Presentation on the Insurance Policy 

Advisory Committee (IPAC) Report on 

the Potential Impact of the ICS on the 

U.S. Life Insurance Industry, 

Policyholders and Markets

Link to the report

https://www.milliman.com/IPAC
Table of Contents

Introduction Slide 3

ICS Background Slide 4

IPAC Model & Scope Slide 5

Model Analysis Slides 6-10

Participating Business Slide 11

Conclusions & Recommendations Slides 12-14 

Appendix Slides 15-29

2
Introduction

 The Insurance Policy Advisory Committee (IPAC) was established in 

2018 by an act of Congress to provide information, advice, and 

recommendations to the Board of Governors of the Federal Reserve 

(Board) on international insurance capital standards and other 

insurance policy issues

 IPAC formed a working group in 2020 comprised of its members to 

provide advice to the Board based on a study of the International 

Association of Insurance Supervisors’(IAIS) Insurance Capital Standard 

(ICS) impact on the US

 The objective of this study was to assess the potential impact of the 

IAIS’ ICS on the US insurers, policyholders, and markets, with a focus 

on long-duration life insurance and retirement products

 The study incorporates the results and finding from a quantitative 

‘stylized’ insurer model 3
ICS Applicability as a Group Prescribed Capital Rule 

(PCR)

 ICS applies to internationally active insurance groups (IAIGs)

4

ICS Background
IPAC ICS Stylized Model & Scope 

 The IPAC ICS Stylized Model (‘Model’) leverages the work of the CRO Coalition and 

the IAIS’ reference ICS approach

 It provides a platform to perform a limited calculation based on the April 2020 

specifications for the reference ICS version 2.0 for the monitoring period (‘ICS’)

 Six large US life insurers (‘Data Volunteers’) contributed data that was aggregated 

for use in the Model

 Includes only specific long-duration life insurance and retirement products offered 

in the US

 Valuation of insurance liabilities and related investment assets under the Market 

Adjusted Valuation (MAV) approach

 Capital requirement calculation for Interest Rate Risk and Non-Default Spread risk 

charges only

 Not as full ICS ratio calculation. Produces an excess capital amount under each 

IPAC defined scenario

5

IPAC Model Analysis& Scope
Model Scenarios

➢ 12.31.2019: Baseline scenario under ICS and Single-A discount 

curves

➢ 3.31.2020: Selected as an example of spread widening and riskfree rates falling

➢ 6.30.2020: Selected as an example of a drop in credit spreads

➢ Interest Rate ‘Spike up’: Shock of risk-free rate using high point 

over last 5 years above the Baseline scenario

Economic 

Scenarios

➢ ICS Base Yield Curve

▪ Increase the spread over the long-term forward rate (LTFR) from 20 to 

100 bps

▪ In addition to the above, reduce grading period from last point of 

liquidity (LOT) to LTFR from 60 to 40 years

➢ ICS Three-Bucket Approach

▪ Modified Top and Middle bucket spread adjustment to reflect spread of 

certain ineligible assets

▪ Modified spread adjustment of Middle and General buckets by applying 

100% application ratio

▪ Moved all General bucket liabilities to Middle bucket

Alternative

‘What if’ 

Scenarios

6

IPAC Model Analysis
Model Results and Analysis

 ICS General and Middle 

bucket liability discount 

rates are meaningfully 

more conservative (lower) 

than the Single-A discount 

rates over most tenors 

 ICS capital resources are 

significantly lower than 

those calculated using a

Single-A discount rates*

 Notably for long duration 

liabilities, the impact is 

significantly punitive

7

* A Single-A corporate bond curve was selected as a benchmark to compare to results of the ICS. The IPAC chose a Single-A curve as

it aligns with US GAAP accounting (FASB Accounting Standards Update 2018-12), and serves as a broad proxy for the average credit

quality of assets held by US insurers to back long-duration insurance liabilities

IPAC Model Analysis
12.31.2019 Baseline: December 31, 2019 market conditions (Fixed liability cash flows only)

$ in Millions Top Middle General Total Top Middle General Total

Assets 64,933 50,480 110,308 225,721 64,933 50,480 110,308 225,721

Liabilities 55,325 35,634 103,552 194,511 56,642 34,928 100,278 191,849

Capital Resources 9,607 14,846 6,756 31,209 8,290 15,552 10,030 33,872

Interest Rate Risk 10,023 8,187

NDSR 695 1,931

Diversification (499) (1,249)

Excess Capital 20,990 25,003

ICS MAV Single-A

ICS MAV Discounting Produces Excessive Conservatism 

 ICS results are dependent on the mix of liabilities allocated to each bucket, with conservatism in 

the General and Middle buckets being offset by less conservatism in the Top bucket

 The bucket allocation criteria have an emphasis on explicit asset/liability cash flow matching that 

is not aligned with US long-term business ALM practices. The majority of US life business is 

allocated to General bucket

 The combination of the allocation of liabilities to the ICS three buckets not being aligned with the 

actual ALM practices of US insurers and the inherent offsetting level of conservatism between the 

buckets, increases the likelihood of the ICS producing inappropriate signals to regulators and 

markets as a result of the liability bucketing

 Conservatism in the ICS discount rate curves results in additional conservatism in the interest rate 

risk and non-default spread risk (NDSR) risk charges

Capital resources 

under ICS 33% lower 

than those under 

Single-A for General 

bucket liabilities

Excess Capital under 

ICS 16% lower than 

under Single-A

8

IPAC Model Analysis
(A) 12.31.2019 Baseline: December 31, 2019 market conditions (all liability cash flows)

$ in Millions Top Middle General Total

Assets 64,933 50,480 222,030 337,443

Liabilities 55,325 35,634 205,723 296,682

Capital Resources 9,607 14,846 16,307 40,760

(B) 3.31.2020 Scenario: March 31, 2020 market conditions (all liability cash flows)

$ in Millions Top Middle General Total

Assets 64,885 49,470 218,672 333,027

Liabilities 52,552 35,638 204,291 292,481

Capital Resources 12,333 13,831 14,381 40,545

Change: 3.31.2020 Scenario - 12.31.2019 Baseline (all liability cash flows)

$ in Millions Top Middle General Total

Assets (48) (1,010) (3,358) (4,416)

Liabilities (2,773) 5 (1,432) (4,201)

Capital Resources 2,726 (1,015) (1,926) (215)

ICS MAV

ICS MAV

ICS MAV

Economic Scenario Analysis

Conservative ‘representative’ 

spreads, application ratios 

(haircuts) and the average spread 

over risk-free calculation are all 

sources of non-economic volatility, 

the impacts of which appear to have 

largely cancelled out under the 

3.31.2020 scenario. 

This appears to be at odds with the 

highly stressed market environment 

in Q1 2020 and brings into question 

the ability of ICS to provide a 

meaningful solvency signal in 

respect of U.S. long-term business, 

in a stressed market environment.

9

Baseline 12.31.2019 3.31.2020

IPAC Model Analysis
(B) 3.31.2020 Scenario: March 31, 2020 market conditions

$ in Millions Top Middle General Total

Assets 64,885 49,470 218,672 333,027

Liabilities 52,552 35,638 204,291 292,481

Capital Resources 12,333 13,831 14,381 40,545

(C) 6.30.2020 Scenario: June 30, 2020 market conditions (all liability cash flows)

$ in Millions Top Middle General Total

Assets 69,208 52,655 234,760 356,623

Liabilities 59,190 39,335 223,309 321,834

Capital Resources 10,018 13,321 11,451 34,789

Change: 6.30.2020 Scenario - 3.31.2020 Scenario (all liability cash flows)

$ in Millions Top Middle General Total

Assets 4,323 3,186 16,088 23,596

Liabilities 6,638 3,697 19,018 29,352

Capital Resources (2,315) (511) (2,930) (5,756)

ICS MAV

ICS MAV

ICS MAV

Economic Scenario Analysis

In contrast to the results of the 

3.31.2020 scenario, the results 

for the 6.30.2020 scenario are 

much more severe relative to 

the significant improvement in 

market conditions in Q2 2020 

from Q1 2020.

This further reinforces the 

concerns around the ICS being 

able to provide a meaningful 

solvency signal in respect of 

U.S. long-term business, during 

periods when there are large 

movements in market inputs. 

10

3.31.2020 6.30.2020

IPAC Model Analysis
Par Business Observations

 The criteria used to allocate products to the ICS three buckets fails to 

recognize the lower risk profile of Par-life business in terms of its 

ability to pass through risk via management actions

 As a result, Par-life business is allocated to the General bucket 

instead of the Middle or Top buckets, which are more appropriate for 

products with lower asset/liability mismatch risk

 The use of the conservative General bucket discount rate artificially 

limits the amount of pass through of risk that can be assumed as a 

result of management actions in the determination ICS IRR charge. 

Consequently, the ICS IRR charge with respect to Par-life products may 

be overstated

 This increases the risk that ICS may produce an inappropriate solvency 

signal in a low interest rate environment

11

Participating Business
Report Conclusions

 With respect to the ICS, the IPAC understands the objectives of the IAIS 

to establish a common language for supervisors to discuss solvency of 

Internationally Active Insurance Groups (IAIGs) and to enhance global 

convergence among the group capital standards that are in place 

 The ICS, in its present form, does not appropriately reflect the product 

and risk-mitigation features of long-duration life and retirement products 

sold in the US and, perhaps just as important, it does not reflect how 

investment choices available in US capital markets support such longduration products

 As currently constructed, the ICS would not be appropriate as a PCR for 

US internationally active insurance groups

12

Conclusions & Recommendations
Report Conclusions

 Three broad observations: 

 The ICS fails to reflect several relevant asset classes and is overly reactive to 

credit spread movements. This could introduce excessive conservatism and 

significant volatility into required capital and excess capital indicators, 

potentially leading to false solvency signals for regulators and markets

 The treatment of Par-life in the ICS discounting methodology is misaligned 

with the actual risk-mitigating profile of that business causing overstatement 

of risk charges in low interest rate environments

 The ICS does not recognize dynamic hedging programs or the use of long-term 

alternative assets in liability management. This introduces regulatory conflict 

between the ICS and the US statutory rules to which many businesses conform 

potentially impairing prudent management of these businesses and even 

introducing inappropriate risk and supervisory signals

13

Conclusions & Recommendations
IPAC Recommendations

 To be “appropriately designed” for the business practices, products, 

markets and supervisory regime in the US, at a minimum, the 

proposed revisions described in the IPAC report, and summarized in

the Appendix of this deck, need to be satisfactorily addressed and 

incorporated 

 Further, the IPAC also proposes that these changes be considered in 

the determination of comparability with the ICS in the forthcoming 

Aggregation Method comparability assessment

14

Conclusions & Recommendations
Appendix
ICS Market Adjusted Valuation (MAV)

 Total Balance Sheet Approach with 

assets and liabilities valued on a 

consistent basis

 Fair value for invested assets

 Insurance liabilities:

 Current estimate: probability 

weighted average of present values 

of future cash-flows using a 

prescribed MAV discount curve

 MOCE: Margin over the current 

estimate to cover uncertainty 

inherent in cash flows

 Other assets/liabilities: only revalue 

the most material items, otherwise use 

applicable IFRS or GAAP reported 

values

16

ICS Background
Reference ICS

The paper considers the impact specifically of the ICS 2.0 for the Monitoring Period 

Reference Method or Reference ICS as described below:

 Valuation: Market Adjusted Valuation (MAV) approach

 Qualifying Capital Resources: Based on the criteria provided in the ICS Technical 

Specifications

 Capital Requirement: Based on the ‘Standard Method’ as defined in the ICS 

Technical Specifications

The April 2020 ICS Technical Specifications (public) were referenced in the design of 

the IPAC stylized insurer model and in the evaluation of the ICS design. 

An IPAC review of subsequent ICS Technical Specifications noted only minor changes 

which were not deemed to have a material impact on the model design or report 

conclusions.

ICS Background
ICS MAV Discounting – Base Yield Curve

LOT LTFR

Grading Period

18

ICS Background
ICS MAV Discounting – Three Bucket Approach

 Top Bucket 

 Fully matched cashflows, highly illiquid 

 100% insurer’s own portfolio spread

 Middle Bucket 

 Partially matched cashflows, generally illiquid

 Weighted Average of Multiple Portfolios (WAMP) spread * 90% application 

ratio

 General Bucket

 Default bucket

 General portfolio spread * 80% application ratio

Insurance liabilities are assigned to buckets based on criteria that assess 

the extent of cash flow matching and illiquidity of the liability 

The more illiquid and cash flow matched, the higher the spread allowed. 

An average spread adjustment is added to the base yield curve

19

ICS Background
IPAC ICS Stylized Model Diagram

 Liability balances were derived from applying ICS discount curves to Dec 31st 

2019 liability cash flows determined under 2019 baseline and alternative 

economic scenarios (per April 2020 ICS Technical Specifications design)

Liability Cashflows

➢ Baseline 2019

➢ Alt Economic Scenarios

➢ Single-A

ICS Yield Curve Generator

Discount Curves

➢ Baseline

➢ Alt Economic Scenarios

Volunteer Data

Asset Mkt Values

➢ Baseline 2019

➢ Alt Economic Scenarios

IPAC Model

Asset/Liability

Capital Resources

Interest Rate Risk Charge and

Non-default Spread Risk Charge

Capital Requirements

Top bucket portfolio yields

Middle bucket TOM ratio

General bucket prescribed spreads

IPAC Model Output

20

IPAC Model Analysis
Risk Charges and Non-Economic Volatility

 The interest rate risk (IRR) charge exhibits non-economic volatility that is highly sensitive to 

short-term changes in the economic environment

 IRR is measured assuming an artificially low starting interest rate environment that consequently 

overstates the impact of minimum interest rate guarantees and negative interest rates

 The non-default spread risk (NDSR) charge is a source of non-economic volatility as the artificial 

disconnect between the measurement of assets and liabilities due to the ICS liability discount 

rate methodology is exacerbated when quantified under a shocked spread scenario and when 

impacted by market environments where there are large temporary changes in spreads

21

All liability cash flows

$ in Millions IRR NDSR Diversification Total

 ICS MAV 14,762 582 (426) 14,918

 Single-A 11,796 1,980 (1,336) 12,440

 Difference 2,966 (1,398) 910 2,479

$ in Millions IRR NDSR Diversification Total

3.31.2020 Scenario 12,358 3,404 (2,148) 13,614

6.30.2020 Scenario 19,728 5,222 (3,317) 21,633

$ in Millions IRR NDSR Diversification Total

3.31.2020 - 12.31.2019 (2,405) 2,822 (910) (493)

6.30.2020 - 3.31.2020 7,371 1,818 (1,169) 8,019

12.31.2019 Baseline 

ICS MAV

Change in ICS

IPAC Model Analysis
IPAC Proposed Revisions to ICS Discounting Design

 Align Three-Bucket criteria to modern ALM practices for long duration 

products

 Top bucket requirements should be broadened to evaluate ALM strategies beyond 

strict cash-flow matching

 Remove limitations on future premium for Top and Middle Buckets for products 

with substantial premium risk mitigation

 Remove overly conservative requirement based on risk-free rates (Middle bucket)

 Refine liability discounting construction to better align asset & liability 

valuation

 Application ratios should be removed

 Spreads should use insurer’s own asset portfolio or a more representative portfolio

 Spreads should not be diluted by holdings of ineligible assets

 Replace flat spreads by tenor with tenor-specific design recognizing granular 

asset type within a given rating (e.g. public v. private, structured credit, etc.)

 LTFR spread should reflect stable, long-term expectation by currency, likely 

far higher than 20bp for USD portfolios

22

IPAC Proposed Revisions
Impact of Discounting Design Changes

 The Model estimates that the increase in capital resources from the 

proposed changes would amount to 17%

8.1%

1.6% 2.7%

4.7%

Fixed cashflow liabilities only

23

IPAC Proposed Revisions
ICS Capital Requirement Issues

 Any flaws in the Three-Bucket mechanism distort risk charges based on shocks 

to asset and liability values and should be remedied

 Interest Rate Risk

 The variation in LTFR in up and down shocks adds inappropriate conservatism 

because there are few asset cash flows beyond the LOT to measure

 Down-rate shocks dominate the charge, made more conservative by flat spread 

adjustments, LTFR adjustments [and fixed shocks even in low-rate environments]

 Non-Default Spread Risk

 NDSR measures the change in asset and liability values under spread shocks, so by 

definition measures the flaws in the ICS liability discounting approach

 Application ratios directly increase NDSR

 Flat spread adjustments result in mismeasurement

24

IPAC Proposed Revisions
Insurance Group and Market Impacts

 Product Strategy

o A high percentage of US long-duration life and retirement products falls within the 

General bucket which translates into lower levels of capital resources, higher 

capital requirements, and ultimately a lower ICS Ratio 

o The IPAC Model shows that ICS capital resources (excluding Par-life) are about one 

third lower as compared to the valuation under the Single-A benchmark.

o The conservatism of the General bucket also creates additional non-economic 

misalignment for Par-life products

 Asset Liability Management (ALM)

o The current ICS design does not recognize the full benefit of ALM hedging programs 

in the calculation of the ICS ratio

o As interest rates started trending down from Q4 2019 through Q1 2020, the IPAC 

Model shows capital resources did not move much under the 3.31.2020 scenario, 

primarily because at Q1 2020 spreads also widened

o An appropriately structured market-based capital measure should provide risk 

signals and prompt more timely need for risk mitigation, while also recognizing the 

benefit of risk mitigation actions such as dynamic hedging

25

ICS Impacts
Insurance Group and Market Impacts

 Strategic Asset Allocation 

o ICS liability discounting fails to recognize the differential yield that a 

number of asset classes, including illiquid assets that provide important 

illiquidity premium, have historically generated while supporting long 

duration products

o The ICS framework, including spread haircuts and shocks, thus further 

distorts the ALM benefits of assets classes termed broadly as ‘Alternatives’ 

as well as long-term equity investments in infrastructure

 Capital Markets and Cost of Capital 

o Capitalization influences insurers’ ratings which, in turn, directly impacts 

the costs they will incur in raising and maintaining capital (e.g., debt 

service costs)

o In considering the results from the IPAC model generally, the financial 

strength of an insurer would be perceived very differently if looking at the 

overly conservative results of the reference ICS versus the Single-A 

benchmark

26

ICS Impacts
Insurance Group and Market Impacts

 Competitive Landscape

o ICS applies to IAIGs only, which would create an unlevel playing field 

o US IAIGs would face unfair competitive challenges from non-IAIGs that 

operate in the same market

 Impact on Long Duration Products 

o IAIGs would likely be economically pressured to reduce or stop selling such 

products, pass additional capital-associated costs on to consumers, or 

change the product design to make it make more capital efficient 

o Some jurisdictions have signaled that they are moving towards ICS-like 

capital regimes for all insurers of a certain size and complexity; If the US 

were to follow a similar approach, the ICS design issues identified in this 

report would impact all US insurers and translate into higher cost and/or 

reduced product availability market-wide, thus adversely impacting 

consumers 

27

ICS Impacts
Regulatory Perspective

 The ICS as a US PCR

o Not appropriately tailored to US business practices, products and 

markets 

o Results are overly conservative

o Results may also reflect exaggerated risk charges and risk charge 

movements period-over-period, due to conservatism and 

discounting mismatch

o NDSR charge is also prominent source of inappropriate volatility 

 Given the high probability for false signals and significant 

ramifications of such false signals, the ICS, as currently designed, 

would not be appropriate as a PCR for US IAIGs

28

ICS Impacts
Regulatory Perspective

 The ICS utility as a monitoring tool

o A redesigned ICS has the potential to provide regulators with a 

globally comparable measure of group solvency that is consistently 

market-based and reflective of an expanded set of risk factors 

relative to the existing US state-based capital regime

o Use of the ICS as a monitoring tool could introduce conflicting 

signals with the US supervisory system and heighten the risk of 

errant supervisory decisions

 Adjustments to existing local regulations could more 

efficiently deliver similar insights than implementation of 

a whole new framework such as the ICS 

29

ICS Impacts