced that FED remains committed to discharging its domestic authority responsibly in a way that recognizes the unique business of insurance companies. Additionally, FED will continue to advocate for international insurance standards that promote a global level playing field and work well for the U.S. insurance market. 


Related Link: Speech

Keywords: Americas, US, Insurance, Accounting, Building Block Approach, Capital Requirements, Dodd Frank Act, US GAAP, FED

Related Articles

HKMA Decides to Maintain Countercyclical Capital Buffer at 2.5%

HKMA announced that, in accordance with the Banking (Capital) Rules, the countercyclical capital buffer (CCyB) ratio for Hong Kong remains at 2.5%.

April 16, 2019 WebPage Regulatory News

EP Approves Agreement on Package of CRD 5, CRR 2, BRRD 2, and SRMR 2

The European Parliament (EP) approved the final agreement on a package of reforms proposed by EC to strengthen the resilience and resolvability of European banks.

April 16, 2019 WebPage Regulatory News

FDIC Consults on Approach to Resolution Planning for IDIs

FDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.

April 16, 2019 WebPage Regulatory News

EP Resolution on Proposal for Sovereign Bond Backed Securities

The European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).

April 16, 2019 WebPage Regulatory News

PRA Seeks Input and Issues Specifications for Insurance Stress Tests

PRA announced that it will conduct an insurance stress test for the largest regulated life and general insurers from July to September 2019.

April 15, 2019 WebPage Regulatory News

PRA Finalizes Policy on Approach to Managing Climate Change Risks

PRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix).

April 15, 2019 WebPage Regulatory News

EBA Single Rulebook Q&A: First Update for April 2019

EBA published answers to nine questions under the Single Rulebook question and answer (Q&A) updates for this week.

April 12, 2019 WebPage Regulatory News

EIOPA Statement on Application of Proportionality in SCR Supervision

EIOPA published a supervisory statement on the application of proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula.

April 11, 2019 WebPage Regulatory News

FED Updates Form and Supplemental Instructions for FR Y-9C Reporting

FED updated the form and supplemental instructions for FR Y-9C reporting. FR Y-9C is used to collect data from domestic bank holding companies, savings and loan holding companies, U.S intermediate holding companies, and securities holding companies with total consolidated assets of USD 3 billion or more.

April 11, 2019 WebPage Regulatory News

OSFI Finalizes Guidelines on Liquidity Adequacy and NSFR Disclosures

OSFI published the final Liquidity Adequacy Requirements (LAR) guideline and the net stable funding ratio (NSFR) disclosure requirements guideline.

April 11, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2920