Lawmakers get update on G-SII, Comframe, captives

As part of testimony from McRaith, Nelson and Woodall

NAIC CEO Ben Nelson (AP Photo/Harry Hamburg) NAIC CEO Ben Nelson (AP Photo/Harry Hamburg)

During the Thursday hearing, the Subcommittee of Housing and Insurance of the House Financial Services Committee heard testimony from NAIC CEO Ben Nelson, Federal Insurance Office Director Michael McRaith, and the insurance expert on the U.S Financial Stability Oversight Council (FSOC) Roy Woodall, on other industry concerns – namely ComFrame, captives and G-SII.

Nelson expressed that one of the NAIC’s biggest concerns with the IAIS project of ComFrame, a common framework for supervision of global insurers, is that it seems to be based on a bank-centric, Euro-centric approach. He also said earlier in the question and answer period that he believes ComFrame has become overly prescriptive in nature. 

Subcommittee Vice Chair Blaine Luetkemeyer, R-Mo., asked McRaith if international standards will be forced on the United States industry, where, he said, we have a model that is working, that was not a problem in 2008 and that is “not a problem today.” 

By design, the ComFrame will be outcome based, McRaith assured the subcommittee. The question then becomes, how do we achieve these outcomes, and this is where state regulators and Congress can push back, McRaith explained. 

Nelson, who has repeatedly urged FIO to stay in its lane, said he wants to see a cost analysis of ComFrame before field testing begins next year.

“I would like to know what something will cost before we test it,” Nelson said. 

McRaith said the costs and benefits of ComFrame will be examined during the testing phase, which will continue for several years.

The insurance standards overseers were also questioned by subcommittee Chairman Randy Neugebauer, R-Texas,  about the New York Department of Financial Services (DFS) report released last week on captive reinsurance as a shadow insurance industry that is falsely inflating life insurers risk-based capital and potentially thought to be imperiling the solvency of companies through a shell game with captive subsidiaries. 

“Do states have a handle on the captives?” Neugebauer asked.

New York’s action illustrates that this is an issue of importance, and the states are engaged, as regulators, and FIO is monitoring this, McRaith told the Subcommittee. He added that they are working in an appropriate and uniform way to bring some uniformity to this issue, and the industry is working to bring some closure on this issue.

Nelson said that the implementation of principles-based reserving (PBR) will be one of the important tools to match reserve requirements, and the commissioners of the NAIC are working hard to resolve the issue. He did not say whether the NAIC is considering a moratorium on captive insurance, as the New York DFS has recommended.

Woodall said he met with companies who do it, who are on both ends of spectrum in terms of their use of captive subsidiaries to hold reserves, and has met with New York Superintendent Ben Lawsky on this issue, and if FSOC needs to make some kind of recommendation it will, he says. But the states have a process underway, he explained to the subcommittee. 

The lawmakers also dove into the global systemically important insurers (G-SII) designations expected soon from the G-20s Financial Stability Board (FSB). They said they were worried that more IAIS standards would come attached with this crop of G-SIIs. 

FSB is expected to get a list of G-SIIs from the IAIS at the end of June. 

Rep. Dennis Ross, R-Fla., asked why Woodall was not part of helping set standards with global standard setting for significantly important insurers.

"I understand IAIS is setting these standards — why aren’t you on that?", Ross asked Woodall.

“I would like to be in the room, too, when Mike McRaith is there. The more boots on the ground the better ... there cannot be too many eyes and ears,” Woodall said.

Ross, trying to tease out why Woodall is not part of the IAIS although he would like to be, responded that the “lack of your presence there gives the impression that maybe we are not giving our best effort there.”

Woodall expressed in his written testimony that an amendment to the bylaws had advanced allowing FSOC to be a nonvoting member of the IAIS but didn't come to fruition last fall. 

The former CEO of the NAIC, Terri Vaughan, who was a member of the IAIS, has suggested that FIO perhaps did not want to advance the measure. 

The IAIS Executive Committee, now with more state commissioners, may revisit the amendment again this year. McRaith did not comment on the direction any such amendment might take.

Woodall also said that Federal Reserve Board Governor Daniel Tarullo, who is now chair of the committee on supervisory and regulatory cooperation of FSB, acting as a gatekeeper of sorts, on the final list of G-SIIs, will “make sure as much as possible that these efforts are coordinated.” He was speaking in reference to the FSOC’s process for designating systemically important financial institutions, the domestic analogue of G-SII. SIFIs are designated by FSOC.

So far, the Council has voted Prudential Insurance and AIG as proposed SIFI designees. They are both in the 30-day response period to the Council.

Insurance groups prodded lawmakers to continue to stay on top of the issue and insurance supervisory representatives to get along, in keeping with the Subcommittee theme.

“We urge that our state regulators and the FIO coordinate closely and cooperate continuously to promote efficient and effective supervision. We believe that both FIO and our state regulators must work together to assure that U.S. competitive interests are represented on par with those of our global competitors, FIO from within the U.S. government and our state regulators as participants in supervisory colleges,” stated Kimberly Olson Dorgan, senior executive vice president, public policy for the American Council of Life Insurers (ACLI.) 

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