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To: Federal Advisory Committee on Insurance (FACI)

From: FACI Subcommittee on FIO’s international work

Re: Recommendations re. FIO’s international work

Date: Monday, September 23rd, 2019

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The Subcommittee on FIO’s international work consists of FACI members from AIG, Aon, Athene, AXA 

XL, Liberty Mutual, the Oregon Division of Financial Regulation, and Prudential. Below are the 

Subcommittee’s recommendations for FIO’s international work.

Recommendations to FIO re. Insurance Capital Standard (ICS):

Summary of ICS recommendations

Our ICS-related recommendations to FIO focus on:

 The importance of continued strong collaboration across the members of Team USA in its 

negotiations at the IAIS.

 Establishing a viable pathway to international acceptance of Aggregation. This effort should be the 

key priority for Team USA and should encompass: outreach and education on the NAIC’s 

development of its Aggregation construct, well-specified IAIS public communications about the way 

forward, detailed work-plans and timelines, and realistic and achievable criteria for assessing 

Comparability.

 Developing a coherent design and candid framing of the so-called "Monitoring Period" – which, in 

addition to concrete work-plans on Comparability, should also specify mechanisms for further work, 

messaging on the inappropriateness of use of ICS results by third parties (such as rating agencies), 

and impact testing of the potential negative externalities of the ICS on product availability and procyclicality.

ICS engagement strategy

 The upcoming IAIS Annual Meeting in November is a critical juncture in the ICS process. To ensure a 

successful outcome, we urge continued strong collaboration between FIO and its NAIC and Federal 

Reserve negotiating partners within “Team USA” – with the ultimate goal of securing an agreement 

at the IAIS that lays a credible pathway for international acceptance of the US “Aggregation” 

approach to insurance group regulatory capital.

 We also see FIO playing a vital role in helping to supportthe NAIC’s education, outreach, and 

advocacy with IAIS members on the “Aggregation” approach – by helping to explain the process, 

substance, and value proposition of the Aggregation approach being designed by the NAIC:
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o This outreach should be pro-active, opportunistic, and could take several forms – for 

example, as part of formal IAIS meetings, informal bilateral discussions with IAIS Executive 

Committee peers (and their staff), public speaking opportunities, or written Treasury reports 

or statements.

o Importantly, as part of its outreach, FIO should highlight the Federal Reserve’s recently 

published proposal as an example of an implementable “Aggregation” construct.

o However, by the same token, FIO should also emphasize that the NAIC, unlike the Federal 

Reserve, currently has standard-setting authority for internationally-active US insurers – and 

that, in turn, it is the NAIC’s “Aggregation” approach which should be the operative basis 

of Comparability discussions at the IAIS.

 We also believe that, contingent on the outcome of the IAIS meeting, FIO and its “Team USA” 

partners should consider issuing a joint public statement to both re-assert and clarify the US 

position on:

o The pathway forward for Aggregation, including a status update on development and 

tangible elements of future work on ICS comparability (e.g., principles, criteria, workplans, 

involved parties, and timelines).

o The structure and design of ICS 2.0 (including a candid assessment of likely remaining 

technical issues).

o The intended approach to the 5-year Monitoring Period, including an explanation of why the 

ICS is not, at this stage, appropriate for any meaningful analytical usage (whether by 

supervisors or by third party analysts, such as credit rating agencies).

Comparability assessment of US “Aggregation”: advocacy objectives and process

 We urge FIO, along with its “Team USA” partners at the IAIS Executive Committee, to prioritize, as 

its key focal point within ICS negotiations: advocacy for the US Aggregation approach being 

developed by NAIC. 

 The critical objective is to design and implement a viable pathway for international acceptance of 

the NAIC’s Aggregation approach, which we expect will result in a determination that Aggregation 

achieves comparable supervisory outcomes as ICS 2.0. 

 As elements of this advocacy, we propose that FIO, along with “Team USA”, should highlight:

o The significant work achieved by the NAIC’s Group Capital Calculation Working Group since 

its inception in February 2016, which has conducted multiple consultations, open hearings, 

and quantitative field testing.
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o The value proposition of an Aggregation style approach in:

 reflecting the primacy of entity-level jurisdictional requirements in how the industry 

manages capital; and 

 providing greater insight into the legitimate similarities and differences across 

various local regimes...which is an issue that has long vexed supervisors and 

analysts, and therefore merits further study and attention via the Aggregation work.

o The importance of jurisdictional flexibility as a key tenet of prudential oversight and tailoring 

of insurance regulations to local markets and circumstances.

o The unproven and untested nature of the ICS 2.0, including design issues, concerns about 

the validity of “best efforts” valuations, and the potential for pro-cyclicality across changing 

market environments.

 We also recommend that FIO and “Team USA” should urge the IAIS to issue a clear and wellspecified communication (at or before its November meeting) that lays out, in tangible and 

granular detail, the work-plan and approaches underlying Comparability assessments

o A clear and tangible communication will be vital in signaling to the broader stakeholder 

community that there is a well-defined and realistic IAIS commitment to addressing 

Comparability.

o Such a communication should provide more detail about how the IAIS plans to approach the 

next formative 12-18 monthsin the process, including timelines, objectives, and 

accountable IAIS working groups.

o As a matter of transparency, this communication should provide considerably more detail 

than either the so-called Kuala Lumpur Agreement or the recent IAIS statement at its Global 

Seminar in Buenos Aires.

Comparability assessment of US “Aggregation”: standards and substance

 As part of the Kuala Lumpur Agreement, the IAIS stated that it "aims to be in a position by the end of 

the monitoring period to assess whether the aggregation method provides comparable, i.e. 

substantially the same (in the sense of the ultimate goal), outcomes to the ICS. If so, it will be 

considered an outcome-equivalent approach for implementation of ICS as a prescribed capital 

requirement (PCR)." 

 Somewhat conversely, the IAIS has provided that the "ultimate goal . . . is a single ICS that includes a 

common methodology by which one ICS achieves comparable, i.e. substantially the same, outcomes 

across jurisdictions." 
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 Of course, the aggregationmethod's methodology differs significantly from that of the ICS. And the 

very concept of a comparability determination regarding an alternate capital assessment regime 

presumes that a "single ICS" is not an end in itself. As a result, we recommend that the following 

framework be utilized for determining the comparability of any jurisdiction's group capital 

assessment regime applicable to internationally active insurance groups (or IAIGs) and incorporated 

into the IAIS communication referred to above:

o The primary criterion for assessing the comparability of a group capital assessment regime 

should be whether it provides a comparable level of policyholder protection and 

contributes to global financial stability. Consequently, a comparability determination 

should not be based on whether the regime achieves equivalent quantitative outcomes to 

the ICS. Rather, the proper focus of a comparability determination should be whether the 

group capital assessment regime, in conjunction with other available supervisory measures, 

ensures substantially the same supervisory outcomes as part of coordinated solvency 

oversight.

o A comparable group capital assessment regime should include a worldwide group capital 

calculation capturing risk at the level of the entire group, including the worldwide parent 

undertaking of the insurance or reinsurance group, which may affect the group's insurance 

or reinsurance operations and activities.

o A comparable group capital assessment regime should recognize and value all material 

liabilities and capital resources in a consistent, objective and reliable manner.

o The group wide supervisor should have the authority to impose preventive, corrective, or 

otherwise responsive measureson the basis of the group capital assessment, including 

requiring, where authorized, capital measures, as a result of the group capital assessment.

o A comparable group capital assessment must not undermine existing jurisdictional capital 

requirements.

ICS Monitoring Period

 We recommend that FIO push for a candid framing and coherent design of the so-called “Monitoring 

Period” – ideally, with a formal IAIS statement issued at the IAIS Annual Meeting that comprises the 

following messages:

o The IAIS plans to execute on a credible, well-specified process for assessing Comparability of 

“Aggregation” and other alternative approaches.

o Implementation of ICS 2.0 for IAIGsremains the authority of the respective group-wide 

supervisors, and as such, the form and timing of final ICS 2.0 implementation are unknown 

at the beginning of the monitoring period. Local regulatorswill make the final decision on 

the form and timing of ICS implementation in their jurisdiction.
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o ICS 2.0 is a work in progress and may be subject to substantial changes before final 

implementation. The 5-year period starting in 2020 is not, therefore,simply a “phase in” of 

ICS 2.0 for adoption as a prescribed capital standard in 2025, but rather an opportunity to 

assess the validity of the standard and address issues with the standard before 

implementation. Of note, the appropriate recognition of long-term guarantee business in 

ICS 2.0 remains a key area of ongoing development.

o Both the form and timing of the final ICS 2.0 implementation are subject to the results of a 

public consultation process and market impact studies to be conducted during the 

monitoring period and focused on impacts on financial stability, the macro-economy and 

consumers.

o In the context of these uncertainties and concerns, any ICS 2.0 results reported by 

companies during the Monitoring Period will not be indicative of capital positions and could 

well misrepresent a company’s financial strength.

Recommendations to FIO re. Holistic framework for Systemic Risk Assessment:

We applaud FIO’s efforts in helping to spearhead the development of the IAIS “holistic” framework for 

systemic risk, which creates a pathway for an activities-based approach to serve as the primary basis of 

identifying, monitoring, and addressing potential systemic risk within insurance. In light of the positive 

overall direction of this effort, we recommend a continued focus on the following five substantive 

themes:

 First -- Promoting a true cross-sectoral activities-based approach, which places insurance within the 

proper context of financial services more broadly. We believe this cross-sectoral view will:

o Serve as a more effective mechanism for identifying and addressing potential systemic 

vulnerabilities.

o Dis-incentivize insurers from pursuing banking-like activities that were at the heart of the 

problems faced by several insurers during the financial crisis.

o Demonstrate the very limited potential for core, well-managed insurance activities to pose 

systemic issues.

 Second -- Ensuring that macro-prudential surveillance does not become a monolithic, overengineered data mining exercise:

o We want to caution against an over-reliance on a purely data-driven approach to 

surveillance, which could distract from meaningful qualitative analysis and dialogue around 

emerging risks.
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 Third – Ensuring that the IAIS approachdoes not overtly single out or discriminate against US 

insurance products, particularly well-established products such as annuities that play an important 

role in US retirement planning.

 Fourth –Deferring to local supervisors as the primary and accountable authorities for systemic risk 

oversight:

o Jurisdictional supervisors (i) are closer to developments and risk factors in local financial 

markets, and (ii) can more readily collaborate with their financial services supervisory peers 

to ensure a cross-sectoral approach.

o The IAIS should, in turn, assist with high-level coordination across the respective local 

supervisors and serve as a convening body for cross-jurisdictional dialogue on emerging 

risks.

 Finally – the ABA should be implemented based on a principle of proportionality, based on an 

insurer’s exposure to potential systemically-risky activities:

o Proportionality should focus on activities that should be in scope, not on a defined list of 

covered companies.

o The in-scope activities should have a demonstrable linkage to financial risk factors, and 

should not cover uncorrelated risks such as cyber and catastrophe – risks which, while 

meaningful to insurance ERM, are not pertinent to illiquidity-driven market disruptions and 

macro-prudential financial surveillance.

o Implementation, in turn, should not require the build-out of cumbersome, enterprise-wide 

approaches, but rathertarget the particular activities of potential concern – and the 

corresponding risk mitigants.

Recommendations to FIO re. Market Access:

 Regarding market access issues, we recommend that FACI identify and study situations in which 

jurisdiction-specific solvency measures are exported through “upstream” application, FDI 

limitations, post-mandatory tender offer sell-down requirements, LOB restrictions and affiliate or 

third country reinsurance cession restrictions, among other market access issues. 

 We also note that other, not-specifically-insurance-related measures either are intended to or have 

the impact of restricting market access or otherwise treating foreign companies differently. Among 

these are unreasonable data transfer restrictions and data center location requirements. 

 We propose that this study should then inform the specific jurisdictions that FIO, in coordination 

with Treasury International and the USTR, should prioritize in its engagement on market access 

issues.