## _cr1590 — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr1590 — EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1590.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1590.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1590.pdf.json) --- ### Major Findings and Developments - U.S. insurance supervision has been significantly strengthened in recent years. - Many recommendations of the 2010 FSAP are being addressed; lessons learned from the financial crisis have been incorporated. - Insurance has been brought within the scope of system-wide oversight of the financial sector. - The Federal Insurance Office (FIO) provides a mechanism for identifying national priorities for reform and development. - The Federal Reserve Board’s (FRB) extension to consolidated supervision of insurance groups now covers around 30 percent of total premium income in the United States. - State regulators are progressing reforms (including the Solvency Modernization Initiative) and strengthening group and international supervision. - Key ongoing workstreams and challenges: - Transition from rules-based to principles-based regulation at the state level is progressing but faces obstacles. - Own Risk and Solvency Assessment (ORSA) introduction from 2015 increases emphasis on risk management and has wide-ranging supervisory resourcing implications. - FRB supervisory approach benefits from banking supervision experience but needs development of an insurance-specific direction; FRB regulation development is proceeding slowly. - Staffing with appropriate insurance skills and expertise across supervisors remains ongoing. ### Overall Assessment Against the Insurance Core Principles (ICPs) - Overall finding: reasonable level of observance of the Insurance Core Principles. - Areas of strength: - State-level capacity for financial analysis with peer review via NAIC processes. - Lead state regulation and a network of international supervisory colleges. - Sophisticated legal-entity capital adequacy approach via Risk-Based Capital (RBC). - High degree of transparency and accountability in regulation and supervision. - FRB supervision enhanced focus on group-wide governance and risk management. - Developing cooperation between state and federal regulators based on complementarity. - Summary observance counts: - Observed (O): 8 - Largely observed (LO): 13 - Partly observed (PO): 5 - Not observed (NO): 0 - Total: 26 ### Key Areas for Development and Recommendations - Valuation standards - Life insurer valuation standard is prescriptive/formula-based and varies in conservatism; lacks transparency and dynamic hedging incentives. - Shortcomings often mitigated by complex structures, including affiliated captive reinsurers. - Principles-Based Reserving (PBR) in the solvency modernization initiative would mitigate issues; implementation date uncertain. - Recommendations: - NAIC pursue Principles-Based Reserving for life insurers. - Captives and insurers should use the same valuation requirements. - Valuation should decompose into current estimate and margin over current estimate. - FRB should define a valuation standard for regulated insurance entities. - Group capital standards and group supervision - No group-level capital standards in place for groups supervised by states or the FRB. - Reporting/approval requirements for intra-group transactions uneven across states, creating arbitrage and contagion risks. - Active use of affiliate captives not uniformly subject to RBC and not always fully disclosed. - Recommendations: - States should obtain direct legal authority over insurance holding companies. - States and FRB should put consistent capital standards in place for groups. - FRB should develop a valuation and capital standard speedily. - Extend RBC to financial guaranty insurers and mortgage insurers. - Governance, risk management and market conduct - Gaps in governance and risk management requirements: no insurance‑specific governance requirements holding boards responsible for governance and controls that recognize policyholder interests. - No uniform requirements for risk management, compliance and internal audit functions (state regulators to require internal audit for larger companies from next year). - State examinations normally occur only every five years; consider more frequent state examinations of larger companies and reduced reliance on outsourcing. - Market conduct supervision should shift to a risk-focused framework with enhanced analysis of complex products and commission-based sales and supervision of significant intermediaries. - Governance and funding of state regulators - Appointment/dismissal arrangements for commissioners in many states expose supervision to potential political influence. - High dependence on state legislatures for legislation and resources creates political and budgetary pressure; NAIC mitigates but does not eliminate these risks. - Need to review levels of skills and expertise as technical demands change (ORSA, potential PBR). - Recommendations: - States reform appointment/dismissal arrangements (fixed terms, published reasons for dismissal). - State governments increase departmental independence over resourcing, enabling retention of fees/assessments to finance work. - NAIC review accreditation scope and operation; consider external assessment/quality assurance. - FRB increase insurance expertise, particularly actuarial, accounting and underwriting risk. ### Regulatory Architecture and Reform Options - Key problems: - Complex, fragmented system with differences across states and between state and federal regulators; risks of inconsistency and unhealthy arbitrage (contributing to use of affiliated captive reinsurers). - NAIC promotes uniform standards via model laws and accreditation but cannot enforce convergence. - FIO can monitor and highlight issues but lacks powers to force convergence. - FRB’s extension into insurance supervision increased regulatory consistency challenges. - Possible reform measures: - States strengthen commitment to convergence and mechanisms to deliver it, including relying on FRB work. - Broaden federal regulation to cover direct financial regulation of all or at least larger insurers or institute a dual mandate. - Federal coordination to establish national standards for implementation by states and FRB, or federal setting of such standards directly. - Creation of a new national independent agency delivering consistency and coordination. - Strengthen/extend accreditation program (independent panel, FRB involvement). - Feasibility option building on Dodd-Frank: assign additional responsibilities and authority to FIO (lead in accrediting regulators, collating sector-wide data, establishing national standards), contingent on operational independence, powers, resources and accountability. ### Market Structure, Performance and Key Statistics - Market scale and participants: - Number of insurance companies reporting to NAIC at end-2013: 4,538. - Total premium volume in 2013: US$1.56 trillion, accounting for 33 percent of the global market. - Insurance density (premiums per capita) in 2013: US$3,979 (United States ranked eleventh). - Insurance penetration in 2013: 7.5 percent (United States ranked seventeenth). - Gross premium written in 2013: financial guaranty insurers US$1,258 million and mortgage insurers US$5,107 million. - Separate account business growth since 2002: 8 percent annually on average; general account business grew 4 percent annually. - Over US$2 trillion in total assets held in separate and general account business. - Market concentration and exits: - Top 10 insurers account for 58 percent (life), 71 percent (health) and 46 percent (P&C). - More than 100 firms exited the market every year since 2008; entries about half of exits. - Exit counts: 147 in 2008, 213 in 2009, 182 in 2010, 142 in 2011, 157 in 2012 and 130 in 2013. - Number of companies in run‑off: 136 as of the end 2013. - Capital and solvency indicators: - RBC ratios have improved since the global financial crisis; RBC ratio of P&C sector slightly decreased in 2013 but remained high. - Had catastrophe charges for earthquake and hurricane been included in 2013 RBC calculation, average RBC ratio would have decreased from 669 percent to 636 percent. - Firms under intensive monitoring as of end-2013: 11 life, 1 fraternal, 39 health and 11 P&C insurers. - Guaranty associations and coverage: - Guaranty fund coverage limits vary across states between US$100,000 to US$500,000 depending on product and state. - Associations are assessment-based (not pre-funded); typical life insurance assessment limit is 2 percent of each insurer’s prior year premium income in the state per year. - Historically at least 96 percent of policyholder benefits covered by guaranty associations or remaining assets of failed insurers. - Guaranty associations can collect approximately US$10 billion annually; with historical average loss rates ~25 percent of insurance liability, they may absorb failures up to total assets of US$40 billion per year. ### Investment Trends, Assets and Liabilities, and Risks - Investment trends - Insurers increasing allocations to private equity, hedge funds, longer duration and lower credit corporate bonds, and real estate-related assets; equity investment by P&C companies has reached nearly 20 percent of total assets. - Life insurers increasing allocation into lower-grade and longer-term corporate bonds; some life insurers increasing securities lending and reinvesting cash collateral. - Regulatory responses: collateral that insurers can re-use must be treated on-balance-sheet and collateral reinvestment subject to a capital charge; limits (10 percent of capital resources) on securities lending introduced. - Asset allocation (life sector, end-2012 context) - non-financial corporate bonds: 34 percent - other bonds: 11.1 percent - government bonds: 10.2 percent - mortgage loans: 9.6 percent - bonds of financial institutions: 9 percent - Fifty percent of government bonds and 30 percent of corporate bonds are invested into long term (more than 10 years as of the end 2012). - P&C sector allocation highlights - equity: 15 percent - government bonds: 25 percent - Liabilities - In the life sector, 90 percent of liabilities are from technical provisions and 65 percent of the technical provisions are from annuity business (as of the end 2012). - In the P&C sector, 57 percent of liabilities are from technical provisions, while other liabilities have a large share (42 percent). - Key risks and vulnerabilities - Life sector: exposure to prolonged low interest rates, asset‑liability mismatches from longer-duration investments and potential longevity increases; commercial property and bank exposures noted. - P&C sector: exposure to major natural catastrophes; legal‑entity regulation may reduce economic loss absorption capacity of diversified groups. - Annuity providers face hedging difficulties for embedded options, requiring continuous dynamic hedging that has significantly impacted earnings. ### ORSA (Enterprise Risk Management) — Expectations and Implementation - ORSA model act (MDL #505) and NAIC ORSA Guidance Manual adopted; ORSA requirements in force as of 1 January 2015 in adopting states. - ORSA scope and exemptions: - ORSA: confidential internal assessment of material and relevant risks and sufficiency of capital appropriate to nature, scale and complexity of the insurer/group. - Insurers with annual direct written and unaffiliated assumed premiums less than US$500 Million are exempt from ORSA. - ORSA will be mandatory for larger companies that cover over 90 percent of the market by premium income. - ORSA Summary Report expectations: - Section 2: high-level summary of quantitative and qualitative assessments of risk exposures in normal and stressed situations for each material risk category; consider impact on capital with regulatory, economic, rating agency and other views; describe model validation process. - Section 3: describe level of financial resources needed to manage current business over a longer-term business cycle; group risk capital assessment must encompass the entire group and consider elimination of IGTs and double gearing, diversification and transferability of capital, contagion, concentration, complexity, and liquidity effects. - Status and recommendations: - At assessment time, 20 states had adopted MDL #505; NAIC implementing examiner/analyst training to support consistent implementation. - FRB needs to increase insurance expertise to supervise SLHCs and NBFCs and make rules more insurer-specific. - Assessment of ORSA implementation: Largely Observed (with comments on phased adoption and training). ### Capital Adequacy (ICP 17) and RBC Features - Regulatory capital determined by Risk-Based Capital (RBC) applied at legal entity level for life, P&C and health insurers. - RBC focus: asset risk, underwriting risk and other risks; aggregation uses correlation approach with detailed calibrations. - RBC control levels (basis Authorized Control Level = 100 percent): - Regulatory Action Level = 1.5 times the Authorized Control Level - Company Action Level = twice the Authorized Control Level - Mandatory Action Level = 70 percent of the Authorized Control Level - Specific RBC calibrations: - RBC C3 Phase 1: calibrated to a 95 percent Value at Risk; 200 economic scenarios are randomly generated and a subset of 12 or 50 is used. - RBC C3 Phase 2: based on a Tail Value at Risk on a 90% confidence level. - RBC C3 Phase 3: not yet in force. - Gaps and limitations: - No group-level capital requirements for groups supervised by states or FRB (including SLHCs and NBFCs). - RBC does not capture most Intra-Group Transactions (IGTs) such as parental guarantees; operational risk not explicitly quantified. - Financial guaranty insurers and mortgage insurers are not subject to RBC. - Recommendations: - Develop RBC for financial guaranty insurers and mortgage insurers. - Develop approaches to capture IGTs in RBC. - FRB develop capital standard for NBFCs and SLHCs coordinated with state regulators and NAIC. ### Supervisory Cooperation, Colleges and Crisis Preparedness - Supervisory colleges: - Membership includes major U.S. state regulators, FRB and participating foreign regulators; CMGs are smaller and the FIO participates in CMGs but not colleges. - Colleges focus on information-sharing, group structures and meetings with senior management; have not yet developed structured shared group-wide risk views or group-wide capital views. - Lead state role: act as U.S. contact for foreign regulators and respond to information requests; 22 U.S. group supervisory colleges meet at different frequencies. - Legal/accreditation context: supervisory college participation will become an accreditation requirement as of January 1, 2016. - Crisis management and resolution: - Cross-border crisis management arrangements at an early stage; CMGs established for NBFCs; resolution plans (living wills) prepared for NBFCs and submitted to FRB/FDIC. - Supervisors have not required insurers generally to maintain contingency plans or to supply urgently required crisis information on a timely basis. - Dodd-Frank Title II permits an alternative process when systemic risk is present, but liquidation/rehabilitation of licensed insurers remains under state law. - Recommendations: - Continue crisis preparedness work, building on CMGs and IAIS/FSB work. - Require internationally-active groups to develop contingency plans and ability to provide timely crisis information. - Use colleges or core sub-groups to enhance practical preparedness (information exchange on group structures, IGTs, barriers to crisis management). ### Key Numerical and Timing References (as stated) - ORSA effective in states adopting model act: as early as 2015. - At time of assessment, 20 states had adopted the Risk Management and Own Risk and Solvency Assessment Model Act. - ORSA mandatory for larger companies covering over 90 percent of the market by premium income. - NAIC goodwill rule: written off over 10 years and cannot exceed 10 percent of an insurer’s capital. - RBC control levels: Authorized Control Level = 100 percent; Regulatory Action Level = 1.5 times Authorized Control Level; Company Action Level = twice Authorized Control Level; Mandatory Action Level = 70 percent of Authorized Control Level. - RBC C3 Phase 1: calibrated to a 95 percent Value at Risk; 200 economic scenarios generated, subset of 12 or 50 used. - RBC C3 Phase 2: based on a Tail Value at Risk on a 90% confidence level. - Catastrophe risk holding period/time-horizon = 1 year; confidence level = 99 percent. - Reserve and premium risk calibration in R4 and R5 = 87.5% VaR. - NAIC RBC Forecasting and Instructions-Life guidance ≈ 170 pages. - MDL 505 / ORSA in force as of 1 January 2015 in adopting states. - Number of companies reporting to NAIC at end-2013: 4,538. - Total premium volume in 2013: US$1.56 trillion. - Number of companies in run-off: 136 as of the end 2013. - Firm intensively monitored as of end-2013: 11 life, 1 fraternal, 39 health and 11 P&C insurers. - Exit counts: 147 (2008), 213 (2009), 182 (2010), 142 (2011), 157 (2012), 130 (2013). - Guaranty fund coverage range: US$100,000 to US$500,000. - Typical life guaranty fund assessment limit: 2 percent of each insurer’s prior year premium income in the state per year. - NAIC staff: around 470; state insurance department staff (aggregate): 11,529 at year-end 2013; state departments’ total budgets: US$1.3 billion in 2015. - FRB insurance staff: currently more than 70 full time employees with insurance and supervision expertise overseeing approximately 17 insurance companies under Federal Reserve supervision. - 38 states have adopted revisions to the Model Holding Company Act providing expanded consolidated authority. - 43 states joined the IIPRC central approval process for certain life, annuity, disability and long term care products. - The IRS has approximately 270 examiners, of whom 20 are trained in insurance AML/CFT issues; the IRS has conducted 71 insurance examinations. - State staffing for market conduct vs financial: 424 examiners, analysts and supervisory staff for market conduct vs 1,757 for financial; over 600 staff for consumer complaints; 673 for rate and form regulation. *Source: EXECUTIVE SUMMARY and selected extracts — _cr1590 (IMF assessment document excerpt).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### _cr1590 - EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY — Key Findings and Developments - U.S. insurance supervision has been significantly strengthened in recent years. - Lessons have been learned from the financial crisis and many of the recommendations of the 2010 FSAP are being addressed. - Insurance has been brought within the scope of system-wide oversight of the financial sector. - The establishment of the Federal Insurance Office (FIO) has created a mechanism for identifying national priorities for reform and development. - The extension of the Federal Reserve Board’s responsibilities to cover consolidated supervision of insurance groups has strengthened supervision of the affected groups (now covering around 30 percent of total premium income in the United States). - State regulators have been adjusting to the new regulatory architecture while progressing reforms such as the solvency modernization initiative and significantly strengthening group and international supervision. - Many changes remain a work in progress: - Transition at the state level from a strongly rules-based approach to more principles-based regulation and risk-focused supervision is progressing but taking time and facing obstacles. - Increased emphasis on risk management through introduction from 2015 of an Own Risk and Solvency Assessment (ORSA) with wide-ranging implications for supervisory work and resourcing. - The FRB’s supervisory approach to insurance groups has benefited from banking supervision experience but needs to develop an insurance-specific direction; development of FRB regulation is proceeding slowly. - Staffing of regulation and supervision with appropriate skills and expertise is ongoing. ### Overall Assessment — Observance with the Insurance Core Principles - The assessment finds a reasonable level of observance of the Insurance Core Principles. - Areas of strength: - State-level capacity for financial analysis with peer group review and challenge through NAIC processes. - Development of lead state regulation and a network of international supervisory colleges. - Sophisticated approach to legal entity capital adequacy via the Risk-Based Capital (RBC) approach. - High degree of transparency and accountability in regulation and supervision. - FRB supervision has enhanced focus on group-wide governance and risk management. - Cooperation between state and federal regulators is developing based on complementarity, although it has further to go. ### Key Areas for Development and Recommendations - Valuation standards: - Valuation standard of state regulators, especially for life insurance, needs improvement. - Current life insurer standard is prescriptive and often formula-based; as products became more complex, prescribed algorithms and formulae have grown in complexity. - Standard has varying levels of conservatism, leading to a lack of transparency and no incentive for appropriate dynamic hedging. - Shortcomings are often mitigated by complex structures, including transactions with affiliated captive reinsurers. - Principles-Based Reserving, part of the solvency modernization initiative, would mitigate some issues, but its implementation date is uncertain. - Group capital standards: - No group-level capital standards in place for groups, whether supervised by states or the FRB. - States should have the ability to set group-wide valuation and capital requirements. - The FRB should develop a valuation and capital standard speedily. - RBC should be extended to financial guaranty companies, based on experience in the financial crisis. - Governance, risk management, and market conduct: - Gaps in governance and risk management requirements: neither state nor FRB supervisors have set insurance-specific governance requirements that hold boards responsible for governance and controls frameworks recognizing policyholder interests. - No requirements for risk management and compliance functions; state regulators will require larger companies to have internal audit functions from next year. - State examinations normally occur only every five years (FRB examinations are more frequent, if not continuous); consider more frequent state examinations of larger companies and reduced reliance on outsourcing in some states. - Market conduct supervision (carried out only by the states) should be strengthened through a risk-focused supervisory framework, enhanced analysis of risk (including complex products and commission-based sales), and supervision of more significant intermediaries. - Governance and funding of state regulators: - Arrangements for appointment and dismissal of commissioners in many states expose supervision to potential political influence. - High dependence on state legislatures for legislation and resources exposes supervisors to political influence and budgetary pressures; NAIC processes mitigate but do not eliminate these risks. - Need to review levels of skills and expertise as technical demands of supervisory work change (ORSA, possible Principles-Based Reserving). - Objectives and potential conflicts: - State regulators’ objectives are not clearly and consistently defined in law. - FRB’s objectives in relation to insurance consolidated supervision do not include insurance policyholder protection, creating potential conflict in times of stress between FRB objectives toward NBFCs/SLHCs and policyholder interests. - Regulatory architecture and reform options: - Regulatory system remains complex and fragmented with differences between state regulators and between state and federal regulators, creating risks from a lack of consistency and opportunities for unhealthy arbitrage (contributing to growing use of affiliated captive reinsurers). - Current regulatory architecture lacks capacity to fully address these issues. - Authorities should review options for change, which include strengthening FIO capacity to bring about convergence on uniform high standards of regulation and supervision as well as comprehensive market oversight. ### ASSESSMENT OF INSURANCE CORE PRINCIPLES — Introduction and Scope (A) - The assessment was carried out as part of the 2014–15 U.S. Financial Sector Assessment Program (FSAP). - It was conducted by Ian Tower, Philipp Keller (external experts engaged by the IMF) and Nobuyasu Sugimoto (IMF Expert) from October 27 to November 17, 2014. - The assessment uses the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised in October 2013. - The previous assessment (2010) was against an earlier IAIS ICPs version issued in 2003. - The ICPs apply to all insurers, whether private or government-controlled; specific principles apply to supervision of intermediaries. - The assessment addresses insurance regulation nationally and does not assess individual state authorities. ### Information and Methodology Used for Assessment (B) - Level of observance ratings: - Observed: all standards observed except those not applicable. - Largely observed: only minor shortcomings exist. - Partly observed: shortcomings sufficient to raise doubts about ability to achieve observance. - Not observed: no substantive progress toward observance. - Assessment is based solely on laws, regulations, and supervisory requirements and practices in place at time of assessment in November 2014. - The assessment does not reflect new and on-going regulatory initiatives, though key proposals for reforms are summarized as additional comments. - Authorities provided a full and well-written self-assessment, supported by anonymized examples of supervisory practices and assessments. ### Overview—Institutional and Macroprudential Setting (C) — Institutional Framework and Arrangements - Insurance regulation and supervision is a shared responsibility of federal and state authorities. - States are responsible for licensing, supervision and examination of all insurance companies and intermediaries (producers). - FRB’s responsibilities for consolidated supervision were extended post-2008 to relevant designated non-bank financial groups (NBFCs) and savings and loan holding company groups (SLHCs); responsibilities now cover around 30 percent of total premium income in the United States. - FIO has a broad monitoring role for the insurance sector and its regulation. - Other federal and state bodies with roles include FSOC (designation of NBFCs and identification of risks to financial stability), state securities regulators and the SEC (and FINRA) for securities-covered products and practices, the Department of Labor for workplace pension products, and FinCEN and the IRS for AML/CFT regulation and supervision. - States generally carry out insurance regulatory functions through state insurance departments: - Licensing, supervision and examination under powers set out in state legislation and state budgets. - A commissioner heads the department and exercises all formal powers; some commissioners are elected, most appointed by the state governor. - Funding is usually raised from insurance markets via fees and levies; budgets are subject to state budgeting processes. - Insurance departments also collect premium taxes for the states, a significant part of state governments’ total revenues. ### Role and Functions of the National Association of Insurance Commissioners (NAIC) - NAIC plays an important role in promoting consistency across state regulation as a regulatory support organization for state insurance supervision. - NAIC has around 470 staff (compared with 11,529 employed by the states). - Key NAIC functions: - Processes and procedures to develop and agree on model laws and regulations (now total over 200); states develop these laws via NAIC working groups. States are not obliged to implement model laws, but the process creates an expectation that state legislation will broadly mirror NAIC requirements; states often implement models with variations. - Financial Regulation Standards and Accreditation Program (“the accreditation program”): - Develops certain minimum standards for financial regulation of multistate companies (does not cover companies operating only in the state of domicile). - Reviews state insurance departments for compliance with standards covering laws and regulations, accounting and solvency provisions, regulatory practices (offsite and onsite), and organizational and staffing practices. - Standards on insurance company licensing were added in 2012. - To achieve and retain accreditation, states undergo a detailed review by independent examiners once every five years; interim annual reviews are also required. Final accreditation decisions are taken by a committee of commissioners. - All 50 states, the District of Columbia and Puerto Rico are accredited. - Formally, accreditation enables states to rely on the solvency regulation undertaken by the domestic state rather than carrying out their own, although individual states may still impose additional requirements on “foreign” companies (accreditation does not guarantee reciprocity). - Centralized financial analysis through the Financial Analysis Working Group (FAWG): - FAWG is a group of 18 senior financial experts who meet to discuss reports from NAIC staff covering all “nationally significant companies” (around 1,600 companies representing 85 percent of the market) based on annual and quarterly statements and other information. - Objective is to challenge domestic state regulators, who retain responsibility for any action, on their analysis of companies and regulatory response. - Provision of databases covering financial information (most companies submit statements direct to the NAIC), data on producers, and support for technical financial analysis. - The Capital Markets Bureau monitors developments, trends and activity in financial markets generally and specifically with respect to the insurance industry; reports issues of interest to state regulators, conducts independent research on investment issues, responds to requests from state regulators, assists in examinations through analysis of investment portfolios, discussions with examiners and participation in on-site examinations as requested. *Source: EXECUTIVE SUMMARY — _cr1590 (IMF assessment document excerpt).* ### 10. State regulators have been enhancing their approach to financial regulation in recent ### 10. State regulators have been enhancing their approach to financial regulation in recent years ### State-level regulatory reforms and implementations - 2008: NAIC launched the Solvency Modernization Initiative (SMI), a review of financial requirements. - Adopted revised group supervision requirements: Insurance Holding Company System Regulatory Act (Model #440) and Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (Model #450). - Adopted Risk Management and Own Risk and Solvency Assessment Model Act (#505) and the Own Risk and Solvency Assessment (ORSA) Guidance Manual. - Increased scheduling of supervisory colleges and implementation of supervisory colleges’ tracking documentation; increased MoUs between state regulators and international regulators. - Adopted requirements for companies to report to regulators on details of their corporate governance. - Adopted revised requirements regarding Credit for Reinsurance Model Law (Model #785). - NAIC adoption of updates to the Standard Valuation Law (Model #820) and the Standard Nonforfeiture law for Life Insurance (Model #808); completion of the industry impact study for life insurance principles-based reserving; adoption of the Valuation Manual. - Movement toward principles-based reserving in life insurance to address redundant reserves for some products and inadequate reserves for others; consideration of making capital requirements reflect individual company risk characteristics more (see assessment of ICP14). - Amended RBC requirements to require capital to be held for cash collateral reinvested under securities lending requirements—requiring such investments to be treated as on the balance sheet and subject to RBC charges. ### Issues remaining unaddressed or partially addressed - Reforms pending for financial guaranty (bond insurers/monoline insurers). - Private mortgage insurance companies are not subject to RBC, although NAIC and state regulators are working on such changes. - Group capital requirements have not been implemented either by federal or state regulators as yet. ### Federal roles: Federal Reserve Board (FRB) - FRB has responsibility for consolidated supervision of certain groups (17 in total) containing insurance companies. - FRB has no authority to license or regulate individual insurance companies, but regulates consolidated entities under: - bank holding companies under the Bank Holding Company Act (BHC Act) where groups contain one or more insurance companies and at least one bank (there are no such groups at present); - savings and loan holding companies (SLHCs) under the Home Owners’ Loan Act (HOLA) where groups contain one or more insurance companies and at least one savings and loan company—there are 15 such groups at present, including four of the largest insurers in the country; - insurance companies which are non-bank financial companies (NBFCs) under the Dodd-Frank Act, where the company has been designated for FRB supervision by the FSOC (there are two insurance groups at present, AIG and Prudential Financial). - FRB staffing and capacity: - FRB has been growing its staff in the insurance area, drawing on staff from other FRB functions, state insurance departments and the insurance sector. - Currently, there are more than 70 full time employees with insurance and supervision expertise contributing to overseeing the (approximately) 17 insurance companies under Federal Reserve supervision. - The FRB’s regulatory regime is still developing and it has not yet defined a group level capital requirement for insurance groups it regulates. - Application of a supervisory approach developed for large banks has led to intensified supervisory work on group-wide governance and risk management issues at FRB-supervised groups. ### Federal roles: Federal Insurance Office (FIO) - FIO established in the Treasury Department with a broad monitoring role for the insurance sector and its regulation, a lead role in international aspects of insurance regulation and specific responsibilities in relation to systemic risk in the insurance sector. - December 2013: FIO released a “Modernization Report” pursuant to title V of the Dodd-Frank Act, providing 18 near-term recommendations to the state regulators, nine recommendations on direct federal involvement and proposed potential federal solutions for the long term. - FIO has no authority to license or regulate individual insurance companies or to undertake consolidated supervision. ### Assessment of the regulatory architecture and reform options (Box 1) - Key identified problems: - Differences and inconsistencies between state insurance regulators and between state and federal regulators in regulation and supervision. - Complex and fragmented regulatory system with scope for conflict between agency mandates and risks of unhealthy arbitrage (influencing use of affiliate captives and choice of state of incorporation). - NAIC promotes uniform standards through model laws and a states accreditation program but cannot enforce convergence. - FIO can monitor and highlight issues but lacks powers to bring about convergence. - Extension of FRB powers to insurance supervision of NBFCs and some other groups added to challenges of regulatory consistency (e.g., holding company regulation and approaches to capital adequacy). - FSOC’s mandate is focused on system-wide stability and its membership does not provide for sector-wide coverage of insurance on the same basis as other sectors. - Possible reform measures (state- or federal-level, or both): - States could strengthen their commitment to convergence on high standards and the mechanisms to deliver them, including relying on work performed and shared with the states by the FRB. - Federal regulation could be broadened to cover direct financial regulation of either all or at least the larger insurance companies; or a “dual mandate” system could be instituted, as for banks. - Federal government could coordinate establishment of national standards for insurance regulation, to be implemented by states and the FRB, or could set such standards directly. - Creation of a new national agency with independence and expertise to deliver consistency and coordination. - Strengthening and extending the existing accreditation program, for example with an independent panel appointed under appropriate processes by Commissioners and FRB. - Feasibility option building on Dodd-Frank: assign additional responsibilities and authority to FIO, including: - Lead role in accrediting insurance regulators, both state and federal, focusing on effectiveness of regulation and supervision with transparency. - Lead role in collating sector-wide data and analyzing risks in the insurance sector. - Potential role in establishing national standards—extending powers to pre-empt state regulations beyond the current limitation to international agreements on prudential matters. - Preconditions for effective FIO extension: - FIO would need to be operationally independent from the government, with appropriate powers, sufficient resources, accountability and independence from undue political and industry pressure in line with the expectations of the Insurance Core Principles. - Role of NAIC: - NAIC’s expertise and contribution to consistent regulation and market oversight should be recognized and engaged in any institutional change. ### Guaranty funds (policyholder compensation arrangements) - Insurance policyholders are protected by guaranty associations in each state; all U.S. insurance companies are required to be members of associations covering life and health insurance and, through separate organizations, property and casualty. - Associations established by state laws (NAIC-developed Guaranty Association Model Acts). - Payments are triggered by insurer insolvency; in practice, associations seek continuity of coverage by transferring policies to other companies. - Laws differ across states on extent of coverage and maximum payable per policyholder: between US$100,000 to US$500,000 depending on product and state. - Associations rely on assessments of other insurers writing the same class of business to make payments (i.e., not pre-funded). - State laws set limits on assessments—typically, for life insurance, 2 percent of each insurer’s prior year premium income in the state per year. ### Market structure and industry performance — key statistics and trends - Industry scale and scope: - The U.S. insurance market is the largest in the world. - There were 4,538 insurance companies reporting to the NAIC at the end of 2013. - Total premium volume in 2013: US$1.56 trillion, accounting for 33 percent of the global market. - Insurance density (premiums per capita) in 2013: US$3,979 (United States ranked eleventh). - Insurance penetration (premiums as a percentage of GDP) in 2013: 7.5 percent (United States ranked seventeenth). - Key specialist lines that must be written in separate companies: financial guaranty; mortgage insurance; and title insurance. - Gross premium written in 2013: financial guaranty insurers US$1,258 million and mortgage insurers US$5,107 million. - Market characteristics: - Relatively low market concentration in most sectors: Top 10 insurers account for 58 percent (life), 71 percent (health) and 46 percent (P&C). - Limited private sector capacity in certain “hard to insure” risks (severe weather, natural catastrophes, some medical risks) leading to “residual market” mechanisms and state/federal programs (e.g., TRIP for terrorism, federal flood and crop programs, state workers compensation/property risk programs, Florida Hurricane Catastrophe Fund). - Limited number of foreign-owned insurance groups; most large groups domestically owned (exceptions: Jackson National owned by UK Prudential, Transamerica owned by AEGON, AXA Equitable and John Hancock owned by Manulife). - No large conglomerate groups offering both banking and insurance services; only four large insurance groups (TIAA-CREF, State Farm Mutual, Nationwide Mutual and USAA) have deposit-taking institutions and material insurance activities and are regulated by the FRB as SLHCs. - Product and risk developments: - Large life insurance groups have expanded separate account business and provide complex guarantees. - Since 2002, separate account business has grown by 8 percent annually on average; general account business grew by 4 percent annually; total reached over US$2 trillion in total assets. - Insurers provide complex guarantees (e.g., Guaranteed Lifetime Withdrawal Benefit); industry has used product design changes and dynamic hedging strategies, but effectiveness in market turmoil remains uncertain. - Distribution: - Distribution mainly through agents and brokers; bancassurance allowed but limited market share. - Capital position and solvency indicators: - Capital adequacy at legal entity level measured by RBC has improved since the global financial crisis; number of companies breaching regulatory intervention levels has improved. - RBC ratio of property and casualty sector slightly decreased in 2013 but remains high. - Insurers are required to include catastrophe risk charges for earthquake and hurricane in RBC calculation currently for informational purposes; after further testing these charges will become part of the calculation. Had these catastrophe charges been in effect in 2013, it would have resulted in a slight decrease in the actual average RBC ratio from 669 percent to 636 percent. - As of the end of 2013, firms under intensive monitoring: 11 life, 1 fraternal, 39 health and 11 P&C insurers. - Market exits and entries: - More than 100 firms have exited the market every year since 2008; number of new entries about half of the exits. - Exit counts: 147 in 2008, 213 in 2009, 182 in 2010, 142 in 2011, 157 in 2012 and 130 in 2013. - Most exits voluntary; a small number failed each year due to financial impairment. - Valuation and capital adequacy interpretability: - Insurance liabilities and corresponding assets generally measured on an amortized cost basis; large unrealized losses may remain on both sides of the balance sheet unless assets are other than temporarily impaired. - Regulators have allowed some individual modification (“permitted practices”) to firms to increase their capital position; use of such practices in recent years has been limited. - Large transactions by insurance groups have been used to increase solo level capital by creating captive reinsurance companies; some transactions (especially term insurance policies) driven by strategies to avoid conservative mortality assumptions for reserving required by state regulators. *Source: _cr1590 - 10. State regulators have been enhancing their approach to financial regulation in recent* ### 24. Regulatory capital adequacy measures at group level are not available, which hampers ### _cr1590 - 24. Regulatory capital adequacy measures at group level are not available, which hampers ### Regulatory capital adequacy and group-level supervision - Regulatory capital adequacy measures at group level are not available, which hampers assessment of the overall soundness of the US insurance sector. - Two insurance groups are designated as nonbank financial companies (NBFCs) and are subject to group wide supervision by the FRB, but group wide capital requirements have not been developed yet. - Intra group transactions are subject to reporting to the state regulator, but: - reporting and approval requirements are uneven among various states, creating arbitrage opportunities and significant contagion risks among group entities. - active usage of affiliate captives (not uniformly subject to RBC in all states and not always subject to full disclosure requirements) creates uncertainty whether capital adequacy is sufficient at the group level. ### Investment trends and regulatory responses - U.S. insurers have been gradually increasing investment in more risky and illiquid assets and equities in recent years, although totals of such investments remain low and capital and investment regulations work to prevent excessive risk taking. - Types of increased investment: - private equity, hedge funds, longer duration and lower credit corporate bonds, and real estate related assets. - Equity investment by P&C companies has reached nearly 20 percent of total assets. - Life insurers are increasing allocation into lower grade and longer-term corporate bonds. - Some life insurers are increasing securities lending activities and reinvesting cash collateral. - Regulatory and accounting responses: - statutory accounting and capital requirements were amended since the financial crisis so that collateral which insurers can re-use must be treated as on-balance sheet and collateral reinvestment is subject to a capital charge. - investment limits (10 percent of capital resources) on securities lending have been introduced. - Market challenge: - Annuity providers struggle to manage hedging portfolios because embedded options in annuity products are difficult to replicate with standardized derivatives; insurers need continuous dynamic hedging, significantly impacting earnings in recent quarters. ### Assets and liabilities (sector allocations) - Life sector allocations (as of end 2012 and end 2013 context): - non-financial corporate bonds: 34 percent of investment. - other bonds: 11.1 percent. - government bonds: 10.2 percent. - mortgage loans: 9.6 percent. - bonds of financial institutions: 9 percent. - Fifty percent of government bonds and 30 percent of corporate bonds are invested into long term (more than 10 years as of the end 2012). - P&C sector allocations: - equity: 15 percent. - government bonds: 25 percent. - municipal securities included as other assets in the referenced chart. - Liabilities: - In the life sector, 90 percent of liabilities are from technical provisions and 65 percent of the technical provisions are from annuity business (as of the end 2012). - In the P&C sector, 57 percent of liabilities are from technical provisions, while other liabilities have a large share (42 percent), in part because they include accounting for unearned premiums. ### Key risks and vulnerabilities - Life sector vulnerabilities: - Significant exposure if economic growth falters again. - Commercial property exposure is high (still below pre-crisis peak) in both loans and investments; exposure to banks is also high. - A further-prolonged low interest rate environment would exacerbate strains. - Life insurers are extending investment duration while longevity may increase liability duration, exacerbating ALM mismatches and vulnerability to low interest rates—critical given predominance of annuity business in technical provisions. - Property and casualty (P&C) sector vulnerabilities: - Risks are more dispersed; the United States is exposed to major natural catastrophes with regionally diverse impact. - Legal-entity-based regulation may reduce the economic loss absorption capacity of well diversified insurance groups. - Some companies are heavily exposed to particular events; national companies are diversified and the largest catastrophe risks are carried by reinsurers outside the United States. ### Preconditions for effective insurance supervision (institutional and market infrastructure) - Macroeconomic and fiscal framework: - Federal Reserve Act goals: “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” - The FRB aims also to contribute to financial stability and economic performance by containing financial disruptions. - Fiscal policy is developed and implemented at state and federal levels; revenue and expenditure budgets determined annually and transparently by state legislatures and the U.S. Congress. - Post-crisis financial sector reforms: - The Dodd-Frank Act strengthened supervision, capital, and risk-management standards; introduced periodic supervisory and company-run stress tests; orderly liquidation authority rulemakings; derivatives market regulation; mortgage market protections; and consumer and investor protection measures. - Regulatory architecture: - Banking sector federal regulators: FRB, FDIC, OCC, National Credit Union Administration. - Securities regulators: SEC (oversees securities industry SROs and administers federal securities laws); CFTC (regulates futures, options on futures, and swaps and oversees specific market participants and infrastructures). - Financial reporting and professional infrastructure: - U.S. firms follow GAAP as promulgated by FASB for general purpose reporting; FASB and IASB are working on convergence. - The Sarbanes-Oxley Act (2002) created PCAOB with standards for auditing and related professional practice. - The United States has an independent judiciary and well-regulated accounting, auditing, and legal professions; federal judges appointed by the President with Senate consent and receive lifetime appointments; state appointment methods vary. - Actuarial standards and professional discipline: - Actuarial Standards of Practice (ASOPs) are promulgated by the Actuarial Standards Board (ASB); ASOPs provide a principles-based framework and are referenced in regulatory requirements. - Codes of Professional Conduct require use of ASOPs; ethical standards set and enforced by professional bodies. - The Actuarial Board for Counseling and Discipline (ABCD) has recommended severe sanctions (public reprimand or expulsion) in 38 cases since it began work in 1992. - There are over 18,000 members of the American Academy of Actuaries. - Consumer protection and safety nets: - State regulators provide complaints handling, consumer information, and consumer education programs; some publish inspection results of market conduct work. - Guaranty funds established by each state indemnify policyholders and other claimants up to limits allowed by state law, triggered by a judicial finding of an insurer’s insolvency. - Most personal lines products are subject to some guaranty fund protection; some lines (e.g., residential mortgage and credit insurance written by bond insurers) are not subject to guaranty fund protection since beneficiaries are commercial enterprises only. *International Monetary Fund — United States financial sector assessment (excerpts).* ### 41. The United States has efficient, deep, liquid, and transparent financial markets. These ### _cr1590 - 41. The United States has efficient, deep, liquid, and transparent financial markets. These ### Overview - The United States has efficient, deep, liquid, and transparent financial markets, including the New York Stock Exchange, NASDAQ, and futures exchanges. These exchanges support the U.S. economy and have significant capitalization. - The United States has a reliable, effective, efficient, and fair legal and judicial system, where judgments are enforced. - The scope and the extent of the coverage vary and depend on the products and states with a range from US$ 100,000 to US$ 500,000. ### Summary of Observance with the ICPs - Observed (O): 8 - Largely observed (LO): 13 - Partly observed (PO): 5 - Not observed (NO): 0 - Total: 26 ### Key findings (selected by theme from the ICP assessment) - Supervisory architecture and objectives - Insurance regulators are clearly identified in law and have adequate powers, more so when 2010 changes to the holding company system powers are adopted in all states. - The establishment of the FIO and extension of the FRB’s mandate introduced a new objective for insurance supervision in relation to U.S. financial stability. - The objectives of the FRB do not explicitly include insurance policyholder protection, creating potential scope for conflict. - Institutional independence and resources - State insurance regulators generally have a high degree of day-to-day operational independence and accountability, operating within a highly transparent framework. - Risks to independence remain from appointment/dismissal arrangements for commissioners and dependence on state legislatures for budgets. - Levels of skills and expertise require development; some departments are dependent on contractual staff; statewide remuneration policies constrain hiring specialists. - Information exchange and coordination - Extent of information exchange has increased, facilitated by NAIC processes, MoUs, and supervisory colleges; seven states have become signatories to the IAIS MMoU. - Increased trust among supervisors domestically and with foreign regulators, though further active management is needed. - Licensing, suitability, and governance - UCAA process and accreditation standard for licensing cover core requirements but inconsistency of requirements and practices remain across states. - States rely heavily on onsite examination to identify suitability issues; competence and integrity assessments are not sufficiently documented. - Neither state nor FRB supervisors have set formal broad-based, insurance-specific governance requirements; reliance is on risk assessment and onsite processes. - Risk management, valuation, and capital - Neither states nor the FRB have a comprehensive set of requirements on risk management and controls tailored to insurance business. - Current valuation standard for life insurers is prescriptive/formula-based with static assumptions; shortcomings mitigated in practice by complex structures. - RBC framework is sophisticated but based on an amortized cost valuation standard that is largely rules-based; financial guaranty insurers and mortgage insurers are not subject to the RBC. - Any capital requirement the FRB develops must be based on a valuation standard. - Supervisory review, interventions, and resolution - State regulators have a highly developed offsite analysis approach supported by NAIC reporting and holding company analysis. - A five years maximum examination cycle is long compared with other regulators; scope exists for shorter or targeted examinations for larger firms. - States have a full range of powers to intervene and use these powers in practice; enforcement measures are wide-ranging and used actively. - States have appropriate tools to wind-up insurance legal entities; insolvency levels have been low, although 136 companies as of the end 2013 have entered into run-off. - Reinsurance, investment, and market conduct - Regulation of reinsurance is comprehensive; state regulators analyze material intra-group reinsurance contracts though complex retrocession webs can affect value/performance. - Investment limits defined in model acts and handbooks form a sophisticated framework; low-interest-rate environment has increased hunt for yield and potential regulatory arbitrage risk. - Extensive body of market conduct requirements exists, supplemented by the Market Regulation Handbook, but it does not create binding requirements and states’ approach remains in large part reactive. - Group-wide supervision, macroprudential surveillance, and crisis preparedness - Group supervision has been improved; the Insurance Holding Company System Model Act allows state regulators to supervise groups; the FRB exercises consolidated supervision over SLHCs and NBFCs. - No capital standards in place for groups supervised by states or for SLHCs and NBFCs supervised by the FRB. - Macroprudential surveillance relevant to insurance is developing; cooperation among FIO, FSOC, FRB, and NAIC exists but could be strengthened. - Cross-border crisis management and coordination are at an early stage of development; supervisory colleges and CMGs have been established but crisis preparedness and resolution capacity need further development. ### Key statistics and explicit figures (as stated) - Coverage range for the scope and extent: US$ 100,000 to US$ 500,000. - Number of companies in run-off: 136 as of the end 2013. - ORSA will be mandatory for larger companies that cover over 90 percent of the market by premium income. - Observance summary counts: Observed (O) 8; Largely observed (LO) 13; Partly observed (PO) 5; Not observed (NO) 0; Total 26. ### Principal recommendations (condensed from Table 3, by ICP) - ICP1 Objectives, Powers and Responsibilities - All states adopt the joint statement of objectives of insurance regulation and review legislation to ensure consistency. - Regulators undertake analysis of potential conflicts between SLHC regime objectives and insurance supervision objectives and recommend legislative changes as appropriate. - ICP2 Supervisor - States reform appointment/dismissal arrangements for commissioners; provide fixed terms and publication of reasons for dismissal. - State governments increase departmental independence over resourcing and staffing. - NAIC review accreditation scope and operation; consider external assessment/quality assurance. - FRB increase insurance expertise, particularly actuarial methods, insurance accounting and underwriting risk. - ICP3 Information Exchange - States and the FRB review internal processes, procedures, and staff training to support proactive information sharing while ensuring confidentiality. - ICP4 Licensing - States improve consistency of licensing requirements, including absolute minimum capital levels and exemptions; improve documentation and accreditation review. - ICP5 Suitability of Persons - State regulators adopt and implement the Corporate Governance Annual Disclosure Model Act and require clearer documentation of properness observations. - ICP7 Corporate Governance - States and the FRB develop appropriate insurance-specific governance standards at legal entity and/or group level and implement them. - ICP8 Risk Management and Internal Controls - After ORSA and internal audit requirements, states review standards and consider requiring risk management, compliance and actuarial functions for larger firms. - FRB develop and communicate expectations for risk management/internal controls for NBFCs and SLHCs. - ICP9 Supervisory Review and Reporting - States review reporting on qualitative issues and consider higher frequency or targeted examinations; consult on removing publication requirement for examination reports. - FRB develop and publish a tailored supervisory framework and tools addressing insurance risks, including stress tests with insurance scenarios (e.g., major pandemic). - ICP12 Winding-up and Exit - States work closely with federal and international regulators and resolution authorities to improve resolvability of large and complex insurance groups. - ICP13 Reinsurance - State regulators analyze retrocession webs and group structure interactions; FRB analyze for systemically important groups. - ICP14 Valuation - NAIC pursue principles-based reserving (PBR); captives and insurers must use the same valuation requirements; apply valuation consistently across states. - Valuation should decompose into current estimate and margin over current estimate; FRB define a valuation standard for regulated insurance entities. - ICP15 Investment - Impose identical investment rules on affiliated captives to which liabilities are ceded; states, NAIC, FRB and FIO continue to analyze investment activities at legal entity and group level. - ICP16 Enterprise Risk Management (ERM) / ORSA - FRB enhance insurance risk expertise; adapt rules to insurer specifics; state regulators and NAIC consider ORSA for all insurers, proportionate to size/complexity. - ICP17 Capital Adequacy - Develop RBC for financial guaranty insurers; allow RBC to capture intra-group transactions; FRB develop capital standard for NBFCs and SLHCs; coordinate to develop common/consistent capital requirements. - ICP18 Intermediaries - Develop a uniform approach to regulation of larger business entities (major commercial lines brokers); require producer disclosures of business status and appointments. - ICP19 Conduct of Business - States develop market conduct requirements addressing unfair treatment, suitability, conflicts of interest; develop a risk-focused market conduct surveillance framework; review resourcing and consider accreditation for market conduct work. - ICP20 Public Disclosure - Require insurance groups and holding systems to submit financial filings on a consolidated level. - ICP22 AML/CFT - FinCEN, state regulators and NAIC expand MOUs and implement electronic information exchange to facilitate information sharing. - ICP23 Group-wide Supervision - State regulators obtain direct legal authority over insurance holding companies; put capital standards in place consistently; address supervisory objective conflicts; implement stress testing; publish consolidated statements; monitor group-level investment activities. - ICP24 Macroprudential Surveillance - Authorities work closer together on macroprudential issues; FSOC encourage FRB stress testing and crisis exercises meaningful to insurance; align insurance representation on FSOC with other sectors. - ICP25 Supervisory Cooperation and Coordination - States and FRB develop stronger cooperation, joint working, secondments and training; FIO and NAIC collaborate on modernization priorities; set objectives for colleges to progress cooperation and consider core group formats. - ICP26 Cross-border Crisis Management - Continue crisis preparedness work, prioritize building on CMGs and international work; ensure internationally-active groups have contingency plans and can deliver required information in a crisis. *Source: IMF assessment content provided in the content unit.* ### 42. The Federal Reserve Board (FRB), the National Association of Insurance Commissioners ### 42. The Federal Reserve Board (FRB), the National Association of Insurance Commissioners (NAIC), and the Federal Insurance Office (FIO) ### Participation and stance - The Federal Reserve Board (FRB), the National Association of Insurance Commissioners (NAIC), and the Federal Insurance Office (FIO) (collectively, the “U.S. authorities”) welcomed the opportunity to take part in the second U.S. FSAP and support the objectives of the IMF’s FSAP more generally. ### Assessment of Insurance Core Principles (ICPs) and recent reforms - The current Insurance Core Principles (ICPs), as amended by the IAIS in 2013, are more rigorous and comprehensive than the prior version used for the first U.S. FSAP conducted in 2010. - The U.S. authorities are therefore pleased that the IMF’s current assessment of the U.S. system broadly indicates compliance with such principles; that insurance supervision in the United States has been significantly strengthened in recent years; that lessons have been learned from the financial crisis; and that many of the recommendations of the 2010 FSAP are being addressed. ### Reforms, implementation status, and expected effects - The Report recognizes that the implementation of global and domestic reforms, particularly the Dodd-Frank Act (DFA) and ongoing enhancements at the state level, has increased the supervisory scope and intensity of insurance supervision and oversight. - Some state and federal reforms are pending and will take time to fully implement, including at the federal level those related to enhanced prudential standards for non-bank financial companies. - The Report acknowledges that additional implementation of the reform programs will further improve compliance with the ICPs in the United States. ### Overall evaluation and U.S. authorities’ response - The U.S. authorities are pleased with the Report’s overall evaluation, which concludes as follows: - Overall, the assessment finds a reasonable level of observance of the Insurance Core Principles. - There are many areas of strength, including at state level the powerful capacity for financial analysis with peer group review and challenge through the processes of the National Association of Insurance Commissioners (NAIC). - Lead state regulation is developing and a network of international supervisory colleges has been put in place. - Regulation benefits from a sophisticated approach to legal entity capital adequacy (the Risk-Based Capital approach). - Regulation and supervision continue to be conducted with a high degree of transparency and accountability. - FRB supervision is bringing an enhanced supervisory focus to group-wide governance and risk management. - Cooperation between state and federal regulators is developing, based on the complementarity of their approaches, although it has further to go. - The Report makes numerous recommendations to increase U.S. compliance with the ICPs. - The U.S. authorities acknowledge that some continued reforms are worth considering to further strengthen certain aspects of the system of regulation and supervision in the United States. - However, the state regulators disagree with a few of the ratings ascribed to certain ICPs and the U.S. authorities do not believe that each of the proposed regulatory reforms recommended in the Report is warranted, or would necessarily result in more effective supervision, reduced cost and complexity of insurance supervision, or successfully address perceived regulatory gaps, especially when compared to functional outcomes. - For example, the Report expresses concern that the objectives of the respective agencies could come into conflict in a crisis situation. - In practice, there is clarity of mission among the U.S. authorities and, to date, they have resolved potential conflicts through regulatory and supervisory cooperation. *Source: _cr1590 - 42. The Federal Reserve Board (FRB), the National Association of Insurance Commissioners* ### 46. The U.S. authorities appreciate the work of the assessors and look forward to continuing ### _cr1590 - 46. The U.S. authorities appreciate the work of the assessors and look forward to continuing ### DETAILED ASSESSMENT — Overview - Insurance regulation and supervision is a shared responsibility of federal and state authorities, with authorities and powers defined in relevant state and federal statutes (i.e. primary legislation). - The 1945 McCarran-Ferguson Act established state jurisdiction over insurance; federal law does not supersede state insurance law unless it specifically relates to the business of insurance. - Key federal actors with roles in insurance regulation: - FRB: consolidated regulation of bank holding companies under the BHC Act (where group contains banks), SLHCs under HOLA (15 such groups at present, including four of the largest insurers), and NBFCs designated by FSOC (two insurance groups at present, AIG and Prudential Financial). - FIO: no authority to license or regulate individual insurance companies; broad monitoring role under the Dodd-Frank Act and lead role in international prudential insurance matters; specific responsibilities including recommending NBFC designation to FSOC and recommending systemic risk determinations. - Other federal/state actors: FSOC, state securities regulators and SEC (and FINRA), Department of Labor, FinCEN, IRS, FDIC (in resolution under Dodd-Frank Act). ### ICP 1 — Objectives, Powers and Responsibilities of the Supervisor Findings - The authority (or authorities) responsible for insurance supervision and the objectives of insurance supervision are clearly defined. - States (through insurance departments) license, regulate and supervise insurance companies and intermediaries, focusing on individual legal entities (they do not license holding companies), but with powers to assess and respond to group-wide risks. - NAIC Model Laws and state insurance codes implicitly set objectives of: - (i) ensuring the financial soundness of insurance companies, so as to limit consumers’ exposure to loss due to financial failure; and - (ii) promoting appropriate standards of market conduct (by companies and intermediaries). - NAIC accreditation program objective: ensure “adequate solvency laws and regulations in each state to protect insurance consumers.” - Joint statement of objectives for posting on insurance department websites developed after 2010 FSAP; 12 states have posted the statement to date. - No separate objectives in state insurance law in relation to group supervision (ICP1.2.3). - FRB objectives differ: - BHCs and SLHCs: ensure companies that control banks or savings and loan companies operate in a safe and sound manner and in compliance with banking laws; no explicit objectives in relation to the insurance sector and policyholders. - NBFCs: ensure safe and sound operation and prevent or mitigate risks to U.S. financial stability arising from material financial distress or activities of an NBFC. Dodd-Frank Act requires enhanced prudential standards and early remediation for NBFCs; no explicit objectives in relation to insurance policyholders. - FIO objectives under Dodd-Frank Act are extensive: monitor all aspects of the insurance industry, identify regulatory gaps that could contribute to systemic crisis, develop federal policy on prudential international insurance matters, and specific powers such as recommending NBFC designation and recommending systemic risk determinations. - No covered agreements negotiated and no pre-emption determinations made by FIO to date. Assessment - Assessment: Partly Observed Comments and Risks - Insurance regulators clearly identified in law and have adequate powers; stronger when 2010 holding company system powers are adopted in all states. - Only states and FRB have powers over insurance companies and/or their groups; FIO has significant oversight powers but not direct supervisory or licensing powers. - State law and regulators’ expression of objectives are consistent with promoting a fair, safe and stable insurance sector for the benefit and protection of policyholders, but explicit statutory objectives are limited. - Risk that state mandates to promote insurance business or excessive focus on affordability could conflict with policyholder protection—states should avoid such conflicts. - FRB’s mandate extension and FIO establishment introduced an objective linked to U.S. financial stability; FRB objectives do not explicitly include insurance policyholder protection and scope for potential conflict exists (e.g., actions to protect depositors or stability could be detrimental to policyholders), though no conflicts have arisen to date. Recommendations - States should adopt the joint statement of the objectives of insurance regulation and review their legislation to ensure consistency with the statement (for example, eliminate any mandate to promote or develop the insurance sector that could conflict with the statement). - Regulators should undertake analysis of potential conflicts between the objectives of the SLHC regime and the objectives of insurance supervision, as set out in the ICPs, and recommend legislative changes as appropriate, which may include more explicit recognition of the objective of insurance policyholder protection. ### ICP 2 — Supervisor (independence, accountability, confidentiality, protection, resources, standards) Findings — Governance, accountability and operational independence - State insurance departments: authority granted to an individual commissioner rather than a board; commissioners exercise functions and powers under state law and may delegate powers internally. - Relationships with legislature and executive clear; departments accountable to legislatures and report annually; act independently in day-to-day work; no decisions require involvement of external executive officers (e.g., governor). - Organizational structure: sections for financial surveillance and producer licensing; financial and market regulation usually organizationally separate with exchange procedures (e.g., NAIC Financial Condition Examiners Handbook); escalation procedures exist. - NAIC accreditation program reviews policies, timeliness and appropriateness of regulatory actions; escalation procedures documented and used. - NAIC processes, codes of ethics and openness mitigate regulatory capture risks. - FRB: Division of Supervision and Regulation supervises BHCs, SLHCs, NBFCs; supervisory work undertaken by Federal Reserve Banks under delegated authority; FRB independent from legislative and executive branches, accountable to Congress; GAO and OIG reviews possible. Appointment and dismissal - Of the 56 commissioners, 12 are elected by popular vote; most appointed by governor with advice and consent of state senate; approximately one-third serve fixed terms; many serve at pleasure of governor. - State laws set qualifications and grounds for removal; publication of reasons for dismissal not generally required. - New Mexico example: future Superintendents selected by bipartisan committee for a four-year term with dismissal solely for incompetence or malfeasance (New Mexico Code, Article 59A-2-2). - FRB members: appointed by President and confirmed by U.S. Senate to a full or unexpired portion of a 14-year term; Chair and Vice Chair designated for four-year terms; members removable for cause by President; no legal requirement to publish reasons for dismissal. (12 U.S.C. § 242). Financing and resources - State insurance departments subject to state budgetary authority; spending limits set by legislature; departments determine fees, assessments and other income. - In aggregate, departments currently raise fees and assessments twice the value of their total expenditure budget. - Funding arrangements vary; some departments retain dedicated revenues; charging fees for examination work provides flexibility. - FRB is self-funded; income primarily from interest on government securities; discretion to allocate resources to mandate. Transparency and review - Laws, regulations and rules subject to public approval processes; administrative rule-making governed by state law. - NAIC model laws/regulations developed via transparent process; recent NAIC model laws available without charge. - State regulators and NAIC publish extensive information (financial data, model laws/regulations, authority/responsibilities, annual reports). - Regulatory enforcement actions typically published and subject to administrative appeal and judicial review; companies may appeal draft examination findings; specific procedures for receiverships and appeals exist (Insurer Receivership Model Act, section 205). Confidentiality, legal protection and codes of conduct - State laws recognize categories of confidential information (examination papers, risk-based capital info, holding company reports); freedom of information laws provide confidentiality exceptions. - NAIC-sponsored MISCA signed by all states; seven states signatories to IAIS MMoU; others pending. - Staff legal protection from lawsuits: Model Law on Examination (#390) provides immunity for good faith actions; states rely on sovereign immunity. - Codes of conduct and ethics laws apply to staff and contractual staff. - FRB employees: laws criminalizing disclosure of trade secrets/confidential business information; FRB rules for treatment of confidential information (18 U.S.C. § 1905 & 12 CFR Part 261); FRB subject to sovereign immunity with specific Federal Tort Claims Act exceptions (28 U.S.C. § 2679(d)(2)). Resources and staffing - State insurance departments’ total budgets for all departments are US$1.3 billion in 2015, similar to 2009; staff totaled 11,529 at year-end 2013. - NAIC employs around 470 staff. - NAIC accreditation program assesses adequacy of resources; departments expected to hire, train and maintain sufficient staff including actuarial expertise and to retain outside experts when appropriate. - Recruitment challenges: attracting younger qualified staff, developing risk-focused supervision skills (including ORSA), limited actuaries concentrated in larger states (some states have no actuaries), lower staffing for market conduct than financial regulation. - FRB is self-funded and able to allocate resources; has been growing insurance staff but staffing levels currently some way below targeted levels in numbers and expertise (including actuarial). Assessment - Assessment: Partly Observed Comments and Risks - State regulators generally have high day-to-day operational independence and accountability; transparent framework with ability to protect confidential information; legal protection adequate. - Risks to independence: appointment/dismissal arrangements expose supervision to potential political influence; elected commissioners susceptible to electoral pressures. - Dependence on state legislatures for legislation and budgets exposes departments to political influence and budgetary pressure; NAIC processes mitigate but do not eliminate risks. - Skill and expertise levels require development as technical demands change; some departments depend on contractual staff or outsource major examinations; statewide remuneration policies constrain ability to hire specialists. - NAIC accreditation has enhanced uniformity and effectiveness of financial regulation; NAIC could extend scope (captive regulation, market conduct, intermediary regulation) and increase focus on quality of supervisory judgments; Examination Peer Review program is valuable and voluntary. Recommendations - States reform arrangements for appointment and dismissal of commissioners, providing for fixed terms, with dismissal only for prescribed causes and with publication of reasons. - State governments increase independence of insurance departments in relation to resourcing, enabling them to determine budgets, set and retain relevant fees and assessment income to finance their work and employ appropriate staff as necessary to meet their objectives, subject to continued accountability to state legislatures. - The NAIC review the scope and operation of the accreditation program, including the potential value of an element of external assessment and a quality assurance element to accreditation work. - The FRB continue to increase its insurance expertise (particularly in the area of actuarial methods, insurance accounting and underwriting risk), including in senior positions, to ensure the effectiveness of its insurance group supervisory work. ### ICP 3 — Information Exchange and Confidentiality Requirements Findings — Legal authority and information sharing - State insurance regulators authorized to obtain information from regulated insurers upon request or at specific times; compel attendance of witnesses; command production of documents; and examine insurers at any time and at designated intervals. - Insurers must regularly submit information related to financial condition and business operations of the entity and its affiliates, including annual and quarterly financial statements and risk-based capital reports. - Key group powers are in the NAIC Insurance Holding Company System Regulatory Act; implementation of the current version is an accreditation standard. From 2016 under accreditation, authority to obtain consolidated financial reports and require an enterprise risk report (Form F) for full holding company structure will be required. - State laws provide for sharing confidential information with other authorities, often via authorization for specific types of information (e.g., examination and holding company information). - Commissioners authorized to share information with other state, federal and international regulators and state, federal and international law enforcement authorities (NAIC Model Law on Examinations, No 390, section 5F(3)(a); Insurance Holding Company System Regulatory Act, No 440, section 8C). - An agreement or MoU is not an absolute prerequisite for information sharing by states nor is strict reciprocity; MoUs are used in practice. - State laws generally require, as a condition of sharing confidential information, that the regulator enter into a written agreement and the receiving party must have authority to maintain confidentiality (NAIC Model Law on Examinations, No 390). *Source: IMF Detailed Assessment (extract) — UNITED STATES* ### section 5F(3)(a); Insurance Holding Company System Regulatory Act, No 440, section 8C). ### _cr1590 - section 5F(3)(a); Insurance Holding Company System Regulatory Act, No 440, section 8C). ### Information sharing and cooperation (NAIC/MISCA, FRB, FIO, FSOC) - MISCA requires requesting state regulators to demonstrate a proper regulatory purpose and legal authority to maintain confidentiality; sets detailed procedures for timely responses and notification if there is a third party or judicial request for disclosure. (MISCA, paragraph 4). - MoUs based on MISCA set expectations including protection of confidential information, limitations on use, and procedures for forwarding information (subject to originator consent). (MISCA, paragraph 4). - Template MoU developed by NAIC with the European body (now EIOPA) used by states for establishing MoUs with foreign regulators. - Seven states are signatories to the IAIS Multilateral Memorandum of Understanding (MMoU); 7 more have applications pending and more are considering applying. - State regulators have information-sharing agreements with the FRB, the OCC and the FDIC; NAIC has a MoU to provide information to the Treasury Department, including FIO and OFR. - The FRB: - under the Dodd-Frank Act may require NBFCs and SLHCs to submit reports and copies of reports provided to other regulators. (12 U.S.C. § 5361(a)(1); 12 U.S.C. § 5361(a)(3)). - may require information under the BHC Act and HOLA, including annual and quarterly reports; may request supervisory information on non-regulated subsidiaries. (12 U.S.C. § 5361(b). U.S.C. § 1844(c), 12 U.S.C. § 1467a(b)). - has legal authority to share information with other supervisors provided confidentiality and lawful supervisory use are assured. (12 U.S.C. §§ 1817(a)(2)(A) and (C); 12 U.S.C. § 3412(e)). - has bilateral formal information-sharing/cooperation agreements with all 50 states and DC insurance departments and with 24 foreign supervisors. - as FSOC member, is signatory to FSOC multilateral MoU on non-public information; FSOC has MoUs with 19 state insurance regulators. - Where no MoU exists, the FRB can still share information after confirming statutory/regulatory requirements and confidentiality and lawful use assurances; requests are assessed case-by-case. - Exchange of information in practice: - State regulators routinely exchange supervisory information under MISCA and via NAIC fora (e.g., FAWG). - Sharing with international regulators increased substantially since the 2010 FSAP; supervisory colleges are now the most intensive exchange context (see ICP25). - Since 2011 for SLHCs and 2013 for NBFCs, state regulators must exchange information and cooperate with the FRB for the 15 SLHCs with insurance business and two insurance NBFCs; extent and quality vary by company and team but confidential information necessary for effective supervision appears to be exchanged. - Cooperation exists with federal authorities (Treasury TRIP, FEMA, Department of Agriculture, Department of Labor). - FIO: - has powers to collect data and information from insurers, enter into information-sharing agreements, and require by subpoena data or information from insurers and affiliates, but must coordinate to determine information is not available elsewhere. (31 U.S.C. § 313(e)). - may share data with state regulators (one information-sharing agreement in place with NAIC). - as FSOC member, is signatory to FSOC multilateral MoU. - confidential status of information provided to FIO continues after provision. (31 U.S.C. § 313(e)(5)(B)). - FIO has not yet used formal powers to collect data from insurance companies. - Assessment: Largely Observed. - Comments/recommendation: increase proactive sharing and review internal processes and staff training for states and the FRB to ensure supervisors understand the importance of sharing information while ensuring confidentiality. ### ICP 4 — Licensing - States are responsible for licensing insurers; FIO and the FRB have no licensing responsibility. - Licensing framework: - licensing defined in state insurance codes by line of business; each insurer must be licensed in each state where it writes business (exceptions: surplus lines and reinsurance where license in one state permits business elsewhere). - NAIC accreditation standards require documented licensing procedures and review/analysis of primary license applications. - Uniform Certificate of Authority Application (UCAA) accepted by all states (and Puerto Rico) with minor variations; UCAA not for HMOs; additional authorizations may be required in some states. - Typical exclusions from licensing vary by state (product warranties, certain pet insurance, prepaid funeral plans; state government-owned entities and certain charities may be exempt). - Corporate form and restrictions: - life insurance must be in a different corporate entity from property and casualty (one composite company grandfathered). - insurers may be corporate or mutual. - Suitability and documentation: - applicants must submit business characteristic report for officers, directors, key managerial personnel and individuals with 10 percent or more beneficial ownership (see ICP5). - Capital and business plan: - absolute minimum surplus determined by state; requirements differ significantly from state to state and may give rise to regulatory arbitrage. - plan of operation must detail product lines, marketing, competition and state-specific strategies; guidance exists but lacks concrete methods of analysis. - Review timing: - UCAA targets: 90 days for primary application and 60 days for expansion where already licensed elsewhere; accreditation program includes 90 days goal; more time if additional information needed. - Scope and conditions: - Licenses granted for specified business lines; additional application needed to add new lines. Imposing conditions is possible but uncommon. - Assessment: Largely Observed. - Comments/recommendation: improve consistency of licensing requirements across states (absolute minimum capital, scope of exemptions) and better documentation of analysis and accreditation review. ### ICP 5 — Suitability of Persons - Processes: licensing, off-site monitoring and on-site inspections used by state regulators to assess suitability of Board members, Senior Management, Key Persons in Control Functions and Significant Owners. - Legal provisions and thresholds: - Title 18 U.S.C. § 1033 bars certain convicted persons from working for an insurer. - Insurance Holding Company System Regulatory Act (#440) defines control and presumes control at ten percent (10 percent) voting securities. - All states and DC use 10 percent or lower threshold for significant owners. - Ongoing suitability and filings: - insurers must notify regulators of changes in officers/directors/key personnel and file biographical affidavits upon request; financial condition of owners filed via Form B (Model Holding Company Regulation #450). - no approval requirement for board or senior management appointments; suitability mainly assessed during examinations (interviews). - Regulatory tools: - Hazardous Financial Condition Model Regulation (#385) allows enforcement to correct governance deficiencies and consider competence, fitness and reputation of management. - dismissal/replacement of individuals for lack of properness has not been required in practice. - Coordination: states use MoUs and FAWG for suitability matters; responsive to foreign suitability enquiries. - Ongoing initiatives: - Corporate Governance Annual Disclosure Model Act/Regulation will require insurers to report governance details starting possibly in 2016, including internal suitability standards and changes. - Assessment: Largely Observed. - Comments/recommendation: adopt and implement Corporate Governance Annual Disclosure Model Act and related guidance; require clearer documentation by examiners on properness observations to enable formal regulatory action. ### ICP 6 — Changes in Control and Portfolio Transfers - Definition and thresholds: - All states and DC adopt language from Model Holding Company Act defining control; control presumed at ten percent (10 percent) ownership. - Form A Statement requires extensive disclosure under oath for change of control applications. - Notification and review: - domestic states must be notified of major transactions with affiliates; assumption/bulk reinsurance statutes set thresholds for material transfers. - any controlling person seeking to divest must file confidential notice at least 30 days prior to cessation of control. - Denial grounds under Model Holding Company Act include: - inability to meet licensing requirements post-change; substantial lessening of competition; financial condition jeopardizing insurer; unfair plans by acquirer; incompetence/integrity concerns; acquisition hazardous to insurance-buying public. - NBFCs: prior notice to FRB required before acquiring shares of an entity with consolidated assets of US$ 10 billion or more engaged in BHC Act section 4(k) activities (including insurance). - Demutualization/conversion and portfolio transfers: - demutualization subject to supervisor approval and comprehensive review. - portfolio transfers require policyholder consent; supervisory approval of transfers of all or part of business. - Assessment: Observed. - Comments: 2010 Model Holding Company Act amendments not adopted by all states, but all ICP6 requirements are adopted across states and DC. ### ICP 7 — Corporate Governance - Legal/regulatory framework: - governance requirements derive from state corporate law and NAIC model laws/regulations; states supplement with standards for audit committee duties and board oversight of investment and actuarial processes. - board responsibilities include receiving appointed actuary annual report, adopting/approving investment policy, and attesting to oversight of group governance (Model #205 section 14; NAIC Model #280/#283; NAIC Model #440). - requirement: insurers exceeding $500 million annual premium must form a board audit committee (Model #205, section 14). - Supervisory guidance and initiatives: - NAIC Financial Condition Examiners Handbook, Financial Analysis Handbook and Company Licensing Best Practices updated since 2010 FSAP. - new requirements for large companies: RMORSA Model Act #505 (ORSA) with first submissions in 2015; proposed corporate governance annual reporting possibly starting in 2016; development of common assessment methodology. - SR12-17 (FRB) sets high-level governance expectations for large FRB-supervised institutions (December 17, 2012). - Supervisory practice: - governance assessed in financial analysis and examinations; Exhibit M in Examiners Handbook provides extensive examiner questions. - emphasis on board challenge of management, tone at the top, oversight of compensation and internal audit. - FRB focuses on group-level governance for supervised groups; can require remedial action. - Assessment: Partly Observed. - Comments/recommendation: States and the FRB should develop appropriate insurance-specific governance standards for legal entity and group levels and implement via model law or FRB requirements. ### ICP 8 — Risk Management and Internal Controls - Current framework: - states lack comprehensive legally-enforceable insurance-specific risk management/internal control requirements; approach is supervision-driven and proportionate to scale/complexity of insurers. - all insurers audited; independent audit committee required for all but smallest; those with US$500 million or more in premium must issue Management Report on Internal Control Over Financial Reporting. (Model #205 section 17). - Insurance Holding Company System Model Act requires annual Enterprise Risk Report (“Form F”). - Control functions: - no in-force mandatory requirements to have specified control functions; NAIC RMORSA Model Act #505 requires risk management frameworks for larger insurers (legal entities > $500 million or groups > $1 billion in annual premiums); 20 states have adopted legislation in line with the model act so far; key requirements take effect in 2015. - NAIC ORSA Guidance Manual defines expected ERM elements (governance, risk identification, risk appetite, ongoing ERM, risk reporting). - no mandatory compliance function across insurers; appointed actuary required; internal audit requirement for large firms to be introduced by revised Model #205 (section 15). - Outsourcing: - Model MGA Act #225, Custodial Model Acts #295 & #298, Third Party Administrators Guideline #1090 and reporting requirements under Holding Company Act/Regulation (#440 & #450). - Financial Condition Examiners Handbook gives guidance on reviewing outsourced arrangements and material outsourced functions. - FRB: - SR 12-17 expects effective and independent internal audit, compliance, risk management and controls for large FRB‑supervised firms. - SR 11-11 and SR 14-9 apply to SLHCs; no insurance-specific requirements; FRB supervisory teams review group-wide documentation and can require remedial action. - Assessment: Largely Observed. - Comments/recommendations: - after ORSA and internal audit requirement introduction, states should review standards and consider applying ORSA-embedded standards more broadly and require larger firms to have risk management, compliance and actuarial functions; - FRB should develop and communicate expectations in relation to risk management and internal controls for insurance NBFCs and SLHCs. ### ICP 9 — Supervisory Review and Reporting - Regulatory authority and supervisory approach: - states derive supervisory authority from NAIC Model Law on Examinations and Holding Company Act/Regulation; accreditation standards require authority to examine as necessary. - NAIC Risk-Focused Surveillance Framework (implemented 2004) combines off-site and on-site supervision; five elements: (1) risk-focused examinations (seven-phase process); (2) financial analysis; (3) review of key developments; (4) prioritization system; (5) supervisory plan. - Insurer Summary Profile aggregates main findings for sharing with non-domestic supervisors. - Reporting and off-site monitoring: - states publish required filings; NAIC Blanks set scope/content of filings; separate confidential RBC filings to NAIC and states. - most reporting is legal-entity focused; no group financial data reporting (see ICP23). - automated processing of quarterly/annual statements; fuller reviews for higher priority companies include solvency, underwriting, investments, risk management and compliance. - lead state performs at least annual financial analysis of groups and NAIC undertakes parallel U.S. GAAP review for largest groups. - On-site examinations: - examinations required at least once every three to five years (NAIC model law max five years); seven examination phases described; examinations must be completed and report finalized within 18 months of the period to which they relate. - external specialists engaged where necessary; some states outsource examinations to consultants. - examination reports are public and factual; work papers/management letters are not public but available to other state supervisors. - Market conduct: - NAIC Market Conduct Annual Statement (MCAS) and Market Analysis Working Group (MAWG) support market conduct analysis; market conduct examinations follow Market Conduct Examiners Handbook where adopted. - FRB: - has authority under Dodd-Frank and HOLA for off-site monitoring and on-site examinations of NBFCs and SLHCs and their subsidiaries. (12 U.S.C. § 5361(b); 12 U.S.C. § 1467a(b)(4)). - supervisory approach for SLHCs/NBFCs draws on banking-derived standards; developing group-wide stress testing and recovery/resolution planning; coordinated through LISCC Operating Committee. - FRB relies on state reporting, bank regulators, U.S. GAAP/SEC reporting and internal management information; continuous monitoring for larger groups; can issue MRIAs, MRAs and observations. - Assessment: Largely Observed. - Comments/recommendations: - states should review reporting on qualitative issues (material outsourcing) and adopt proposed corporate governance reporting; - consider higher frequency or targeted examinations for larger groups and consult on removing requirement for publication of examination reports; - review scope for more coordinated multistate market conduct examinations; - FRB should develop and publish tailored supervisory framework and tools addressing insurance risks for SLHCs and NBFCs, including stress tests with insurance risk scenarios (e.g., major pandemic). ### ICP 10 — Preventive and Corrective Measures - Only states have direct powers to intervene and require corrective actions for individual insurers. - Powers for operating without a license include cease and desist notices and coordination with law enforcement. - State corrective/preventive powers include fines, suspension/revocation of licenses, imprisonment, disallowance of dividend payments, requirements for action plans, and other remedial measures. - NAIC Model Law #385 defines criteria for hazardous financial condition (reserve adequacy, reinsurance adequacy/collectability, fitness/propriety, filing timeliness, administrative systems, liquidity, affiliate transactions) and enumerates remedial actions (adjust reinsurance, restrict business, increase capital/surplus, suspend dividends, increase reporting, require business plan changes, etc.). - RBC Model Act (#312) provides four escalation levels with trigger events and required actions: - Company Action Level: - Trigger: insurer capital less than 200 percent of RBC, or less than 300 percent of RBC plus negative trend (life/health) or triggers trend test (P&C). - Action: insurer must submit an RBC Plan within 45 days detailing causes and corrective actions and four-year projections. - Regulatory Action Level: - Trigger: insurer capital less than 150 percent of RBC. - Action: submit/revise RBC Plan; state to examine condition and issue corrective order. - Authorized Control Level: - Trigger: insurer capital less than 100 percent of RBC. - Action: as Regulatory Action Level or place insurer under regulatory control (rehabilitation/liquidation). - Mandated Control Level: - Trigger: insurer capital less than 70 percent of RBC. - Action: supervisor must place insurer under regulatory control (except P&C run-off). - FRB remedies: for SLHCs and NBFCs, may restrict activities, require remedial activities, withhold approval of activities/acquisitions, restrict/suspend payments to shareholders; for NBFCs may issue cease and desist orders and remove individuals. (12 U.S.C. § 5362). - Assessment: Observed. - Comments: states have full range of powers and use them; RBC framework provides automatic early intervention and supervisors have tools for discretionary intervention. ### ICP 11 — Enforcement - States possess broad enforcement powers: restrict business activities, require reserve increases, require capital increases, RBC corrective actions, restrict dividends, stop new policy issuance, retain experts, require management changes, fine directors/managers, suspend or revoke licenses. - Hazardous Financial Condition Model Regulation (#385) permits correction of governance deficiencies and assessment of management competence/fitness/reputation. - Conservatorship: supervisor may be appointed conservator by court; broad authority to act in court oversight. - Sanctions: - Model Holding Company Act authorizes financial penalties and criminal proceedings for willful false statements; in 2013 about US$19 million collected in fines/penalties, accounting for 1.5 percent of total funding of state regulators. - 2013 statistics: 179 suspensions, 127 revocations and 798 formal hearings by state regulators. - Assessment: Observed. - Comments: states actively and effectively use enforcement measures. ### ICP 12 — Winding-up and Exit from the Market - Receivership and exit: - state receivership laws allow conservator/rehabilitator to exercise directors/officers powers; supervisors seek to use administrative supervision, rehabilitation, liquidation or run-off with reinsurance arrangements to transfer obligations. - Policyholder priority: - Insurance Receivership Model Act (#555) gives highest priority to policyholders after administrative fees of the receiver; 48 states adopted life and health guaranty limit of 250,000 or more; other states have limits between US$100,000 to 500,000; P&C guaranty funds provide up to 300,000. - Historically at least 96 percent of policyholder benefits covered by guaranty associations or remaining assets of failed insurers. - Guaranty associations can collect approximately US$ 10 billion annually; with historical average loss rates ~25 percent of insurance liability, they may absorb failures up to total assets of US$ 40 billion per year (about size of the 25th largest life insurance company (general account)). - Coordination: - FAWG performs analysis of financially troubled insurers and groups and supports domiciliary regulators for multistate coordination. - Dodd-Frank Title II: - Secretary of Treasury (with President), on recommendation from FIO and FRB (consult FDIC), may make systemic risk determination to place insurer or holding company (if largest subsidiary is an insurer) into receivership; Title II applies only where insurer presents systemic risk; process not used to date. - liquidation/rehabilitation remains under state law; if state regulator does not commence proceedings within 60 days, FDIC may file for orderly liquidation under state law. (12 U.S.C. § 5383(e)(3)). - Assessment: Observed. - Comments/recommendation: states have appropriate tools; recommend close work with federal and international regulators and resolution authorities to improve resolvability of large and complex insurance groups; note differences between ICPs and FSB Key Attributes may produce different conclusions. ### ICP 13 — Reinsurance and Risk Transfer - Prudential regulation for domiciled reinsurers similar to insurers; market regulation adapted. - Statutory credit for ceded business allowed only if reinsurer meets requirements; non-US licensed reinsurers require collateral. - NAIC revisions to Credit for Reinsurance Model Law (#785) and Model Regulation (#786) reduce collateral requirements for reinsurers domiciled in qualified jurisdictions (currently Bermuda, Germany, Switzerland, UK). - Dodd-Frank Title V section 531(a) specifies that if home state of ceding insurer recognizes credit for reinsurance, no other state can deny such credit. - Relevant laws/regulations/guidelines: NAIC Model Laws #785, #786, #791, Holding Company Act/Reg #440/#450, SSAP No 61 and 62R, Appendix A-785 and A-791. - SSAP distinguishes risk transfer vs deposit accounting; reinsurance must transfer risk or be treated as deposit. - Supervision of cedants: - reinsurance strategy, systems, controls assessed at licensing and ongoing monitoring; reinsurance programs reviewed in quarterly/annual reviews and examinations (cat coverage, reinstatements, actual risk transfer, reinsurer quality, significant recoverables). - intra-group reinsurance agreements above a limit reported 30 days prior; Commissioner may disapprove. - Documentation, liquidity and capital market transfers: - documentation requirements appropriate; supervisors assess liquidity risk associated with reinsurance; consider structures transferring risk to capital markets. - Assessment: Observed. - Comments/recommendations: - state regulators should undertake comprehensive review of web of retrocessions, capital mobility and affiliated credit risk to strengthen group-level oversight; - FRB should analyze retrocession webs for systemically important groups and establish methodology/framework to collect necessary information (to be used beyond narrow resolution planning). ### ICP 14 — Valuation - Valuation standard: Statutory Accounting Principles (SAP) codified in NAIC Accounting Practices and Procedures Manual (APPM) composed mainly of SSAPs; SAP is detailed, continuously updated and adapted from US GAAP with insurance regulatory conservatism. - Valuation approaches: - assets: amortized cost or fair value with impairment assessment. - P&C liabilities: principles-based, mainly US GAAP‑based, generally undiscounted (except some long-term lines like workers’ compensation). - life liabilities: predominately rules-based with detailed product-specific rules; discounting based on prescribed rates or expected return of associated assets. - Actuarial role: - appointed actuary required; qualifications specified in Actuarial Opinion and Memorandum Regulation; actuarial standards of practice binding. - life insurers must submit Statement of Actuarial Opinion (SAO) and supporting memorandum; asset adequacy analysis required with multiple economic scenarios (New York “New York Seven” scenarios de facto standard). - Principles-Based Reserving (PBR): - NAIC developed PBR via Standard Valuation Law (SVL) adopted 2009 and Valuation Manual adopted by super-majority in 2012. - PBR implementation requires at least 42 states representing 75 percent of total U.S. premium to adopt SVL revisions; target not yet reached. - Issues identified: - valuation standards differ across states and entities (captives); conservatism implicit rather than explicit (no clear current estimate + explicit margin); P&C reserves generally undiscounted; life reserves often use assumptions set at time of sale. - valuation standard may not incentivize dynamic hedging; affiliated captives can create arbitrage via differing asset backing rules and use of parental guarantees/letters of credit. - FRB has not decided valuation standard for its capital standard for insurance groups. - Assessment: Partly Observed. - Comments/recommendations: - NAIC should continue to pursue PBR for life insurers; - captives and insurers should use same valuation requirements; - valuation standard applied consistently across states and reflect how assets backing liabilities are actually managed; - adapt valuation standard to capture conservatism explicitly as margin over current estimate; - state regulators ensure sufficient in-house expertise for principles-based reserving; - FRB should define a valuation standard for regulated insurance entities. ### ICP 15 — Investment - Investment limits and model acts: - Investments of Insurers Model Act (#280) defines types of investments, prohibitions and clear limits by asset class; Investments in Medium and Lower Grade Obligations Model Act (#340) imposes additional limits. - Model acts specify monitoring/reporting and commissioner authority for non-compliance. - MDL #385 (Hazardous Financial Condition) allows commissioner to require limiting or withdrawing from certain investments when insurer deemed hazardous. - Supervisory guidance: - Financial Analysis Handbook and Financial Condition Examiners Handbook provide detailed supervisory guidance on assessing governance, risk management and controls related to investments, including stress testing, diversification, credit risk assessment and liquidity planning. - liquidity expectations include formal written liquidity plan and detailed liquidity tables; NAIC scoring includes liquidity-related ratios. - New York example: ‘Liquidity and Severe Mortality Inquiry’ collecting qualitative and quantitative current and stress liquidity positions. - Affiliated captives: - affiliated captives in some states may cover liabilities with assets inconsistent with insurer investment rules; some states allow parental guarantees or letters of credit. - Assessment: Observed. - Comments/recommendations: - identical investment rules and limits should be imposed on affiliated captives to which insurance liabilities are ceded; - state regulators with NAIC, FRB and FIO should continue analyzing investment activities at legal entity and group levels to address regulatory arbitrage and improve consistency across state and federal regulations. ### ICP 16 — Enterprise Risk Management (ERM) and ORSA - Legal/regulatory instruments: - Insurance Holding Company System Model Regulation Act (MDL #450) — Form F enterprise risk report required from ultimate controlling person including strategy, audit findings, acquisitions/disposals, shareholder changes, investigations/regulatory activities/litigations, business plan/strategies, capital resources/distribution, rating movements, web of guarantees, and material developments that could lead to adverse effects. - Risk Management and Own Risk and Solvency Assessment Model Act (MDL #505) and NAIC ORSA Guidance Manual; ORSA requirements in force as of 2015. - ORSA definition and scope: - ORSA: confidential internal assessment appropriate to nature, scale and complexity of insurer/group of material and relevant risks associated with current business plan and sufficiency of capital resources. - insurers must maintain risk management framework for identifying, assessing, monitoring, managing and reporting material/relevant risks. - ORSA Summary Report must be submitted on request; group insurers must submit to lead state commissioner. - insurers with annual direct written and unaffiliated assumed premiums less than US$500 Million are exempt from ORSA. - ORSA Summary Report sign-off required by Chief Risk Officer or executive with ERM oversight and provided to board. - ORSA goals and expected content: - primary goals: foster effective ERM and provide group-level perspective on risk and capital to supplement legal entity view. - ORSA Summary Report expected to include: - Section 1: Description of the risk management framework. - Section 2: Assessment of risk exposures. - Section 3: Group assessment of risk capital and prospective solvency assessment. - ORSA Manual expectations for ERM include governance, risk identification/prioritization, formal risk appetite/tolerances, ongoing ERM activity, decision-useful risk reporting. - Assessment: (Implied within ICP8/ICP9 as implemented; ORSA requirements first submissions in 2015.) - Recommendation: ORSA intended to improve group-level perspective and inform supervisory scope/depth/timing of risk-focused analysis and examinations. *International Monetary Fund — assessment excerpt from the United States insurance supervisory framework (section content)._ ### Section 2 of the ORSA Summary Report should provide a high-level summary of ### _cr1590 - Section 2 of the ORSA Summary Report should provide a high-level summary of ### High-level summary of quantitative and qualitative assessments - "Section 2 of the ORSA Summary Report should provide a high-level summary of quantitative and qualitative assessments of risk exposures in normal and stressed situations for each material risk category." ### Impact on capital and risk capital requirements - "The assessment should consider the impact of stresses on capital, with consideration of risk capital requirements based on regulatory, economic, rating agency and other views." ### Model validation process description - "The ORSA Summary Report should provide a general description of the insurer’s process for model validation." *Source: _cr1590 - Section 2 of the ORSA Summary Report should provide a high-level summary of* ### Section 3 of the ORSA Summary Report should describe the level of financial resources ### Section 3 of the ORSA Summary Report should describe the level of financial resources ### ORSA and group risk capital assessment - Section 3 should describe the level of financial resources needed to manage the insurer’s current business over a longer term business cycle. - The group risk capital assessment can be done on different bases, e.g. group, legal entity or other but has to encompass the entire group. - The group risk capital assessment should consider: - the elimination of IGTs and double gearing, leverage resulting from holding company debt; - diversification and availability and transferability of capital; - contagion, concentration and complexity risk; - the effects of liquidity risk. - Insurers are expected to have a robust capital forecasting capability and capital resources sufficient to operate in normal and in stress situations. - If a group performs the prospective solvency assessment for each individual insurer, that assessment should may take into account group risks, capital transfers between legal entities and limitation on capital mobility. - The Financial Analysis Handbook and the Financial Condition Examiners Handbook set clear expectations on risk management, risk culture, asset liability and liquidity risk management, investments, reinsurance and other risk mitigation approaches, and process and controls. ### Federal Reserve Board (FRB) supervisory expectations - The FRB’s Consolidated Supervision Framework for Large Financial Institutions expects large financial institutions to: - put robust internal processes in place that enable the firm to maintain capital and liquidity under normal and stressful conditions; - maintain processes that enable identification and measurement of potential risks to asset quality, earnings, cash flows, and other primary determinants of capital and liquidity positions; - conduct rigorous and regular stress testing; - maintain sound risk measurement and modeling capabilities; - establish goals for capital and liquidity positions that are approved by the firm’s board of directors taking into account legal or regulatory restrictions on the transfer of capital or liquidity between legal entities; - maintain a clearly articulated corporate strategy and institutional risk appetite; - ensure the organization’s internal audit, corporate compliance, and risk management and internal control functions are effective and independent. - The Dodd-Frank Act tasks the FSOC with recommending heightened prudential standards to the FRB for risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit exposure reports, concentration limits, enhanced public disclosures, and overall risk management for nonbank financial companies and large, interconnected bank holding companies. ### Status of ORSA implementation and state adoption - Assessment: Largely Observed - Comments: - The ORSA requirements of the State Regulators are not yet in force but will become effective as early as 2015 for those states that have adopted it. - At the time of the assessment, 20 states had adopted the Risk Management and Own Risk and Solvency Assessment Model Act. - ORSA will be mandatory for larger companies that cover over 90 percent of the market by premium income. - The NAIC is implementing a training program for examiners and analysts to support consistent implementation. - The FRB will need to increase its expertise in insurance for the supervision of relevant SLHCs and NBFCs and make rules and regulation more specific to insurers. ### ICP 17 — Capital Adequacy: framework and findings - Description of regulatory capital: - Regulatory capital is determined by the Risk Based Capital (RBC) approach, defined in the Risk-Based Capital (RBC) for Insurers Model Act. - RBC is applied on a legal entity basis for life, P&C and health insurers. - RBC focuses on three main risks: asset risk, underwriting risk and other risks; capital charges for specific risks are aggregated using a correlation approach. - The RBC framework does not allow for the use of internal models (exceptions mainly for life RBC C3 Phase 1 and 2). - Available capital resources: - Are defined using SAP and take into account quality and suitability to absorb losses on a going-concern and wind-up basis. - SAP includes concepts such as conservatism, consistency and recognition. - Goodwill may be counted as an available capital resource only if arising from the purchase of an insurance subsidiary, must be written off over 10 years and cannot exceed 10 percent of an insurer’s capital. - RBC control levels (basis is Authorized Control Level = 100 percent): - Regulatory Action Level = 1.5 times the Authorized Control Level - Company Action Level = twice the Authorized Control Level - Mandatory Action Level = 70 percent of the Authorized Control Level - RBC structure and aggregation examples: - P&C aggregation: R0 + (R1^2 + R2^2 + R3^2 + R4^2 + R5^2 + R6^2 + R7^2)^(1/2) - Life aggregation: C0 + [ (C1o + C3a)^2 + (C1cs)^2 + (C2)^2 + (C3b)^2 + (C4b)^2 ]^(1/2) + C4a - Health aggregation: H0 + [ (H1)^2 + (H2)^2 + (H3)^2 + (H4)^2 ]^(1/2) - Specific RBC calibrations and model requirements: - RBC C3 Phase 1 (implemented in 2000) addressed interest rate risk for annuities and single premium life products; calibrated to a 95 percent Value at Risk; 200 economic scenarios are randomly generated and a subset of 12 or 50 is used. - RBC C3 Phase 2 (in force since 2005) applies to variable annuities and life contracts with GMDBs; based on a Tail Value at Risk on a 90% confidence level and requires stochastic scenarios and cash flow testing. - RBC C3 Phase 3 is not yet in force; would apply to all individual life policies covering interest rate and market risk using scenario testing based on a Tail Value at Risk of 90 percent. - Gaps and limitations: - No group-level capital requirements are in place for insurance groups (including FSOC-designated NBFCs and SLHCs supervised by the FRB). - The RBC does not take into account Intra-Group Transactions (IGTs), except for retrocessions; parental guarantees and other forms of IGTs are not considered in the RBC calculation. - The RBC is largely based on the amortized cost approach and is not calibrated to a single target level; different risk classes use different holding-periods and confidence levels (e.g., catastrophe risk uses a 1 year horizon and 99 percent confidence; reserve and premium risk in R4 and R5 calibrated to an 87.5% VaR). - Operational risk is not explicitly quantified; taken into account qualitatively and in business risk calibration; an Operational Risk Subgroup is evaluating options. - Supervisory and analytical tools supplementing RBC: - NAIC forecast tool for quarterly RBC assessment; IRIS system in use since 1972; FAST; Analysis Team System (ATS); RBC trend test; loss reserve tools. - Assessment: Largely Observed - Comments: - RBC is sophisticated and continuously updated but complex and prescriptive; extensive instruction sets (e.g., RBC Forecasting and Instructions-Life ≈ 170 pages). - Documentation of methodology, parameterization and assumptions would be appropriate. - Financial guaranty insurers and mortgage insurers are not subject to RBC; NAIC developing capital model for mortgage insurers. - State regulators’ focus on legal-entity solvency supports policyholder protection but quantitative group-level capital requirements would enhance transparency and reduce regulatory arbitrage. ### Group supervision, FRB and state roles (ICP 23) - Division of responsibilities: - FRB: supervision of SLHCs and designated NBFCs on a consolidated basis; uses Regulation Y and LL; objectives include enhancing firm resiliency and reducing systemic impact of failures. - State regulators: supervision of legal entities and holding company systems based on MDL 440 and MDL 450; lead state model for group coordination. - FRB supervisory practices: - Large, complex firms are overseen by the LISCC; FRB assigns senior supervisory officer and multidisciplinary teams; example staffing: about 14 examiners assigned to AIG with expectation to extend to about 20 people. - FRB uses coordinated horizontal reviews, firm-specific exams and reliance on other supervisors’ assessments; conducts CCAR for banks and plans to extend stress testing to large nonbank financial institutions. - FRB has started a quantitative impact study (QIS) to evaluate potential effects of revised regulatory capital framework on SLHCs and NBFCs substantially engaged in insurance underwriting; the QIS gives no indication of potential group-level capital standard or methodology. - State group supervision: - MDL 440/450 define scope of group supervision; revisions in 2010 allow commissioners to obtain consolidated reports (authority, not mandatory); 38 states adopted revisions. - The Risk Management and Own Risk and Solvency Assessment Model Act (MDL 505) and NAIC ORSA Guidance Manual set ORSA expectations; in force in states that have implemented the model law as of 2015. - Lead state system: lead state responsible for holding company analysis and coordination of multistate work; roles beyond holding company analysis are not prescribed. - Gaps and recommendations regarding group-level capital and authority: - No group-level capital standards in place for groups supervised by states or by the FRB. - State regulators would be facilitated by direct legal authority over insurance holding companies to assess group interactions and IGTs. - The FRB should develop and formulate its preferred approach (valuation standard, time horizon for capital, risk measure, legal entities to be covered) and coordinate with state regulators and the NAIC. - Assessment: Partly Observed - Comments: - Group supervision has been improved (supervisory colleges active) but direct authority and group-level capital standards are lacking. - Stress testing regimes and consolidated capital standards consistent across FRB and state supervision are needed to assess intra-group transaction impacts and failure modes. - Recommendations (group supervision): - state regulators obtain direct legal authority over the insurance holding company (although this is beyond the current ICP); - capital standards are put in place in a consistent manner, for groups supervised by state regulators and by the FRB; - potential conflicts of interests of different supervisory authorities are identified and clarified; - a stress testing regime for insurance groups and holding companies be implemented; - consolidated financial statements are published by all insurance groups; - investment activities at the group level are carefully monitored to address potential regulatory arbitrage and search for yield at the group level. ### Selected policy recommendations and supervisory enhancements across ICPs 16–24 - For FRB: - enhance expertise in insurance risk and business models; - adapt rules and regulation to take into account the specifics of insurers, where warranted; - develop a capital standard for NBFCs and SLHCs, with due consideration of accounting and actuarial standards, developing methodology in cooperation with state regulators and the NAIC; - develop and formulate preferred approach to valuation standard, time horizon for capital, risk measure and legal entities to be covered. - For state regulators and NAIC: - consider requiring the ORSA for all insurers, proportionate to the size and complexity of the firms; - develop an RBC requirement for financial guaranty insurers and mortgage insurers, taking into account their specific exposures to risk; - develop an approach that would allow RBC to capture IGTs; - coordinate with the FRB to achieve common or consistent capital requirements to avoid regulatory arbitrages; - develop a uniform approach to the regulation of larger producer business entities, including major commercial lines brokers; - require producers in all states to disclose to customers the status under which they are doing business, including which insurance companies have appointed them; - develop market conduct requirements addressing fair treatment of policyholders, due skill and diligence, suitability of advice, and conflicts of interest management; - develop a risk-focused surveillance framework specifically for market conduct to support proactive, risk-based supervision; - review staffing and resourcing models for market conduct regulation and consider reducing dependence on consultants; - consider accreditation program for market conduct work, building on MAWG and the Market Regulation Handbook; - require insurance groups and insurance holding systems to submit financial filings also on a consolidated level. - For inter-agency cooperation (AML/CFT, macroprudential, colleges): - FinCEN, state regulators and the NAIC should expand the network of MOUs and implement electronic information exchange speedily; - different authorities and offices should work closer together on macroprudential issues; - FSOC should encourage the FRB to develop stress testing and crisis management exercises meaningful to the insurance sector and clearly define the concept of systemic relevance for NBFCs; - representation of the insurance sector within FSOC should be brought in line with other sectors. ### Key numeric and timing references (exact from source) - ORSA effective in states adopting model act: as early as 2015. - At time of assessment, 20 states had adopted the Risk Management and Own Risk and Solvency Assessment Model Act. - ORSA mandatory for larger companies covering over 90 percent of the market by premium income. - NAIC goodwill rule: written off over 10 years and cannot exceed 10 percent of an insurer’s capital. - RBC control levels: - Authorized Control Level = 100 percent; - Regulatory Action Level = 1.5 times Authorized Control Level; - Company Action Level = twice Authorized Control Level; - Mandatory Action Level = 70 percent of Authorized Control Level. - RBC C3 Phase 1: calibrated to a 95 percent Value at Risk; 200 economic scenarios generated, subset of 12 or 50 used. - RBC C3 Phase 2: based on a Tail Value at Risk on a 90% confidence level. - Catastrophe risk holding period/time-horizon = 1 year; confidence level = 99 percent. - Reserve and premium risk calibration in R4 and R5 = 87.5% VaR. - NAIC RBC Forecasting and Instructions-Life guidance ≈ 170 pages. - MDL 505 / ORSA in force as of 1 January 2015 in adopting states. - The IRS has approximately 270 examiners, of whom 20 are trained in insurance AML/CFT issues; the IRS has conducted 71 insurance examinations. - State staffing for market conduct vs financial: 424 examiners, analysts and supervisory staff for market conduct vs 1,757 for financial; over 600 staff for consumer complaints; 673 for rate and form regulation. - 43 states joined the IIPRC central approval process for certain life, annuity, disability and long term care products. - 38 states have adopted revisions to the Model Holding Company Act providing expanded consolidated authority. - 22 U.S. group supervisory colleges meet at different frequencies. - In 2010 state fraud bureaus received more than 132,000 case referrals, opened about 45,000 cases, resulting in more than 4,200 arrests and 2,000 civil actions. *Source: _cr1590 - Section 3 of the ORSA Summary Report should describe the level of financial resources* ### Appendix A, Holding Company and Supervisory College Best Practices). ### Appendix A, Holding Company and Supervisory College Best Practices ### Membership and Purpose of Supervisory Colleges - Membership generally comprises the major U.S. state regulators, the FRB and all foreign regulators, if they choose to participate. - CMGs are smaller groupings, with foreign regulators of the major parts of the group only. The FIO participates in CMGs but not in colleges. - Some states have explicit thresholds for participation, expressed in terms of the size of the business in the United States and its share of the host country market. - Colleges for U.S. groups generally operate on the basis of terms of reference agreed by the members (on the initiative of the U.S. chair), which: - define expectations of the purpose of the college, - set out membership, - identify the GWS, - specify roles and responsibilities, scope of activities, frequency of meetings, etc. - Colleges to date have focused on information-sharing amongst regulators, including national regulatory regimes, group structures and activities, and on meetings and presentations from senior management of the insurance groups. ### Practical Operation and State Regulator Role - A review highlighted that the state regulator, as the GWS, was responding to information requests from host regulators. - U.S. regulators, including the FRB, value the process and outputs to date, including coordination of work. - Companies reported participation and that they received feedback and follow-up questions from colleges. - Supervisory colleges have not yet developed: - a structured, shared view of group-wide risks, - group-wide governance and risk management, - or (absent a U.S. or global group-wide capital standard) a view on the financial condition of the group. - State regulators are also members of 12 supervisory colleges for insurance companies operating in the United States which have foreign parent companies. - Lead state regulator role: act as U.S. contact for foreign regulators and respond to information requests, college meetings and conference calls (NAIC Financial Analysis Handbook, section VII, Appendix A, Holding Company and Supervisory College Best Practices, section IIIA). - In practice, state regulators determine resource allocation to colleges where they are the host, accounting for materiality of U.S. business and the importance of the U.S. business to the group as a whole. ### Legal and Accreditation Context - International cooperation and supervisory colleges is not an accreditation standard, although the supervisory college requirements in the holding company model acts will become an accreditation requirement as of January 1, 2016. - The revised NAIC Insurance Holding Company System Regulatory Model Act gives states explicit authority to participate in supervisory colleges and is already in force in the 38 states which have adopted it to date. - States have established and participated in colleges in practice, even where the state has not yet adopted the revised holding company legislation. ### Assessment: Supervisory Coordination (Assessment: Largely Observed) - U.S. insurance regulation has developed a significantly stronger focus on domestic and international supervisory coordination, reflecting: - states’ development of the holding company analysis framework, - the growth in supervisory colleges under the IAIS framework, - strengthening of SLHC supervision, and addition of group-wide NBFC supervision by the FRB, which has become the lead regulator (Group-Wide Supervisor) of the groups it supervises. - At the state level, the lead state concept is embedded and delivering stronger coordination, including on troubled companies; limitations remain on cooperation between state regulators due partly to lack of uniformity in regulatory approaches. - State regulators’ cooperation with FRB supervisors is developing based on complementarity (legal entity and group focus), though the FRB role is relatively new and relationships further need to develop for some groups. - The absence of U.S. or global group-wide capital standards (see ICP23) constrains the lead state holding company analysis process, the FRB’s group-wide supervision, and the work of colleges; however, regulators have not let this prevent establishment and effective functioning of supervisory colleges in an information-sharing and coordination role. ### Recommendations on Supervisory Colleges - States and the FRB should review how to develop stronger cooperation between U.S. insurance supervisors, which could include: - increased joint working (e.g., on-site work), - secondments, - appropriate training; - the FIO and NAIC should work more closely together, for example to develop a shared view on priorities for modernization of insurance regulation. - State regulators and FRB should set objectives for colleges to move to the next level of cooperation, including potentially: - development of a shared group risk assessment similar in purpose to the insurance group profile and joint working; - considering whether this may require sub-groups of members or colleges to meet in a core group format to promote efficient working. - States should fully and effectively incorporate the state regulators’ collective expectations on international supervisory colleges into the accreditation program. ### ICP 26 — Cross-border Cooperation and Coordination on Crisis Management (Description) - ICP 26: The supervisor cooperates and coordinates with other relevant supervisors and authorities such that a cross-border crisis involving a specific insurer can be managed effectively. - Cross-border cooperation and coordination is handled by U.S. regulators through: - colleges of supervisors established and led by the U.S. regulator, in place for all groups meeting the IAIS definition of an internationally active insurance group; most state regulators, the FRB (where it has supervisory responsibilities), and most (or in some cases all) foreign supervisors participate; and - Crisis Management Groups (CMGs)—established and meeting under FRB chairmanship for the NBFCs. The FDIC and FIO are also members, reflecting potential roles in resolution of NBFCs under Title II of the Dodd-Frank Act, as well as major state regulators and supervisors from foreign jurisdictions where major operations are conducted—i.e., representation from domestic and foreign supervisors is more limited than for colleges. - State regulators also participate in colleges and CMGs established by foreign supervisors for groups with a significant U.S. presence. - State and federal authorities have adequate powers to share information with each other and with foreign regulators to coordinate preparations for crisis management and coordination (see also ICP2 and ICP3). ### Crisis Preparedness and Experience - State regulators have had experience since the financial crisis dealing with cross-border insurance companies facing serious difficulties; receivership action has not been required of U.S. regulators in such cases. - Cross-border crisis management arrangements have not yet been fully applied in practice owing to lack of cross-border receiverships (though there have been domestic insurance company failures). - Coordination with the foreign regulator of the parent company of U.S. entities appears to have been effective in at least one case via the lead state regulator, preventing action by an individual regulator that could have jeopardized crisis management. - Colleges have held initial discussions of crisis preparedness (including exchange of key contact information) and crisis management arrangements; they have generally focused on information-sharing and building a shared view of group risks. - Detailed discussions on implications of intra-group transactions and of barriers to effective crisis management in practice have generally not yet occurred (but see NBFCs). ### Information, Contingency Planning, and NBFC Resolution Plans - Supervisors have not explicitly required that companies supply on a timely basis information needed for authorities to manage a crisis (ICP26.5); regulators would rely on general powers to require information, but exercise of such powers during a crisis may not result in timely production of urgently required information. - State regulators do not have requirements on insurers generally to maintain contingency plans in case of crisis. - For NBFCs, resolution plans (“living wills”) have been prepared by both groups covering global operations as required under the Dodd-Frank Act, submitted to the FRB and FDIC, and are being shared by FRB and FDIC on request with the CMG member state regulators of the NBFCs but have not yet been shared and discussed within the CMG itself. - Analysis of the plans by federal authorities and feedback to the groups has been limited to date. ### Dodd-Frank Act Resolution Plan Processes (Section 165) - The Act contains requirements and processes that apply to all large institutions subject to FRB oversight: - The FRB and FDIC do not approve resolution plans, but they may jointly find a plan is not credible or would not facilitate an orderly resolution in bankruptcy. - If a resolution plan is found to have deficiencies, the company will have 90 days to resubmit; if deficiencies are not corrected, the firm may under the law become subject to more stringent capital, leverage, or liquidity requirements, or restrictions on growth, activities, or operations. - Resolution plans may not rely on extraordinary government support. - These requirements are not tailored to insurance companies where necessary (for example in relation to measures to be taken in case the plan is inadequate). - Company-prepared plans for large institutions supervised by the FRB are generally used to support the FDIC’s planning for the exercise of its resolution powers. - Under Dodd-Frank Act, Title II, insurance companies and groups would generally expect to be resolved under the U.S. Bankruptcy Code or otherwise applicable insolvency law (for licensed insurance companies, state insurance insolvency laws). Title II allows a separate process when systemic risk is potentially at issue and a systemic risk determination has been made by the Secretary of the Treasury; resolution of an insurer would still take place under state law under this process. However, a holding company of an insurance group that is not itself licensed as an insurance company could be resolved using the specific Dodd-Frank Act resolution powers. (Dodd-Frank Act, section 203). - The FIO and the FDIC are beginning to work with state regulators and state guaranty associations to better understand how state-based arrangements for resolution of insurance companies operate in practice. ### Assessment: Cross-border Crisis Management (Assessment: Largely Observed) - The U.S. authorities’ approach to cross-border crisis management and coordination is at an early stage of development, reflecting: - recent establishment of colleges of supervisors and, for the two NBFCs, Crisis Management Groups; - application to the NBFCs of much of the same Dodd-Frank framework used for other large financial institutions has brought early progress, rigor and consistency to resolution plan processes. - Outside the college framework (generally limited to IAIGs), U.S. supervisors have coordinated with both foreign and multiple U.S. state jurisdictions in managing troubled companies effectively, although the crisis did not extend to a failure of any company involved. - There is scope for using colleges (or smaller groups of college members as for CMGs) to undertake crisis preparedness, including: - more sharing of information on group structures, - intra-group transactions, - potential barriers to effective crisis management. - Supervisors should ensure all internationally-active groups have developed contingency plans and can deliver information required in a crisis in a timely fashion. - In relation to resolution and Dodd-Frank Act processes for management of a crisis where systemic risk is potentially at issue, work remains at an early stage and the capacity of authorities to manage a resolution of a cross-border insurance group will need further development. ### Recommendations on Crisis Preparedness and Resolution - Continue work on crisis preparedness, giving priority to building on the work of the CMGs (and current work at the FSB and the IAIS) to develop planning for a crisis and resolution of a major cross-border group. - Ensure supervisors use colleges or core sub-groups to enhance practical preparedness (information exchange on group structures, intra-group transactions, barriers to effective crisis management). - Require that internationally-active groups develop contingency plans and the capacity to provide timely information during a crisis. *IMF assessment: Appendix A, Holding Company and Supervisory College Best Practices.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1590.pdf_