FED launched a proposal to establish risk-based capital requirements for depository institution holding companies that are significantly engaged in insurance activities. Under the proposed framework, known as the Building Block Approach or BBA, holding companies significantly engaged in insurance activities would be required to aggregate their state-based capital requirements into a consolidated requirement. The proposal would establish both minimum requirements and a buffer on top of the minimum. Comments on the proposal will be accepted until December 23, 2019. FED also published a white paper that explains the methodology being proposed to adjust for the differences between different state-based insurance capital requirements and bank capital requirements.
The proposal would also revise reporting requirements for depository institution holding companies significantly engaged in insurance activities. FED proposes to implement a new reporting form for use in the Building Block Approach. The proposed reporting form, titled “Capital Requirements for Board Regulated Institutions Significantly Engaged in Insurance Activities” (Form FR Q-1), and instructions focus on information needed to perform the Building Block Approach calculations. The proposed Form FR Q-1 is not intended to be exhaustive in terms of addressing supervisory needs other than the needs for the Building Block Approach. The vast majority of the information reported to FED through the proposed reporting form would not be public. The information that FED proposes to make public would consist of the building block available capital, building block capital requirement, and Building Block Approach ratio for the top-tier parent of an insurance depository institution holding company’s enterprise. The proposed effective date for the reporting form is January 2021.
The Building Block Approach accounts for risks that are specific to the business of insurance and is different from the calculations used for bank capital requirements. However, the minimum standard under the Building Block Approach would be comparable to one of the key measures of bank health, the minimum total capital ratio, which is set at 8% for banks. The proposal builds on comments received on a conceptual proposal from June 2016 that described the Building Block Approach. FED supervises depository institution holding companies, including those significantly engaged in insurance activities and the Board currently oversees eight firms. Their insurance activities include life, title, and property and casualty, and the firms range in size from less than USD 10 billion in total assets to more than USD 250 billion. The proposal builds on existing state-based insurance standards while establishing minimum capital requirements that are specific to the business of insurance. As part of the proposal, the Board will conduct a quantitative impact study of the Building Block Approach to better inform the framework.
The accompanying white paper describes the FED attempt to identify and evaluate different scaling methodologies. FED finds that the probability of default (PD) approach based on historical data could be used to translate information between regimes in a way that preserves the economic meaning of solvency ratios. This method, however, requires data that are not currently available for some regimes outside of the United States. The election of the scaling approach is, therefore, a choice between using a single simple approach to scaling in all economies or differentiating the scaling approach by country and using the historical PD domestically. FED recommends the latter approach. Although this approach will involve more work and some uncertainty for companies operating in countries with limited data, it should allow for scaling that is more accurate and aid comparability.
- Press Release
- Proposed Rule
- Comparison of Regulatory Frameworks (PDF)
- Reporting Form (XLSX)
- Reporting Instructions (PDF)
Comment Due Date: December 23, 2019
Keywords: Americas, US, Insurance, Capital Requirements, Building Block Approach, Reporting, FR Q-1, Risk-based Capital, Scaling Methodologies, FED
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