Annual Report on the Insurance Industry

FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY 

Completed pursuant to Title V of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act

SEPTEMBER 2018
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Table of Contents

I. INTRODUCTION.......................................................................................... 1

A. Structure of Report ............................................................................................................... 1

B. Federal Insurance Office ...................................................................................................... 1

1. Insurance Regulation and the Federal Insurance Office .................................................. 1

2. FIO’s Five Pillars ............................................................................................................. 3

3. FIO Activities ................................................................................................................... 4

C. Treasury’s EO Report .......................................................................................................... 7

1. Systemic Risk and Solvency ............................................................................................ 8

2. Efficient Regulation and Government Processes ............................................................. 9

3. International Engagement .............................................................................................. 11

4. Economic Growth and Informed Choices ...................................................................... 12

II. SYSTEMIC RISK AND SOLVENCY .......................................................14

A. Domestic Developments .................................................................................................... 14

1. NAIC Group Capital Calculations ................................................................................. 14

2. NAIC Macro Prudential Initiative .................................................................................. 16

3. Financial Stability Oversight Council Designations ...................................................... 17

B. International Developments ............................................................................................... 18

1. Activities-Based Approach ............................................................................................ 18

2. Development of an International Insurance Capital Standard for Insurance Groups .... 20

3. IAIS Liquidity Management and Liquidity Stress Testing ............................................ 22

III. EFFICIENT REGULATION AND GOVERNMENT PROCESSES.....24

A. Role of State and Federal Regulation ................................................................................ 24

1. FIO Engagement with Federal Agencies and the States ................................................ 24

2. Federal Agency Developments ...................................................................................... 24

B. Terrorism Risk Insurance Program .................................................................................... 25

1. Data Collection and the 2018 Data Call ......................................................................... 26

2. Terrorism Risk Insurance Program Effectiveness Report .............................................. 26

3. Advisory Committee on Risk-Sharing Mechanisms ...................................................... 27

C. Cyber Insurance and Insurance Industry Cybersecurity .................................................... 28

1. The Cyber Insurance Market .......................................................................................... 28

2. Insurance Industry Cybersecurity................................................................................... 30

D. Mitigation and Coordination with Other State and Federal Agencies ............................... 32
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IV. INTERNATIONAL ENGAGEMENT .......................................................36

A. IAIS .................................................................................................................................... 36

1. Structural Changes at the IAIS ....................................................................................... 36

2. FIO’s Role Within the IAIS ........................................................................................... 38

3. Insurance Core Principles/ComFrame ........................................................................... 39

B. U.S.-EU Covered Agreement ............................................................................................ 41

1. Background; Benefits; and Transparency ...................................................................... 41

2. Implementation by Federal and State Authorities .......................................................... 44

3. Transparency and the Joint Committee .......................................................................... 51

4. The Path Forward ........................................................................................................... 52

C. EU-U.S. Insurance Project ................................................................................................. 55

D. Financial Stability Board ................................................................................................... 56

V. ECONOMIC GROWTH AND INFORMED CHOICES.........................57

A. Standards of Conduct ......................................................................................................... 57

B. Retirement Income ............................................................................................................. 58

C. Long-Term Care Insurance ................................................................................................ 59

D. InsurTech ........................................................................................................................... 61

1. The InsurTech Market and Recent InsurTech Developments ........................................ 61

2. Regulatory Responses to InsurTech ............................................................................... 63

VI. INSURANCE INDUSTRY FINANCIAL OVERVIEW...........................65

A. Domestic Insurance Marketplace Overview ...................................................................... 65

1. Financial Performance and Condition ............................................................................ 66

2. Life and Health Sector.................................................................................................... 70

3. Property and Casualty Sector ......................................................................................... 84

4. Market Performance ....................................................................................................... 95

B. Capital Markets Activity .................................................................................................... 96

1. Mergers & Acquisitions of U.S. Insurers ....................................................................... 97

2. Alternative Risk Transfer Insurance Products ............................................................... 97

C. International Insurance Marketplace Overview ............................................................... 102

D. Domestic Insurance Market Outlook ............................................................................... 104
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Glossary

ABA ..........

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Activities-Based Approach

ACRSM Advisory Committee on Risk-Sharing Mechanisms

A&H Accident and Health

ART Alternative Risk Transfer

B3i Blockchain Insurance Initiative

BEAT Base Erosion and Anti-Abuse Tax

BLS Bureau of Labor Statistics, U.S. Department of Labor

CFPB Consumer Financial Protection Bureau

Code Internal Revenue Code

ComFrame IAIS Common Framework for the Supervision of IAIGs

Core Principles Core Principles for Financial Regulation set forth in 

Executive Order 13772 (February 3, 2017)

Council ..........

..........

..........

..........

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Financial Stability Oversight Council

CRI Collateralized Reinsurance

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection 

Act of 2010 

DOL U.S. Department of Labor

EIOPA European Insurance and Occupational Pensions Authority

DTA ..........

..........

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..........

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Deferred Tax Assets

DTL Deferred Tax Liabilities

EO Report U.S. Department of the Treasury, A Financial System That 

Creates Economic Opportunities: Asset Management and 

Insurance

ERISA Employee Retirement Income Security Act of 1974

EU European Union

FACI Federal Advisory Committee on Insurance

Fannie Mae Federal National Mortgage Association

FATF ..........

..........

..........

..........

..........

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Financial Action Task Force

FCA United Kingdom’s Financial Conduct Authority

FCTF IAIS Financial Crime Task Force

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve System

FEMA Federal Emergency Management Agency
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Fintech EO Report .......... U.S. Department of the Treasury, A Financial System that 

Creates Economic Opportunities: Nonbank Financials, 

Fintech, and Innovation

FIO .......... Federal Insurance Office

Freddie Mac .......... Federal Home Loan Mortgage Corporation

FSB .......... Financial Stability Board

FS-ISAC

FSSCC .......

..........

... Financial Services Sector Coordinating Council for Critical 

Infrastructure Protection and Homeland Security

FSTF .......... NAIC Financial Stability Task Force

Financial Services-Information Sharing and Analysis Center

G-20 .......... Group of Twenty

GAAP .......... Generally Accepted Accounting Principles

GAAP Plus .......... Generally Accepted Accounting Principles with adjustments

GCC .......... Group Capital Calculation

GCCWG .......... NAIC Group Capital Calculation Working Group

GDPR .......... EU General Data Protection Regulation

Ginnie Mae .......... Government National Mortgage Association

G-SII .......... Global Systemically Important Insurer

HHS ..........

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U.S. Department of Health and Human Services

HUD U.S. Department of Housing and Urban Development

IAIG Internationally Active Insurance Group

IAIS International Association of Insurance Supervisors

iCBCM FSB Cross-Border Crisis Management Group for Insurers

ICP IAIS Insurance Core Principle

ICS IAIS Insurance Capital Standard

ILS Insurance-Linked Securities

ILW Industry Loss Warranty

IoT Internet of Things

IPPC OECD Insurance and Private Pensions Committee

IRS .......... Internal Revenue Service

ISLHC .......... Insurance Savings and Loan Holding Company

L&H .......... Life and Health 

LTCI .......... Long-Term Care Insurance

M&A ..........

..........

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Mergers and Acquisitions

MAV Market-Adjusted Valuation

MBS Mortgage-Backed Securities
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MitFLG ..........

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Mitigation Framework Leadership Group

NAIC National Association of Insurance Commissioners

NCA National Competent Authorities

NFIP National Flood Insurance Program

NOAA National Oceanic and Atmospheric Administration

NOL Net Operating Losses

NYDFS New York Department of Financial Services

OECD Organisation for Economic Co-operation and Development

P&C Property and Casualty

RBC ..........

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Risk-Based Capital

Report FIO, 2018 Annual Report on the Insurance Industry

S&P 500 Standard and Poor’s 500 Index

S&P Global S&P Global Market Intelligence

SEC U.S. Securities and Exchange Commission

Secretary Secretary of the Treasury

Treasury U.S. Department of the Treasury

TRIA Terrorism Risk Insurance Act of 2002, as amended

TRIP ..........

..........

..........

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Terrorism Risk Insurance Program

TRIP Reauthorization 

Act

Terrorism Risk Insurance Program Reauthorization Act of 

2015

U.S.-EU Covered 

Agreement 

Bilateral Agreement between the United States of America 

and the European Union on Prudential Measures Regarding 

Insurance and Reinsurance

USTR Office of the United States Trade Representative
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I. INTRODUCTION 

This Report is submitted by the Federal Insurance Office (FIO) of the U.S. Department of the 

Treasury (Treasury) pursuant to Section 502(a) of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (Dodd-Frank Act), which requires the annual submission of a 

report to the President, the Committee on Financial Services of the House of Representatives, 

and the Committee on Banking, Housing, and Urban Affairs of the Senate “on the insurance 

industry and any other information as deemed relevant by the Director [of the Federal Insurance 

Office] or requested by such Committees.”1

A. Structure of Report

This Report begins with an overview of FIO’s statutory responsibilities and its role, as described 

in the October 2017 Treasury report, A Financial System That Creates Economic Opportunities: 

Asset Management and Insurance (the EO Report).2 The Report then summarizes FIO’s key 

activities since those described in its 2017 Annual Report on the Insurance Industry.

3

 Next, the 

Report provides a summary of the EO Report. Sections II through V are organized around the 

four key themes from the EO Report: (1) Systemic Risk and Solvency; (2) Efficient Regulation 

and Government Processes; (3) International Engagement; and (4) Economic Growth and 

Informed Choices. This Report concludes with a discussion and analysis of the insurance 

industry’s financial performance in calendar year 2017, its financial condition as of December 

31, 2017, and the domestic insurance market outlook for 2018. 

B. Federal Insurance Office

1. Insurance Regulation and the Federal Insurance Office

In the United States, the primary regulators of the business of insurance are the fifty states, the 

District of Columbia, and the five U.S. territories.4 As Treasury explained in the EO Report, the 

federal government also plays an important role in the insurance sector.

5

 

1 Federal Insurance Office Act of 2010, 31 U.S.C. § 313(n)(2). 

2 U.S. Department of Treasury, A Financial System That Creates Economic Opportunities: Asset Management and 

Insurance (2017), https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-ThatCreates-Economic-Opportunities-Asset_Management-Insurance.pdf. 

3 FIO, Annual Report on the Insurance Industry (2017), https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/2017_FIO_Annual_Report.pdf. 

4 State regulation of the insurance industry is coordinated through the National Association of Insurance 

Commissioners (NAIC), a voluntary organization whose membership consists of the chief insurance regulatory 

officials of the 50 states, the District of Columbia, and the five U.S. territories.

5 See Treasury, EO Report, 82-90.
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Title V of the Dodd-Frank Act established FIO within Treasury.6

 In addition to advising the 

Secretary on major domestic and prudential international insurance policy issues and having its 

Director serve as a non-voting member of the Financial Stability Oversight Council (Council), 

FIO is authorized to: 

• monitor all aspects of the insurance industry, including identifying issues or gaps in the 

regulation of insurers that could contribute to a systemic crisis in the insurance industry 

or the U.S. financial system; 

• monitor the extent to which traditionally-underserved communities and consumers, 

minorities, and low- and moderate-income persons have access to affordable insurance 

products regarding all lines of insurance, except health insurance; 

• recommend to the Council that it designate an insurer, including the affiliates of such 

insurer, as an entity subject to regulation as a nonbank financial company supervised by 

the Board of Governors of the Federal Reserve System (Federal Reserve);

• assist the Secretary in the administration of the Terrorism Risk Insurance Program 

(TRIP), as established in Treasury under the Terrorism Risk Insurance Act of 2002, as 

amended (TRIA);

• coordinate federal efforts and develop federal policy on prudential aspects of 

international insurance matters, including representing the United States, as appropriate, 

in the International Association of Insurance Supervisors (IAIS) and assisting the 

Secretary in negotiating covered agreements;

• determine whether state insurance measures are preempted by covered agreements;

• consult with the states (including state insurance regulators) regarding insurance matters 

of national importance and prudential insurance matters of international importance; and 

• perform such other related duties and authorities as may be assigned to FIO by the 

Secretary.7

In addition, before the Secretary may make a determination as to whether to seek the 

appointment of the Federal Deposit Insurance Corporation (FDIC) as receiver of an insurer under 

Title II of the Dodd-Frank Act, the Secretary must first receive a written recommendation from 

the FIO Director and the Federal Reserve.8

 Additionally, FIO and the Federal Reserve 

coordinate on the performance of annual analyses of nonbank financial companies supervised by 

the Federal Reserve, particularly with respect to stress testing, to evaluate whether such 

 

6 Federal Insurance Office Act of 2010, § 313(a). Title V also designates the Secretary of the Treasury (Secretary) 

as advisor to the President on “major domestic and international prudential policy issues in connection with all lines 

of insurance except health insurance.” § 321(a)(9).

7 § 313(c)(1).

8 Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. § 5383(a)(1)(C).
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companies have the capital, on a consolidated basis, necessary to absorb losses as a result of 

adverse economic conditions.9

The Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law on 

May 24, 2018, directs the Secretary of the Treasury and the Federal Reserve’s Chair (or their 

designees) to submit an annual report to Congress on their efforts with respect to global 

insurance regulatory or supervisory forums.10 The Act also requires the Secretary and Chair (or 

their designees) to report to Congress on their efforts to increase transparency at IAIS 

meetings.

11 In addition, the Act requires that, before supporting or consenting to the adoption of 

any final international insurance capital standard, the Secretary, the Chair, and FIO’s Director 

also must complete a study and submit a report to Congress on the impact of any such standard 

on consumers and U.S. markets.12

2. FIO’s Five Pillars 

On October 26, 2017, Treasury released the EO Report in response to Executive Order 13772, 

issued by President Trump on February 3, 2017, which called on Treasury to identify laws and 

regulations that are inconsistent with the Core Principles for Financial Regulation set forth in the 

Executive Order (Core Principles).

13 The EO Report examined the regulatory framework for the 

U.S. asset management and insurance industries and made recommendations to ensure alignment 

of the regulatory framework with the Core Principles. The EO Report also included 

recommendations to improve the efficiency of regulation and government processes in the 

insurance sector.

 

9 § 5365(i)(1)(A).

10 Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 211(c)(1)(a), 132 

Stat. 1296 (2018).

11 § 211(c)(4). The Act also establishes an Insurance Policy Advisory Committee at the Federal Reserve. See § 

211(b).

12 § 211(c)(3)(A). The Act further includes a Congressional finding that before taking a position on any global 

insurance regulatory or supervisory proposal, the Secretary, the Federal Reserve, and FIO’s Director shall “achieve 

consensus positions with State insurance regulators through the National Association of Insurance Commissioners.” 

§ 211(a)(2). When signing the Act into law, however, the President issued a statement noting: “These directives 

contravene my exclusive constitutional authority to determine the time, scope, and objectives of international 

negotiations. My Administration will give careful and respectful consideration to the preferences expressed by the 

Congress in section 211(a) and will consult with State officials as appropriate, but will implement this section in a 

manner consistent with my constitutional authority to conduct foreign relations.” President Donald J. Trump, 

Statement by President Donald J. Trump on S. 2155 (May 24, 2018), https://www.whitehouse.gov/briefingsstatements/statement-president-donald-j-trump-s-2155/. 

13 See Exec. Order No. 13,772, 3 C.F.R. 586 (2018), https://www.gpo.gov/fdsys/pkg/CFR-2018-title3-vol1/pdf/CFR2018-title3-vol1.pdf; Treasury, EO Report, 3.
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The EO Report endorsed the state-based regulatory model for the U.S. insurance industry while 

also recognizing the importance of the federal government’s role. The EO Report described how, 

in executing its statutory mission, FIO should be guided by five pillars:

1) Promote the U.S. state-based insurance regulatory system and advocate for the U.S. 

insurance sector in international forums and negotiations, and in foreign markets. 

2) Provide insurance policy expertise and advice to the federal government, state insurance 

regulators, and industry through the publication of comprehensive research and analysis, 

consultation on emerging issues, and evaluation of federal insurance programs. 

3) Provide coordinated and collaborative leadership on insurance issues that engage the 

federal government and state insurance regulators, including through enhanced 

coordination between the federal government and state insurance regulators.

4) Protect the U.S. financial system and economy by advising the Secretary and the Council 

on insurance-related matters that may pose a threat to U.S. financial stability.

5) Protect America’s financial security by promoting access to insurance products and 

administering the Terrorism Risk Insurance Program.14

Treasury explained that the five pillars were established to advance the Core Principles, and 

stated its commitment to FIO’s increased transparency and stakeholder engagement to ensure 

accountability to these pillars.15 The pillars, and the corresponding commitments to transparency 

and stakeholder engagement, have helped guide FIO’s activities since release of the EO Report

(including the activities described in Section I.B.3, below), and are further reflected in the 

contents of this Report. 

3. FIO Activities

A summary of FIO activities during the period covered by this Report (some of which are further 

detailed later in this Report) is provided below. 

In July 2017, Treasury and the Office of the U.S. Trade Representative (USTR) announced the 

intention of the United States to sign the Bilateral Agreement between the United States of 

America and the European Union on Prudential Measures Regarding Insurance and Reinsurance 

(U.S.-EU Covered Agreement). The United States and the European Union (EU) signed the 

agreement on September 22, 2017. Developments concerning the U.S.-EU Covered Agreement 

are discussed in Section IV.B of this Report. 

FIO staff continued to participate in the quarterly meetings of the Mitigation Framework 

Leadership Group (MitFLG), including the meetings on July 14, 2017, January 12, 2018, April 

25, 2018, and July 26, 2018. MitFLG and the National Mitigation Investment Strategy, to which

FIO staff are contributing, are discussed in Section III.D of this Report. 

 

14 Treasury, EO Report, 105-106.

15 Treasury, EO Report, 106.
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On July 28, 2017, the Advisory Committee on Risk-Sharing Mechanisms (ACRSM) held a 

meeting on the potential involvement of the capital markets in the support of insurance for 

terrorism risk. The ACRSM, and the Terrorism Risk Insurance Program, also are discussed in 

Section III.B of this Report.16

On August 3, 2017, Treasury hosted an insurance industry cybersecurity tabletop exercise. 

Treasury hosted a second tabletop exercise on August 16, 2018. Insurance industry 

cybersecurity, and related FIO activities, are discussed in Section III.C of this Report. 

The Federal Advisory Committee on Insurance (FACI), which provides advice and 

recommendation to FIO in performing its duties and authorities, convened on August 17, 2017, 

December 6, 2017, February 22, 2018, and May 10, 2018. These meetings addressed a variety of 

topics (some of which are discussed in further detail in this Report), including: autonomous 

vehicles and auto insurance; big data; blockchain; cyber risk and insurance industry exposure; 

cybersecurity regulation; InsurTech; and natural catastrophes and mitigation.17

FIO contributed to the EO Report, which was issued in October 2017. The EO Report made

multiple recommendations concerning regulation of the U.S. insurance industry and the role and 

priorities of FIO. The EO Report is summarized in Section I.C below. 

As part of its ongoing commitment to improve coordination with the U.S. members of the IAIS, 

on January 29, 2018, FIO hosted a stakeholder session on IAIS work at Treasury with 

representatives from the members of “Team USA”: FIO; state insurance regulators; the NAIC; 

and the Federal Reserve. The topics addressed included the development of an Insurance Capital 

Standard (ICS) and the use of an activities-based approach (ABA) for evaluating systemic risk. 

FIO also has continued to coordinate efforts on international insurance matters to ensure that 

U.S. stakeholders have regular opportunities to meet and work with all of “Team USA.”

The Treasury delegation to the March 22, 2018 U.S.-India Financial Regulatory Dialogue in 

Mumbai included a FIO representative. The Dialogue is an annual meeting between U.S. 

financial services regulators and their Indian counterparts to share information and perspectives 

on key regulatory issues. 

On April 2, 2018, Treasury hosted a property and casualty (P&C) insurer cybersecurity 

roundtable, providing a forum to discuss: key cyber risks, threats, and vulnerabilities; managing 

cybersecurity risk; governance and priority-setting; response and recovery planning; third-party 

risk management; cyber insurance; and other insurance industrywide challenges. 

 

16 More information on the ACRSM – including its meeting agenda, minutes, and presentations – is available on 

FIO’s website. See “Advisory Committee on Risk-Sharing Mechanisms (ACRSM),” Treasury, last updated 

November 2, 2017, https://www.treasury.gov/initiatives/fio/acrsm/Pages/default.aspx. 

17 More information on FACI – including its meeting agenda, minutes, and presentations – is available on FIO’s 

website. See “Initiatives: Federal Advisory Committee on Insurance (FACI),” Treasury, last updated September 7, 

2018, https://www.treasury.gov/initiatives/fio/Pages/faci.aspx. 
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On May 23, 2018, FIO, the Federal Emergency Management Agency (FEMA), and the National 

Oceanic and Atmospheric Administration (NOAA) co-hosted a financial sector stakeholder 

discussion, “Financing Mitigation and Promoting Resilience.” The discussions focused on: 

building the business case for mitigation; leveraging and incentivizing investment in mitigation; 

and opportunities for innovation. 

On June 18, 2018, Steven J. Dreyer joined Treasury as the Director of FIO.

On June 29, 2018, FIO issued its report on the Effectiveness of the Terrorism Risk Insurance 

Program, as required by the TRIP Reauthorization Act.18 TRIP is discussed in Section III.B of 

this Report. 

FIO contributed to Treasury’s July 2018 report, A Financial System That Creates Economic 

Opportunities: Nonbank Financials, Fintech, and Innovation (the Fintech EO Report).19 The 

Fintech EO Report identifies “improvements to the regulatory landscape that will better support 

nonbank financial institutions, embrace financial technology, and foster innovation.”20 The 

Fintech EO Report, and InsurTech more generally, are discussed in Section V.D of this Report.

Throughout 2017 and 2018, FIO continued to provide expertise to other Treasury offices and 

other federal agencies, as discussed in Section III.A.1 of this Report. For example, FIO assisted 

FEMA on reinsurance and alternative risk instruments in connection with the National Flood 

Insurance Program (NFIP). 

In addition, throughout 2017 and 2018, FIO has continued to fulfill its statutory role representing 

the United States in the IAIS and elsewhere on prudential international insurance measures. FIO 

was actively involved on IAIS work in: developing the evaluation of systemic risk and the ABA; 

the Common Framework for the Supervision of Internationally Active Insurance Groups 

(ComFrame); and developing an ICS – including its consultation paper on ICS Version 2.0 and 

related plans for field testing (as discussed in more detail in Section II.B of this Report). FIO 

also continued its involvement and leadership roles with working groups and task forces at the 

IAIS on a variety of issues, including resolution, financial crimes, cybersecurity, and 

governance, as described in more detail in Section IV.A of this Report. 

Internationally, FIO also remains engaged in the Insurance and Private Pensions Committee 

(IPPC) at the Organisation for Economic Co-operation and Development (OECD). The OECD 

serves as a source of advice for the Group of Twenty (G-20) and the public on various 

 

18 FIO, Report on the Effectiveness of the Terrorism Risk Insurance Program (June 2018), 

https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/2018_TRIP_Effectiveness_Report.pdf. 

19 See Treasury, A Financial System that Creates Economic Opportunities: Nonbank Financials, Fintech, and 

Innovation (July 2018), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-CreatesEconomic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf.

20 Treasury, “Treasury Releases Report on Nonbank Financials, Fintech, and Innovation,” news release, July 31, 

2018, https://home.treasury.gov/news/press-releases/sm447. 
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policymaking and implementation matters, and collects and publishes statistical data and 

analyses on various topics.21 The Department of Commerce leads the official delegation from 

United States to the IPPC, which also includes Treasury and representatives of state insurance 

regulators. 

FIO also has continued its work with the EU-U.S. Insurance Project. On January 25, 2018, the 

EU-U.S. Insurance Project Steering Committee hosted its fifth public event in Washington, D.C. 

to discuss the use of big data; cyber risks and the regulator’s role; and business opportunities, 

challenges, and emerging risks impacting the United States and Europe. The EU-U.S. Insurance 

Project is discussed further in Section IV.C of this Report. 

C. Treasury’s EO Report 

On October 26, 2017, Treasury issued the EO Report in response to Executive Order 13722, 

which established a set of Core Principles for regulation of the U.S. financial system.22 The 

Core Principles under Executive Order 13722 are:

A. Empower Americans to make independent financial decisions and informed choices in 

the marketplace, save for retirement, and build individual wealth; 

B. Prevent taxpayer-funded bailouts;

C. Foster economic growth and vibrant financial markets through more rigorous regulatory 

impact analysis that addresses the systemic risk and market failures, such as moral hazard 

and information asymmetry;

D. Enable American companies to be competitive with foreign firms in domestic and foreign 

markets;

E. Advance American interests in international financial regulatory negotiations and 

meetings;

F. Make regulation efficient, effective, and appropriately tailored; and 

G. Restore public accountability within federal financial regulatory agencies and rationalize 

the federal financial regulatory framework.

Treasury has released four reports under the Executive Order, including the EO Report. The 

three other reports addressed regulation of (1) banks and credit unions, (2) the capital markets, 

and (3) nonbank financials, Fintech, and financial innovation.23

 

21 See OECD, Secretary-General’s Report to Ministers 2018 (2018), 16, 

http://www.oecd.org/publications/secretary-general-s-report-to-ministers-22223843.htm. 

22 Treasury, EO Report; Exec. Order No. 13,772. 

23 See Treasury, A Financial System That Creates Economic Opportunities: Banks and Credit Unions (June 2017), 

https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf; Treasury, A 

Financial System That Creates Economic Opportunities: Capital Markets (October 2017), 
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The EO Report focused on the regulatory framework for the U.S. asset management and 

insurance industries. The EO Report, which included an overview of the life insurance and P&C 

industries and the regulation of those sectors, supported the primacy of state regulation and noted 

that the NAIC plays a central role in state insurance regulation and policy. At the same time, 

Treasury noted that the federal government has long had a significant impact on insurers and the 

business of insurance. Treasury also highlighted the roles of FIO and the Council in the federal 

aspects of insurance regulation, and identified 23 federal regulators and agencies involved in 

insurance to varying degrees.24

The EO Report made detailed findings and recommendations, organized under four main 

themes: 

1) the proper evaluation of systemic risk; 

2) ensuring effective regulation and government processes;

3) rationalizing international engagement; and 

4) promoting economic growth and informed choices. 

The EO Report’s recommendations relating to insurance are described below.

1. Systemic Risk and Solvency

The EO Report noted that states are the primary U.S. regulators of the insurance industry, and 

that federal insurance regulation should be coordinated with the states. The EO Report stated 

that entity-based systemic risk evaluations generally are not the best approach for mitigating 

risks arising from the insurance industry. Instead, insurance regulators should focus on potential 

risks arising from products and activities across the industry as a whole. At the international 

level, Treasury recommended that FIO and other U.S. members of the IAIS support the IAIS’s 

work on the ABA, take steps to improve the IAIS assessment methodology for global 

systemically important insurers (G-SIIs), and consider how to increase transparency with respect 

to development of the methodology.25

The EO Report made several recommendations regarding ongoing capital and liquidity 

initiatives conducted by the states and the NAIC, the Federal Reserve, and the IAIS. Treasury 

recommended harmonization of capital initiatives by the NAIC and the Federal Reserve to 

mitigate duplicative and unnecessary regulatory burdens for U.S. insurers, and directed FIO to 

consult with state insurance regulators, the NAIC, and the Federal Reserve on their respective 

group capital initiatives to produce the best outcomes for U.S. insurers, U.S. policyholders, and 

 

https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINALFINAL.pdf; and Treasury, Fintech EO Report. 

24 Treasury, EO Report, 82-90.

25 Treasury, EO Report, 97-99.
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the U.S. insurance market. Treasury also expressed its support for robust liquidity risk 

management programs for insurers, and encouraged the states, the NAIC, and the Federal 

Reserve to continue their work to address potential liquidity risk in the insurance sector. 

Treasury directed FIO to advocate for improvements to the existing IAIS standards regarding 

liquidity management and planning.26

The EO Report recommended that FIO and the other U.S. members of the IAIS support the 

IAIS’s work on the ABA. Further, Treasury noted that such an approach is more appropriate 

than an entity-based approach to assessing potential systemic risk in the global insurance market. 

Treasury also recommended that FIO and the other U.S. members of the IAIS take steps to 

improve the IAIS’s G-SII assessment methodology and consider how to increase transparency 

with respect to the assessment methodology. Treasury further recommended that the U.S. 

members of the IAIS advocate that the IAIS enhance its work on cross-sectoral consistency with 

other financial sectors – such as through work with the Basel Committee on Banking 

Supervision – which will allow the IAIS to better assess the potential global systemic risk of 

insurers.27

2. Efficient Regulation and Government Processes 

The EO Report noted that while the business of insurance is primarily regulated at the state level, 

numerous federal agencies or authorities are involved in insurance with varying roles and 

responsibilities. In some cases, the federal government is itself a participant in the insurance 

sector, either as a consumer or provider of insurance. At times when the federal government is a 

regulator, Treasury commented that federal agencies have not always adequately considered the 

unique business model of insurers, leading to instances where prudential rules do not 

appropriately reflect the differences between banks and insurers. Treasury stated that it is 

important for the federal government to develop an effective and harmonized approach to 

engagement with the insurance sector that adequately reflects the nature and existing regulatory 

regime of the business. 

Accordingly, Treasury recommended that federal agencies and entities establish formal 

mechanisms to communicate and coordinate with each other regarding insurance-related issues, 

and that FIO assist in this effort by establishing a more formalized and rationalized approach to 

its own engagement with federal agencies and entities. To promote coordination of the federal 

government’s authority with respect to insurance, FIO should consult with and advise federal 

agencies and entities when they conduct rulemaking or policy action relating to insurance.28

The EO Report also recognized that certain activities, products, and issues are within the scope 

of both federal and state regulators, and that those regulators may take positions that create 

tension, conflict, or duplication between state and federal requirements. The EO Report stated 

 

26 Treasury, EO Report, 100-104.

27 Treasury, EO Report, 98-99.

28 Treasury, EO Report, 128.
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that, to improve efficiency, states should be consulted and afforded the opportunity to provide 

input when the business of insurance is addressed at the federal level. Accordingly, FIO should 

lead coordination efforts among the states and the federal government to improve 

communication and help develop policy on insurance-related issues.29

In addition to the general recommendations regarding state and federal regulations, the EO 

Report made specific recommendations to improve the efficiency and effectiveness of regulation 

by several federal agencies. These recommendations included streamlining or clarifying the 

regulation of: insurance savings and loan holding companies by the Federal Reserve; the 

“business of insurance” (as defined in Title X of the Dodd-Frank Act) by the Consumer 

Financial Protection Bureau; and insurance products that are non-exempt securities by the 

Securities and Exchange Commission.

30 Treasury also noted that the U.S. Department of 

Housing and Urban Development (HUD) has expressed its intention to continue applying

“disparate impact liability” under the Fair Housing Act to homeowners insurance practices that 

have an unjustified discriminatory effect. Treasury recommended that HUD reconsider the 

application to such insurance practices of its 2013 rule codifying how disparate impact cases are 

analyzed and consider whether this application of the rule is consistent with the McCarranFerguson Act of 1945 and all relevant state law.31 

The EO Report reviewed TRIP and made recommendations concerning data calls, certifying an 

“act of terrorism,” and the ACRSM. Treasury directed FIO to coordinate with the states and the 

NAIC to attempt to eliminate or reduce inconsistencies between data calls on terrorism risk 

insurance conducted by Treasury and the states. Treasury also described the process for 

certification of an act of terrorism under an interim final rule adopted by Treasury in December 

2016, and directed FIO to be proactive in applying the process in connection with any event that 

has a reasonable likelihood of resulting in more than $5 million in insured losses under TRIA. 

Finally, Treasury encouraged the ACRSM to continue to investigate the potential for increasing 

private participation in the terrorism risk insurance market.32

The EO Report found that cybersecurity and insurer data security are national policy issues that 

require coordination among federal and state public sector entities and partnership between the 

public and private sectors. Treasury recommended prompt adoption of the NAIC Insurance Data 

Security Model Law by the states, and further recommended Congressional action if the states do 

not achieve uniform data security laws within five years. Similarly, Treasury recommended that 

the states and the NAIC work together to expeditiously pass uniform legislation regarding data 

breach notification for insurers, and further recommended Congressional action if the states do 

not achieve uniform requirements within five years.33

 

29 Treasury, EO Report, 129.

30 Treasury, EO Report, 106-109, 111-112.

31 Treasury, EO Report, 109-110.

32 Treasury, EO Report, 113-115.

33 Treasury, EO Report, 117-118.
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With respect to cybersecurity, the EO Report also noted Treasury’s role as the federal interface 

for matters involving cyber threats and cybersecurity for financial institutions, including insurers, 

and recommended improved information sharing within the insurance industry to enhance 

cybersecurity. Treasury also directed FIO to establish a working group charged with assessing 

cybersecurity challenges for the insurance sector and issuing recommendations to insurance 

sector participants and relevant regulators, with particular attention paid to small and regional 

insurers.34

In addition to recommendations directed to the federal government, the EO Report made 

recommendations to improve the efficiency and uniformity of state regulation with respect to 

product approval and speed to market, commercial insurance, and the insurance producer 

licensing and appointment process.35

3. International Engagement 

The EO Report reviewed the multilateral standard setting framework and key initiatives in 

international insurance regulation, focusing on the roles of the Financial Stability Board (FSB), 

the IAIS, and FIO. Treasury found that U.S. engagement in international financial regulatory 

standard-setting bodies remains important to promote financial stability, level the playing field 

for U.S. financial institutions, and prevent unnecessary and overly burdensome standard-setting 

that could stifle financial innovation. Accordingly, Treasury stated its strong belief that the 

FSB’s activities should be limited to its purpose of monitoring and enhancing global financial 

stability, and that risk assessments and standards should be tailored to industry sectors and 

undertaken by the appropriate standard setter with the necessary technical supervisory expertise 

(including, for insurance-related matters, the IAIS).36 With respect to the IAIS, Treasury 

recommended that any future changes to the organizational structure be done in a manner that 

ensures appropriate and geographically balanced representation and committee leadership among 

IAIS members. While acknowledging that the IAIS has taken steps to improve stakeholder 

transparency, Treasury recommended that the IAIS take additional action to further increase 

transparency and stakeholder input, and encouraged U.S. members of the IAIS to collectively 

advocate for increased transparency and collaboration during the international standard 

development process.37 The EO Report also stated that FIO should have a permanent, voting 

membership on the IAIS Executive Committee.38

The EO Report noted that emerging markets present significant opportunities for the U.S. 

insurance industry and foreign jurisdictions to develop an insurance marketplace that protects 

policyholders and encourages investment and expansion. Despite these opportunities, the EO 

 

34 Treasury, EO Report, 118.

35 Treasury, EO Report, 120-127.

36 Treasury, EO Report, 132.

37 Treasury, EO Report, 133-135.

38 Treasury, EO Report, 136.
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Report further noted that certain jurisdictions have imposed measures that restrict the ability of 

non-domestic insurers, reinsurers, and intermediaries—including those domiciled in the United 

States—from competing on a level playing field. Accordingly, the Secretary directed FIO and 

Treasury’s Undersecretary for International Affairs to enhance engagement in multilateral and 

bilateral dialogues concerning the insurance sector’s international market access.39

The EO Report reviewed the background of the U.S.-EU Covered Agreement, which is discussed 

in detail in Section IV.B of this Report, and noted that additional covered agreements may be 

mutually beneficial to the United States and other foreign jurisdictions. Treasury stated its belief 

that appropriate transparency and regular, substantive engagement with stakeholders is necessary 

for the proper implementation of the U.S.-EU Covered Agreement. These stakeholders include 

FIO, state insurance regulators, the NAIC, and others.40

4. Economic Growth and Informed Choices

The EO Report reviewed rulemaking by the Department of Labor (DOL) concerning the 

definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA). 

In April 2016, the DOL amended its definition and adopted several related administrative 

exemptions from the prohibited transaction provisions in ERISA and the Internal Revenue Code 

(the Code) (collectively, the Fiduciary Rule). Treasury concluded that full implementation of the 

Fiduciary Rule should be delayed until relevant issues, including costs of compliance, could be 

evaluated to best serve retirement investors, and that such an evaluation should include 

participation by the Securities and Exchange Commission (SEC) and other financial regulators. 

Treasury highlighted the role of the SEC in addressing investor protection, and stated that the 

SEC and the DOL should work together to address standards of conduct for financial 

professionals in providing investment advice to retail consumers. Treasury also recommended 

that the SEC and the DOL engage with state insurance regulators regarding the impact of 

standards of care on the annuities market, noting that annuities are an important contributor to 

the Core Principle of empowering Americans to save for retirement.41

The EO Report noted that insurers have increasingly sought out infrastructure investments as a 

means of achieving higher net yields during the persistently low interest rate environment over 

the last decade. The EO Report further noted that current state requirements regarding the 

amount and type of capital insurers must hold do not reflect the special features of infrastructure 

investments and, in some cases, may penalize insurers to the point that such investments are not 

economically viable. Accordingly, Treasury recommended that state insurance regulators and 

the NAIC evaluate potential steps to encourage the development of more calibrated regulatory 

treatment of high-quality infrastructure investments.42

 

39 Treasury, EO Report, 137-138.

40 Treasury, EO Report, 138-140.

41 Treasury, EO Report, 64-70.

42 Treasury, EO Report, 140-141.
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The EO Report also discussed the important role played by the life insurance industry and its 

products in providing a secure retirement for millions of Americans, and explained that annuities 

in particular can be a valuable component of a retirement investment portfolio because they offer 

a guaranteed income stream that cannot be outlived. The EO Report noted that annuities are not 

widely offered in 401(k) and other defined contribution plans, and referred to employer concerns 

over legal liability under ERISA as the principal deterrent to offering an in-plan annuity option. 

To encourage the availability of in-plan annuity options and promote broader economic choice, 

Treasury recommended that the Departments of Labor and Treasury develop proposals on how 

to establish or certify an independent fiduciary to assist plan sponsors in meeting their ERISA 

obligations by assessing the long-term financial strength of annuity providers.43

*** 

Lastly, the EO Report reviewed the ongoing decline of the private long-term care insurance 

(LTCI) market and observed that state insurance regulators and the NAIC are actively reviewing 

a range of issues and policy changes to stabilize and potentially regrow the market. The EO 

Report concluded that in addition to existing state efforts to address problems in the LTCI 

market, the challenges in financing long-term care require a coordinated response from the 

federal government because they are of national interest. Accordingly, Treasury stated that it 

would convene an inter-agency task force to develop policies to complement reforms at the state 

level relating to the regulation of LTCI.44

Sections II through V of this Report are organized according to the EO Report’s four themes. 

Each Section presents developments in domestic and international insurance policy, regulation, 

and markets corresponding to each theme.

 

43 Treasury, EO Report, 141-143.

44 Treasury, EO Report, 143-144. According to the EO Report, the task force will include representatives of the 

Department of Health and Human Services, Treasury, the Internal Revenue Service, and the Office of Management 

and Budget.
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II. SYSTEMIC RISK AND SOLVENCY

Section II of this Report describes selected domestic developments – including updates on 

NAIC Group Capital Calculations, the NAIC Macro Prudential Initiative, and Council 

designations – relating to systemic risk and solvency. It then discusses international 

developments such as the activities-based approach for systemically-risky activities, ICS 

development, and liquidity management and stress testing. FIO’s other international work is 

discussed in Section IV of this Report. 

A. Domestic Developments

1. NAIC Group Capital Calculations 

In April 2016, the NAIC Executive Committee and Plenary adopted as a charge to the Financial 

Condition Committee that it (1) construct a group capital calculation using a Risk-Based Capital 

(RBC) aggregation methodology, and (2) liaise with the NAIC’s ComFrame Development and 

Analysis Working Group on international capital developments and consider group capital 

developments by the Federal Reserve to help inform its construction of a U.S. group capital 

calculation.45 The Group Capital Calculation Working Group (GCCWG) was formed and

charged with constructing a group capital calculation (GCC), using a RBC aggregation 

methodology, as an assessment tool for state regulators in providing a baseline quantitative 

measure for group risks.46

Over 2017, the GCCWG considered three key issues in the construction of the GCC. First, the 

GCCWG discussed how to accommodate U.S. insurers that are not subject to RBC requirements 

and have no prescribed RBC formula. Such insurers include mortgage guaranty, financial 

guaranty, title, and other insurers. In these cases, the NAIC recommended that minimum capital 

requirements in state laws should be used, but where those requirements differ, one basis for the 

calculation should be chosen and applied to all insurers of that type.47 Captive insurers would 

require additional consideration, with the result that the treatment of captives, in particular those 

that assume reserves for certain term life insurance and universal life insurance policies (often 

referred to as “XXX/AXXX” reserves), was discussed throughout 2017. Similarly, insurers with 

XXX/AXXX reserves operating under permitted or prescribed accounting practices would have 

 

45 See NAIC, Spring Volume I 2016 Proceedings of the National Association of Insurance Commissioners (April 

2016), 2-21, 2-32, https://www.naic.org/prod_serv/PRC-ZS-2016_combined.pdf. The ComFrame Development and 

Analysis Working Group proposed this charge in October 2015. See NAIC, NAIC Group Capital Calculation 

Recommendation: Adopted by the ComFrame Development and Analysis Working Group – Oct. 30, 2015, Adopted 

by the International Insurance Relations Committee – Nov. 19, 2015 (2015), 

https://www.naic.org/documents/committees_e_grp_capital_wg_related_cap_calc_reccomendation.pdf.

46 See NAIC, 2016 Proceedings of the NAIC, 2-21, 2-32.

47 Memorandum from NAIC Staff to Group Capital Calculation Working Group (March 22, 2017), 2, 

https://www.naic.org/documents/cmte_e_grp_capital_wg_related_staff_memo_us_insurers.pdf.
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to make adjustments to RBC to reflect the impact of those practices on capital.48 These issues 

remain the subject of discussion. 

Second, the GCCWG discussed the use of scalars for non-U.S. insurers within a group with a 

U.S.-based parent. Scalars would adjust local jurisdictional capital requirements to equate them 

to comparable U.S. levels. The NAIC recommended a “relative ratio approach” through which 

differences in accounting and capital requirements for life and non-life insurers within a given 

jurisdiction could be accommodated.49

The third issue addressed by the GCCWG in 2017 was how to approach non-regulated entities 

within a group. The NAIC recommendation was to include: (1) other entities that are material to 

the group from a risk perspective (to be further defined by the GCCWG) to address contagion 

and other embedded risks; (2) any entity that could reasonably produce a to-be-defined economic 

loss; or (3) any entity required to be individually identified in the GCC by the lead 

state-/group-wide supervisor, with further discussion necessary to determine a risk assessment 

for these entities.50

The work of the GCCWG continued in 2018, with the additional charge of field testing a beta

version of the GCC that does not consider stress tests by the 2018 Fall National Meeting 

(mid-November 2018). Early in the year, the GCCWG further discussed the treatment of senior 

debt and surplus notes in the GCC; at issue was their potential inclusion in available capital 

resources. The NAIC’s recommendation was that surplus notes should be treated as available 

capital, while structurally subordinated senior debt should be recognized as available capital to a 

limited degree.51 In June 2018, the GCCWG exposed for consultation a memorandum 

addressing the scope of the group and revisiting the treatment of non-regulated entities.52

At the Summer National meeting in August, the NAIC Group Capital Working Group considered 

comments submitted by stakeholders in response to its recent public exposure of plans to field 

test its current work. In a letter later that month to two U.S. Senators, the NAIC noted that it 

expects field testing to begin before the end of 2018, with finalization of its new group capital 

calculation no sooner than the end of 2019.53

 

48 Memorandum from NAIC Staff to Group Capital Calculation Working Group (March 22, 2017), 2-3.

49 Memorandum from NAIC Staff to Group Capital Calculation Working Group (April 13, 2017), 

https://www.naic.org/documents/cmte_e_grp_capital_wg_related_staff_memo_scalars.pdf.

50 Memorandum from NAIC Staff to Group Capital Calculation Working Group (October 30, 2017), 2-3, 

https://www.naic.org/documents/cmte_e_grp_capital_wg_related_staff_memo_nonregulated_entities.pdf.

51 Memorandum from David Altmaier, Chair, Group Capital Calculation Working Group to Group Capital 

Calculation Working Group (April 19, 2018), 4, 

https://www.naic.org/documents/cmte_e_grp_capital_wg_related_staff_memo_surplus_notes_debt.pdf.

52 Memorandum from NAIC Staff to Group Capital Calculation Working Group, (June 26, 2018), Attachment B, 

https://www.naic.org/meetings1808/cmte_e_grp_capital_wg_2018_summer_nm_materials.pdf. 

53 Letter from Julie Mix McPeak, NAIC President, et al., to Senators Tim Scott and Mike Rounds (August 16, 

2018), https://www.naic.org/documents/government_relations_181816_scott_rounds_letter.pdf. 
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2. NAIC Macro Prudential Initiative

In August 2017, the NAIC launched its Macro Prudential Initiative as part of the work of its

Financial Stability Task Force (FSTF). The Macro Prudential Initiative’s goal is to consider new 

or improved tools that state insurance regulators can use to: 

• better monitor and respond to the impact of external financial and economic risks on 

insurers;

• better monitor and respond to risks from or amplified by insurers that might be 

transmitted externally, and which may result in significant market impacts or financial, 

reputational, legal, or regulatory risks for the insurer; and

• increase public awareness of NAIC/state insurance regulator monitoring capabilities 

regarding macroprudential trends within the United States and their implications.54

The Macro Prudential Initiative is designed to provide greater insight into both aggregate risks 

across markets and specific insurers where risks may be concentrated.55

Under the Macro Prudential Initiative, the NAIC will undertake a comprehensive review of state 

insurance regulators’ “toolbox,” assessing what existing data, metrics, and analyses are available 

to support macroprudential monitoring, and what enhancements or additions might be needed to 

serve this purpose. The first step in the process will be to improve the effectiveness and use of 

existing tools. Beyond that, the FSTF identified four areas for potential enhancements: liquidity; 

recovery and resolution; capital stress testing; and exposure concentrations.56 This work began 

in late 2017, and is continuing through 2018. 

The FSTF also established the Liquidity Assessment Subgroup in September 2017. The 

Subgroup identified a list of existing data related to liquidity risk, as well as gaps and concerns 

with the data. The Subgroup also exposed, for public consultation, proposals to modify NAIC 

financial statement reporting forms (also known as blanks) to address those data gaps and 

concerns.57 For 2018, the Subgroup is also charged with developing a liquidity stress testing 

framework, including identification of the universe of insurers to which it would apply.58

On the issue of recovery and resolution, the FSTF referred to the NAIC’s Receivership and 

Insolvency Task Force a request to take several actions, including the following: 

 

54 NAIC, NAIC Financial Stability Task Force Macro Prudential Initiative (MPI): A Proposed Framework (August 

1, 2017), 2, https://www.naic.org/documents/cmte_ex_financial_stability_tf_macro_prudential_initiatives.pdf.

55 NAIC, Proposed MPI Framework, 2.

56 NAIC, Proposed MPI Framework, 2-4.

57 NAIC, 2017 Proceedings of the National Association of Insurance Commissioners: 2017 Fall National Meeting

(December 2-4, 2017), 4-21, https://www.naic.org/prod_serv/PRC-ZS-17-03_Combined.pdf. 

58 “Liquidity Assessment Subgroup,” NAIC, https://www.naic.org/cmte_ex_lasg.htm. 
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• undertake an evaluation of current recovery and resolution laws, guidance, and tools to 

evaluate whether they incorporate best practices in those areas identified as important to 

financial stability;

• review what information and/or processes in recovery and resolution planning in other 

jurisdictions (or to groups that may be systemically important) could be most valuable for 

state insurance regulators to consider requiring of large, cross-border U.S. groups; and

• evaluate whether there are any current misalignments between federal and state laws that 

could be an obstacle to achieving effective and orderly recovery and resolutions for U.S. 

insurance groups.59

3. Financial Stability Oversight Council Designations 

In 2017, the Council conducted a statutorily required annual reevaluation of its July 2013 

determination that American International Group, Inc. (AIG) shall be subject to Federal Reserve 

supervision and enhanced prudential standards.

60 In September 2017, the Council announced the 

rescission of its determination regarding AIG.

61 In its re-evaluation, the Council noted changes 

that had taken place since the Council’s 2013 determination, including changes that were the 

direct result of steps AIG had taken that reduced the potential effects of AIG’s financial distress 

on other firms and markets. In particular, the Council cited AIG’s reduction of total debt 

outstanding, short-term debt outstanding, derivatives use, securities lending activities, repurchase 

agreements, and total assets. The Council also recognized changes in AIG’s corporate strategy, 

with the company no longer engaging in the types of activities that were the primary source of its 

risks prior to the financial crisis.62

Following a review of the Council’s processes for designating nonbank financial companies and 

financial market utilities, Treasury issued a report on this topic in November 2017.63 The report 

was in response to an April 2017 Presidential Memorandum directing the Secretary to conduct a 

thorough review of the Council’s designation processes and report to the President. The 

 

59 NAIC, 2017 Proceedings, 4-22.

60 Treasury, Basis of the Financial Stability Oversight Council’s Final Determination Regarding American

International Group, Inc. (July 8, 2013), 

https://www.treasury.gov/initiatives/fsoc/designations/Documents/Basis%20of%20Final%20Determination%20Reg

arding%20American%20International%20Group,%20Inc.pdf. 

61 Treasury, “Financial Stability Oversight Council Announces Rescission of Nonbank Financial Company 

Designation,” news release, September 29, 2017, https://www.treasury.gov/press-center/pressreleases/Pages/sm0169.aspx. 

62 Treasury, Notice and Explanation of the Basis for the Financial Stability Oversight Council’s Rescission of its 

Determination Regarding American International Group, Inc. (AIG) (September 29, 2017), 5, 

https://www.treasury.gov/initiatives/fsoc/designations/Documents/American_International_Group,_Inc._(Rescission

).pdf. 

63 Treasury, Financial Stability Oversight Council Designations (November 17, 2017), 

https://www.treasury.gov/press-center/press-releases/Documents/PM-FSOC-Designations-Memo-11-17.pdf. 
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Presidential Memorandum also directed the Secretary to evaluate the consistency of the 

Council’s activities related to designations with Executive Order 13772.64

The Treasury report evaluated and provided recommendations on the Council’s processes for 

designating nonbank financial institutions and for designating financial market utilities.65 The 

review of each process was organized around three main issues: their effects and efficacy, their 

analytical rigor, and the Council’s engagement and transparency with firms, regulators, and the 

public.66

In the report, Treasury acknowledged that there are challenges in assessing systemic risk. The 

report recommended that the Council prioritize an activities-based or industry-wide approach to 

potential risks posed by nonbank financial companies.67 Treasury also recommended that the 

Council increase the analytic rigor of its designation analyses, including considering the costs 

and benefits of designation. In addition, Treasury recommended improving the Council’s 

engagement with companies under evaluation and their regulators, and its transparency to the 

public regarding designations. Treasury also recommended that the Council provide a clear 

“off-ramp” for designated nonbank financial companies to achieve the rescission of their 

designations. Treasury noted that such an “off-ramp” may incentivize designated companies to 

address key factors that led to the determination, and thereby help achieve the goal of reducing 

risks to U.S. financial stability.68

B. International Developments

1. Activities-Based Approach

In January 2017, the IAIS Systemic Risk Assessment Task Force was created to assess and 

measure systemically-risky activities through an ABA, and improve cross-sectoral consistency in 

systemic risk measurement. Relatedly, the IAIS, jointly with the Basel Committee on Banking 

Supervision, created the Task Force on Systemically Important Banks and Insurers in 2017 to

address inconsistencies between the assessment methodologies for Global Systemically 

Important Banks and G-SIIs.

69

The FSB, in consultation with the IAIS and national authorities, identified an initial list of nine 

G-SIIs in July 2013 using an assessment methodology developed by the IAIS, as well as the 

 

64 Memorandum from President Donald J. Trump to the Secretary of the Treasury (April 21, 2017), 

https://www.whitehouse.gov/presidential-actions/presidential-memorandum-secretary-treasury/. 

65 Treasury, Financial Stability Oversight Council Designations, 4. The content on financial market utilities is 

outside the scope of this Report.

66 Treasury, Financial Stability Oversight Council Designations, 4.

67 Treasury, Financial Stability Oversight Council Designations, 10. This recommendation is also consistent with 

the ongoing work on the activities-based approach at the IAIS, as discussed in Section II.B.1 of this Report.

68 Treasury, Financial Stability Oversight Council Designations, 10-12.

69 See FIO, 2017 Annual Report, 107.
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policy measures that should apply to them.70 The FSB conducted similar annual G-SII 

identification processes in 2014, 2015, and 2016. In June 2016, the IAIS released an updated 

G-SII Assessment Methodology,71 and the FSB identified nine insurers as G-SIIs, including the 

same three U.S. groups (AIG, MetLife, Inc., and Prudential Financial, Inc.) that had been 

identified under the previous methodology. In November 2017, the FSB, in consultation with 

the IAIS and national authorities, decided not to publish a new list for 2017. Importantly, the 

FSB also welcomed and encouraged the IAIS’s work to develop an ABA to systemic risk in the 

insurance sector and noted that, once developed, the ABA may have significant implications not 

only for the assessment of systemic risk, but also for the identification of G-SIIs and G-SII 

policy measures.72

 

On December 8, 2017, the IAIS released its interim consultation paper on an activities-based 

approach to systemic risk, with a deadline for public comment by February 15, 2018.73 This 

interim consultation paper set forth a four-step conceptual approach for the IAIS’s work on 

developing ABA policy measures. The first step is the identification of activities that insurers 

engage in that could potentially threaten global financial stability in an ABA context. The 

second step is the evaluation of existing IAIS policy measures (such as the IAIS Insurance Core 

Principles (ICPs), the draft ComFrame including ICS Version 1.0, and the G-SII policy 

framework) that may help mitigate the potential systemic risk stemming from the identified 

activities. The third step involves a gap analysis that would identify risks associated with an 

activity that are not sufficiently mitigated by an existing policy measure. The fourth step is the 

development of policy measures or enhancement of existing policy measures to address any 

residual systemic risk. This step also involves consideration of the scope of application of the 

identified policy measure(s) and the use of proportionality and the consideration of cost and 

benefit aspects.74

The interim consultation paper provided stakeholders an opportunity to give input into the 

development of the ABA and feedback on proposed steps that the IAIS will follow in its work on 

deriving ABA policy measures. To promote stakeholder transparency, the IAIS also held two 

stakeholder meetings on the ABA approach to systemic risk – the first in Nashville, Tennessee 

on January 13, 2018, and the second in London, England on February 1, 2018.75

 

70 FSB, Global Systemically Important Insurers (G-SIIs) and the Policy Measures That Will Apply to Them (July 18, 

2013), http://www.fsb.org/wp-content/uploads/r_130718.pdf. 

71 See IAIS, “IAIS Releases Updated G-SII Assessment Methodology,” news release, June 16, 2016, 

http://www.iaisweb.org/file/61170/iais-press-release-updated-g-sii-assessment-methodology. 

72 FSB, Review of the List of Global Systemically Important Insurers (G-SIIs) (November 21, 2017), 

http://www.fsb.org/wp-content/uploads/P211117-2.pdf. 

73 IAIS, “IAIS Releases Interim Consultation Paper on an Activities-Based Approach to Systemic Risk,” news 

release, December 8, 2017, https://www.iaisweb.org/page/news/press-releases//file/70446/iais-press-releaseinterim-public-consultation-on-an-activities-based-approach. 

74 IAIS, Activities-Based Approach to Systemic Risk (December 8, 2017), 10-11, 

https://www.iaisweb.org/page/consultations/closed-consultations/2018/activities-based-approach-to-systemicrisk//file/70440/interim-aba-cp-final-for-launch. 

75 “IAIS Newsletter,” IAIS, February 2018, 5, https://www.iaisweb.org/page/news/newsletter/file/72356/iaisnewsletter-february-2018. 
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2. Development of an International Insurance Capital Standard for 

Insurance Groups

a) ICS Background

In October 2013, the IAIS announced its plan to develop a risk-based global ICS, in response to 

a request by the FSB to create a comprehensive, group-wide supervisory and regulatory 

framework for Internationally Active Insurance Groups (IAIGs). In 2014, the IAIS began to 

design this new regulatory framework, known as ComFrame, which would consist of both 

qualitative and quantitative supervisory requirements tailored to the complexity and international 

scope of IAIGs. As the quantitative component of ComFrame, the ICS in its final form will 

become a prescribed capital requirement, representing minimum capital requirements that 

supervisors could use to assess an insurance group’s financial health. 

To date, there have been two significant milestones of the ICS project. As the first milestone, the 

IAIS adopted ICS Version 1.0 for extended field testing in July 2017, which identified two 

valuation approaches—the market-adjusted valuation (MAV) and Generally Accepted 

Accounting Principles with adjustments (GAAP Plus). ICS Version 1.0 also established a 

standard method for calculating the ICS capital requirement and indicated that other methods 

would be considered in the calculation of the ICS capital requirement, including the use of 

internal models, external models, and variations of the standard method.76

As the second milestone, in November 2017, the IAIS decided that once ICS Version 2.0 is 

adopted by 2019, implementation would occur in two phases—a five-year monitoring phase 

followed by the implementation phase. The first phase of implementation, or the monitoring 

period, would take effect on January 1, 2020 and continue through December 31, 2024. During 

this time, the ICS would not be used as a prescribed capital requirement (i.e., the ICS results 

would not be used as a basis for triggering supervisory action). Rather, the five-year monitoring 

period would be used for confidential reporting to group-wide supervisors and discussion in 

supervisory colleges. Confidential reporting by all IAIGs would be mandatory during this time 

and would involve the reporting of a reference ICS based on MAV with a single discounting 

approach, the standard method for calculating capital requirements, and converged criteria for 

qualifying capital resources. A reference ICS would provide a basis for comparison across 

IAIGs and with respect to GAAP Plus and internal model generated results.77 The monitoring 

period would allow group-wide supervisors and host supervisors to discuss and assess the ICS as 

well as compare ICS results against existing group capital standards or calculations under 

development. Finally, additional reporting of the ICS based on GAAP Plus valuation and 

 

76 IAIS, Risk-Based Global Insurance Capital Standard Version 1.0 for Extended Field Testing (July 21, 2017), 

https://www.iaisweb.org/page/supervisory-material/insurance-capital-standard/file/67651/ics-version-10-forextended-field-testing. 

77 The IAIS will begin discussions in later 2018 on comparability or the definition of equivalent outcomes of the 

reference ICS relative to ICS results generated by GAAP Plus and internal models as well as in comparison to 

outcomes generated by the Aggregation Method.
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internal model-based capital requirement calculations would be permitted at the option of the 

group-wide supervisor. The second phase of implementation would be the use of the ICS as a 

group-wide prescribed capital requirement. The IAIS further agreed in November 2017 that it 

would assist in the collection and analysis of data toward the development of the Aggregation 

Method, a methodology that leverages the group capital calculation work that is being conducted 

by U.S. state regulators and the Federal Reserve.

78

While the Aggregation Method is not part of ICS Version 2.0, it is an important development in 

the IAIS’s efforts to create a global ICS. The Aggregation Method data collection was launched 

on June 1, 2018, initiating the process for developing an alternative approach to the ICS standard 

method for determining capital resources and capital requirements. 

The IAIS’s ultimate goal is a single ICS that includes a common methodology through which 

one ICS achieves comparable, or substantially the same, outcomes across jurisdictions. ICS 

Version 2.0 is intended to attain an improved level of comparability in comparison to ICS 

Version 1.0. While ICS Version 2.0 may still include two valuation approaches, the differences 

between the two are expected to narrow by 2019, particularly in light of the implementation of 

certain accounting changes that will impact financial reporting based on either GAAP or 

International Financial Reporting Standards.79

b) ICS Status

The IAIS has been undertaking a multi-year quantitative field testing process with volunteer 

insurance groups. Four ICS field testing exercises have been conducted between 2015 and 2018. 

Each quantitative ICS field testing exercise has built upon the previous year’s analysis of 

submitted data and feedback received from volunteer groups. In 2018, 50 volunteer groups 

participated in the ICS field testing exercise, including eight U.S. firms.

Certain open issues significant to the operations of U.S. insurers have been included in 2018 ICS 

field testing and for potential resolution in ICS Version 2.0. Specifically, structural 

subordination has been recognized in the ICS, alongside contractual subordination, allowing the 

ICS framework to potentially recognize the treatment of certain financial instruments, consistent 

with U.S. insurance industry practices. 

On July 31, 2018, the IAIS issued a third consultation document on the ICS, providing 

stakeholders with a final opportunity to share their views on the current structure of the ICS and 

to suggest any potential policy changes necessary to inform the refinement of the ICS for 

Version 2.0 and implementation by 2019. Together with the ICS Version 2.0 consultation 

 

78 “Implementation of ICS Version 2.0,” IAIS, November 2, 2017, https://www.iaisweb.org/page/supervisorymaterial/insurance-capital-standard/file/69796/implementation-of-ics-version-20. 

79 IAIS, Risk-Based Global Insurance Capital Standard Version 2.0, Public Consultation Document (July 31, 2018), 

https://www.iaisweb.org/page/supervisory-material/insurance-capital-standard/file/76133/ics-version-20-publicconsultation-document. 
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document, the IAIS published a separate consultation document on ComFrame for stakeholder 

feedback. Though ICS is part of ComFrame, it was previously agreed by the IAIS that ICS 

Version 2.0 would be adopted as a stand-alone document in 2019; as a result, two separate 

consultation documents were issued. The consultations on both ICS Version 2.0 and ComFrame 

will close on October 30, 2018.80

3. IAIS Liquidity Management and Liquidity Stress Testing

In February 2017, the IAIS announced that it would develop an ABA for evaluating and 

mitigating systemic risk in the insurance sector, and formed the Systemic Risk Assessment Task 

Force (later transformed into the Systemic Risk Assessment Drafting Group) to accomplish that 

work.81 Previous work on systemic risk by the IAIS identified six main areas for consideration 

in assessing systemic risk: (1) exposure to liquidity risk; (2) macroeconomic exposure (including 

credit guarantees); (3) counterparty exposure; (4) substitutability; (5) global activity; and (6) 

size.82 The IAIS is using these aspects as a starting point for development of the ABA. 

The IAIS noted that for insurers with comparatively longer-term liabilities and assets matched to 

their duration, liquidity risk is generally well contained, but nonetheless, liquidity risks could 

contribute to systemic risk because of specific circumstances or features.83 The IAIS provided 

examples of such conditions. Further, the IAIS identified a number of existing IAIS policy 

requirements related to liquidity risk management, including enterprise risk management and 

Own Risk and Solvency Assessment, investment and asset-liability management, and capital 

adequacy requirements that could serve a macroprudential purpose in the ABA. Additionally, 

the IAIS noted that the ICPs and the draft ComFrame both require regular assessments of the 

level of risks borne by an insurer using forward-looking quantitative techniques, such as liquidity 

stress testing.84 The next step in this work is to determine whether there are any necessary 

revisions or additions to existing policy measures, including identifying entities to which those 

measures would apply. 

Thus far, the IAIS has identified two categories of options to address as potential policy 

measures: (1) quantitative, stress-based requirements; and (2) qualitative planning. Quantitative 

 

80 “Public Consultation on Risk-Based Global Insurance Capital Standard (ICS) Version 2.0,” IAIS, July 31, 2018, 

https://www.iaisweb.org/page/consultations/current-consultations/ics-version-20/; “Overall ComFrame,” IAIS, July 

31, 2018, https://www.iaisweb.org/page/consultations/current-consultations/overall-comframe-including-icsversion-20/. 

81 IAIS, Activities-Based Approach to Systemic Risk (December 8, 2017),

https://www.iaisweb.org/page/consultations/closed-consultations/2018/activities-based-approach-to-systemicrisk/file/70440/interim-aba-cp-final-for-launch.

82 IAIS, Global Systemically Important Insurers: Updated Assessment Methodology (June 16, 2016), 14, 

https://www.iaisweb.org/page/supervisory-material/financial-stability-and-macroprudential-policy-andsurveillance/file/61179/updated-g-sii-assessment-methodology-16-june-2016.

83 IAIS, Activities-Based Approach to Systemic Risk, 13.

84 IAIS, Activities-Based Approach to Systemic Risk, 24.
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liquidity requirements are viewed as unlikely in the short-term, but may be explored as a 

longer-term solution. On the other hand, qualitative planning requirements are seen as a 

possibility for the ABA policy measures to be proposed in 2019. The consideration of enhanced 

qualitative requirements will include liquidity risk governance, management, and reporting. 

Adequacy of existing data and transparency of supervisory reporting will also be considered.85 

The IAIS intends to assess interconnectedness within both quantitative and qualitative options. 

A consultation document to be issued in 2018 will elaborate in more detail on potential policy 

measures as the IAIS further develops its holistic framework for assessing and mitigating 

systemic risk in the insurance sector at a global level. 

 

85 IAIS, Activities-Based Approach to Systemic Risk, 28.
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III. EFFICIENT REGULATION AND GOVERNMENT PROCESSES

Section III addresses FIO’s efforts to advance efficient regulation and government processes 

through coordination on insurance matters at the state and federal levels. It also discusses certain

developments at two federal agencies – HUD and the SEC. The section then turns to terrorism 

risk insurance, cyber insurance and cybersecurity, and concludes with a discussion of the role of 

insurance in mitigating natural catastrophes.

A. Role of State and Federal Regulation 

1. FIO Engagement with Federal Agencies and the States

FIO continues to regularly consult with and advise multiple federal agencies and entities on 

insurance-related matters. For example, FIO has worked with the U.S. Department of Veterans 

Affairs on issues arising under the Servicemembers’ Group Life Insurance Program and other 

life insurance programs for the benefit of servicemembers, veterans, and their families. FIO has 

consulted with the Department of Labor regarding the fiduciary duty of plan sponsors in 

selecting an annuity provider for a defined contribution plan. As another example, FIO has 

assisted FEMA on reinsurance and alternative risk transfer instruments in connection with the 

NFIP.

FIO has also sought to lead regulatory coordination between the states and the federal 

government with respect to insurance regulation and the development of policy on 

insurance-related issues. For example, FIO regularly interacts with the states and the NAIC, 

through direct communications with state commissioners and their staff, and through 

participation at NAIC meetings. In addition, FIO coordinated closely with the NAIC in 2017 

and 2018 to avoid duplicative federal-state data calls, as described in Section III.B of this Report. 

More generally, FIO continues to invite stakeholder input on federal-state coordination and other 

issues through FACI meetings, the ACSRM, and other stakeholder sessions. 

2. Federal Agency Developments

Federal agencies, including HUD and the SEC, have taken steps to improve the efficiency and 

effectiveness of the regulation of insurance. On June 18, 2018, HUD issued an advance notice of 

public rulemaking to invite public comment on possible amendments to the disparate impact 

rule. The disparate impact rule codifies HUD’s longstanding interpretation that the Fair Housing 

Act creates liability for practices with an unjustified discriminatory effect, even if those practices 

are not motivated by discriminatory intent.86

The SEC continues to consider proposing a rule that would permit a variable annuity summary 

prospectus and a streamlined prospectus update, while continuing to provide appropriate 

 

86 Reconsideration of HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard, 83 Fed. Reg. 

28560 (June 20, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-06-20/pdf/2018-13340.pdf. 
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disclosure to investors.87 According to the SEC’s Spring 2018 Agency Rule List, the Division of 

Investment Management is considering recommending that the SEC propose “rules designed to 

provide variable insurance products investors with more user-friendly disclosure and to improve 

and streamline the delivery of information about variable insurance products through increased 

use of the Internet and other electronic means of delivery.”88 Also, in its Report on Objectives 

for Fiscal Year 2019, the SEC’s Office of Investor Advocate continued to support “the 

development of a summary prospectus for variable annuities that would disclose the key facts 

that investors need to know about the risks and costs, as well as the benefits, of their 

investment.”89

B. Terrorism Risk Insurance Program 

The September 11, 2001 terrorist attacks resulted in an insurance industry loss of about $44 

billion (in 2016 dollars),90 which at the time was the largest insurance industry loss in history. 

Following those attacks, insurers and reinsurers largely withdrew from the terrorism risk 

insurance market, threatening planned construction, property acquisition, business projects, and 

other economic activity.91 In response, TRIA was enacted,92 which created TRIP within 

Treasury.93 TRIP was established primarily to incentivize the private market to offer insurance 

for terrorism risk, while providing a transitional period for the private market to resume pricing 

terrorism risk and build capacity to absorb future insurance losses.94 Under the TRIP 

Reauthorization Act,95 TRIP has been extended through December 31, 2020. 

 

87 On June 5, 2018, the SEC adopted Rule 30e-3, which allows mutual funds, including funds that underlie variable 

annuity and insurance products, to deliver required shareholder reports on the Internet. Optional Internet 

Availability of Investment Company Shareholder Reports, 83 Fed. Reg. 29158 (June 22, 2018), 

https://www.gpo.gov/fdsys/pkg/FR-2018-06-22/pdf/2018-12423.pdf. The EO Report recommended adoption of 

Rule30e-3. Treasury, EO Report, 112.

88 Enhanced Disclosure for Separate Accounts Registered as Unit Investment Trusts and Offering Variable 

Insurance Products (SEC) 3235-AK60 (Spring 2018), 

https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201804&RIN=3235-AK60. 

89 SEC Office of the Investor Advocate, Report on Objectives: Fiscal Year 2019 (June 29, 2018), 13, 

https://www.sec.gov/files/sec-office-investor-advocate-report-on-objectives-fy2019_0.pdf. 

90 See Charlene Chia, “Assessing Terrorism Risk 15 Years After 9/11,” AIR, September 8, 2016, http://www.airworldwide.com/Publications/AIR-Currents/2016/Assessing-Terrorism-Risk-15-Years-After-9/11/. 

91 TRIA § 101(a)(5). Because the provisions of TRIA appear in a note (15 U.S.C. § 6701 note), instead of 

references to sections of the United States Code, references are identified by the sections of the Act.

92 Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322 (2002).

93 For purposes of this Report, TRIP refers to the program as it is administered through current Treasury regulations. 

See Terrorism Risk Insurance Program, 31 C.F.R. pt. 50 (2018).

94 TRIA § 101(b).

95 Terrorism Risk Insurance Program Reauthorization Act, Pub. L. No. 114-1, 129 Stat. 3 (2015).
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1. Data Collection and the 2018 Data Call 

Under the TRIP Reauthorization Act, Treasury is required to collect terrorism risk insurance 

information annually from insurers in order to analyze the overall effectiveness of TRIP.96 

Beginning with the 2018 data call, Treasury coordinated with state insurance regulators and the 

NAIC to develop a consolidated data call (with the same information reported to Treasury as 

well as to state regulators), in order to reduce the burden on participating insurers.97

FIO conducted a voluntary TRIP data call in 2016. The 2017 and 2018 data calls were 

mandatory, subject to a number of limited reporting exemptions for certain insurers: (1) on the 

basis of their small volume of TRIP-eligible lines premium writings; or (2) because they were 

classified as captive insurers that wrote policies in TRIP-eligible lines of insurance, but did not 

provide any terrorism risk insurance subject to TRIP.98 FIO collected certain data elements 

through third-party workers’ compensation rating bureaus to minimize the burden on reporting 

insurers, and used multiple reporting templates based on classification of the insurer’s size and 

operations.99

Through its coordination with state regulators and the NAIC, FIO has developed a consolidated 

data collection approach that relies in substantial part upon the data templates originally 

developed by Treasury, with further revisions based upon the experience from prior data 

collection and the input of state regulators. FIO estimates that an extremely high proportion of 

insurers required to participate in both the 2017 and 2018 TRIP data calls provided the requested 

data.100

2. Terrorism Risk Insurance Program Effectiveness Report

The TRIP Reauthorization Act requires Treasury to submit to Congress a report on the 

effectiveness of TRIP in 2016, 2018, and 2020.101 The TRIP Reauthorization Act also requires 

Treasury to submit reports in 2017 and 2019 to Congress concerning the competitiveness of 

small insurers in the terrorism risk insurance marketplace.102 FIO relied upon information from 

the 2017 and 2018 TRIP data calls, as well as comments and information submitted by interested 

parties, to produce the required report on the effectiveness of TRIP, which Treasury submitted to 

Congress on June 29, 2018.103

 

96 TRIP Reauthorization Act § 111 (TRIA § 104(h)).

97 Terrorism Risk Insurance Program 2018 Data Call, 82 Fed. Reg. 56328 (November 28, 2017),

https://www.gpo.gov/fdsys/pkg/FR-2017-11-28/pdf/2017-25402.pdf. 

98 Terrorism Risk Insurance Program 2018 Data Call, 82 Fed. Reg. 56328. 

99 2017 Data Collection Under the Terrorism Risk Insurance Program, 82 Fed. Reg. 20420 (May 1, 2017), 

https://www.gpo.gov/fdsys/pkg/FR-2017-05-01/pdf/2017-08716. 

100 Response rates of participating insurers in the 2017 and 2018 data calls ranged from 85 percent and 99 percent, 

depending on year and category of insurer. See FIO, 2018 TRIP Effectiveness Report, 13. 

101 TRIP Reauthorization Act § 111 (TRIA § 104(h)(2)). 

102 TRIP Reauthorization Act § 112 (TRIA § 108(h)). 

103 FIO, 2018 TRIP Effectiveness Report. 
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In the 2018 TRIP Effectiveness Report, FIO concluded that TRIP has been effective in making 

terrorism risk insurance available and affordable in the insurance marketplace. The market for 

terrorism risk insurance appears to be relatively stable, with few observable differences in the 

relevant benchmarks. Over time, there has been an increase in the amount of private reinsurance 

capacity for conventional terrorism risk exposure, but little or no increase in reinsurance capacity 

for non-conventional (i.e., nuclear, biological, chemical, or radiological) exposures. Treasury 

did not observe any aspects of TRIP that discouraged or impeded insurers from providing P&C 

insurance in general, or terrorism risk insurance specifically. In particular, TRIP remains an 

important feature of the market for workers’ compensation insurance, given the nature of 

insurance that must be provided for workers’ compensation as a matter of state law. Since 

TRIP’s inception, Treasury estimated that total premiums charged by insurers for terrorism risk 

insurance from 2003 to 2017 were approximately $37.6 billion (excepting amounts associated 

with captive insurers), which represents less than two percent of the total premiums earned in 

TRIP-eligible lines of insurance during that period. 

3. Advisory Committee on Risk-Sharing Mechanisms

The ACRSM is a federal advisory committee established by the TRIP Reauthorization Act. It is 

statutorily required to provide FIO with advice, recommendations, and encouragement with 

respect to the creation and development of non-governmental risk-sharing mechanisms to protect 

against losses arising from acts of terrorism.104 The ACRSM is comprised of nine members who 

serve as representatives of insurers, reinsurers, and capital market participants. To facilitate its 

exploration of the potential for increasing private participation in the terrorism risk insurance 

market, the ACRSM created five subcommittees (Direct Insurance, Reinsurance, Capital 

Markets, Exploration of Catastrophic Risks in Other Markets, and Consumer Interests).105 In 

2017, the Committee held three public meetings to gather information from industry participants, 

focusing on the direct insurance market, the insurance of catastrophic risks in other 

(non-terrorism) markets, and capital markets. Each session also addressed consumer interests 

relevant to the meeting’s core topic.106

The Secretary has encouraged the ACRSM, in light of the importance of TRIP, and the 

upcoming consideration of any further TRIP reauthorization, “to continue its efforts and develop 

recommendations for FIO,” which “should focus on how to increase private market participation 

in the terrorism insurance marketplace, with the goal of providing enhanced taxpayer protection 

in a way that does not result in market dislocations for the consumers and providers of terrorism 

risk insurance.”107 

 

104 TRIP Reauthorization Act § 110.

105 ACRSM, Summary of Public Meeting (March 31, 2017), 14-15, 

https://www.treasury.gov/initiatives/fio/acrsm/Documents/Minutes_March_2017_ACRSM.pdf. 

106 Meeting agenda and minutes are available through the ACRSM website. “Advisory Committee on Risk-Sharing 

Mechanisms (ACRSM),” Treasury, https://www.treasury.gov/initiatives/fio/acrsm/Pages/default.aspx, last updated 

November 2, 2017

107 Treasury, EO Report, 115.
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C. Cyber Insurance and Insurance Industry Cybersecurity

FIO continues to monitor developments related to the cyber insurance market and insurance 

industry cybersecurity.108 Although cyber insurance and cybersecurity generally are treated as 

distinct matters, it is important to recognize the areas in which they overlap as cyber risks

continue to increase.

109 Policyholders consider cyber insurance valuable because, in addition to 

risk transfer, it may offer methods for assessing their own cybersecurity, and also may provide 

resources to assist with mitigation before an incident and response and recovery following one. 

Just like their own policyholders, insurers themselves must take into account their own risks and 

take steps to secure their extensive underwriting and other operational data, as well as assess 

potential vulnerabilities from new developments such as their increasing reliance on InsurTech. 

(InsurTech is discussed further in Section V.D of this Report). Below, the Report provides more 

information on the cyber insurance market in the United States and globally, and discusses in 

more detail cybersecurity for the insurance industry specifically.

1. The Cyber Insurance Market

The U.S. cyber insurance market continued to grow in 2017, nearing $1.9 billion for standalone 

and package policies combined, a 32 percent increase over premiums in the prior year.110 While 

take-up rates of cyber insurance can vary significantly depending on the industry and company

size, overall take-up rates have been fairly consistent over the past year, according to at least one 

survey.111 Another analysis, however, found that the cyber policies in force in 2017 jumped 24 

percent as compared to 2016, but that take-up rates remained low among small to medium-size 

enterprises.112

 

108 See FIO, Annual Report on the Insurance Industry (2015), 65-67, 

https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/2015%20FIO%20Annual%20Report_Final.pdf; FIO, Annual Report on the Insurance Industry

(2016), 56-61, https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/2016_Annual_Report.pdf; 

FIO, 2017 Annual Report, 54-62. 

109 The intersection between cybersecurity and the development of the cyber insurance market was underscored by a 

2017 report from the OECD. See OECD, Enhancing the Role of Insurance in Cyber Risk Management (2017), 

https://read.oecd-ilibrary.org/finance-and-investment/enhancing-the-role-of-insurance-in-cyber-riskmanagement_9789264282148-en. 

110 See, e.g., Calvin Trice and Jason Woleben, “Packaged Business Cybersecurity Premiums Written Soar YOY in 

2017,” S&P Global Market Intelligence, May 11, 2018, 

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=44537694. See also Caroline Saucer, 

“Best’s Special Report Says Cyber Market Still Awaiting a Real Growth Spurt,” Best’s News Service, May 25, 2018, 

http://www3.ambest.com/ambv/bestnews/newscontent.aspx?AltSrc=104&RefNum=208809. 

111 The Council of Insurance Agents & Brokers, Cyber Insurance Market Watch Survey: Executive Summary

(December 2017), https://www.ciab.com/download/11984/ciab-december-cyber-market-watch-survey/. 

112 Saucer, “Cyber Market Still Awaiting a Real Growth Spurt.”
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Observers continue to predict significant future growth: one forecast, for example, estimates that 

the global cyber insurance market will exceed $16 billion in premiums by 2023.113 Even those 

who project lower volumes agree that the rate of cyber insurance premium growth will outpace 

the growth rate of other types of insurance within three years.114 One potential driver of growth, 

however – the implementation of the General Data Protection Regulation (GDPR)115 in the 

EU – has not yet demonstrated the anticipated market impact.116

Despite recent growth, cyber insurance remains a small portion of the over $550 billion U.S. 

P&C insurance market. Insurers reportedly are cautious in face of uncertainty about the risk and 

cost of claims. One rating agency shares these concerns, cautioning that “aggressive growth” by 

any insurers in this market segment could be “credit negative, as underwriting, pricing, and 

reserving uncertainties would outweigh the potential earnings growth benefits.”117 

“Accumulation risk” – the risk of numerous covered losses arising from a single event – is 

another area of concern.118

Cyber insurance can help policyholders defray the cost of cyber incidents such as data breaches. 

One survey found, for example, that the average cost of a data breach is nearly $4 million.119 

Policyholders also may be attracted by the risk management services that insurers increasingly 

offer as part of their cyber insurance policy packages. For example, insurers may offer their 

clients discounts for service providers who can help with workforce training, evaluating network 

vulnerabilities, and reviewing incident response plans.120

 

113 Prescient & Strategic Intelligence, Cyber Insurance Market Overview (November 2017), 

https://www.psmarketresearch.com/market-analysis/cyber-insurance-market. 

114 “Cyber Insurance Premium Growth Will Soon Outpace All Other Sectors,” Carrier Management, June 8, 2018, 

https://www.carriermanagement.com/news/2018/06/08/180246.htm. 

115 Council Regulation 2016/679 of April 26, 2016, General Data Protection Regulation, 2016 O.J. (L 119) (EU), 

http://ec.europa.eu/justice/data-protection/reform/files/regulation_oj_en.pdf. 

116 Mengqi Sun, “Why Europe’s Cyber Insurance Windfall Hasn’t Happened,” The Wall Street Journal, June 20, 

2018, https://www.wsj.com/articles/why-europes-cyber-insurance-windfall-hasnt-happened-1529496000. Many 

previously projected that GDPR would spur demand for cyber coverage in the EU. See, e.g., Sarah Veysey, 

“Privacy Rules May Boost Cyber Purchases,” Business Insurance, October 2, 2017, 

https://www.businessinsurance.com/article/20171002/NEWS06/912316174/Privacy-rules-may-boost-cyberinsurance-purchases. 

117 Matt Macfarland, “Fitch: ‘Aggressive Growth’ in Cyber Would Be Credit Negative for Insurers,” S&P Global 

Market Intelligence, November 14, 2017, 

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=42630952. 

118 See, e.g., Geneva Association, Advancing Accumulation Risk Management in Cyber Insurance (August 16, 

2018), https://www.genevaassociation.org/research-topics/cyber-and-innovation/advancing-accumulation-riskmanagement-cyber-insurance. 

119 The Council of Insurance Agents & Brokers, Cyber Insurance Market Watch Survey. 

120 See, e.g., Joe Rosengarten, “How Insurance Companies are Minimizing Cyber Losses,” Insurance Business 

America, October 3, 2017, https://www.insurancebusinessmag.com/us/news/cyber/how-insurance-companies-areminimizing-cyber-losses-80810.aspx. 
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As the market grows, insurers, regulators, and policymakers continue to work on identifying and 

addressing outstanding issues related to cyber insurance. For example, key cyber insurance 

terms are not standardized, and both private industry and government bodies are advancing 

proposals to promote better understanding of common concepts.121 The FSB published for 

public consultation a draft Cyber Lexicon with a set of core terms related to cybersecurity and 

cyber resilience in the financial sector. After considering the responses to the consultation, the 

FSB plans to finalize the Lexicon for delivery to the G-20 in November 2018.122

2. Insurance Industry Cybersecurity

Financial services organizations, including insurers, remain among the most frequent victims of 

reported data breaches. One report found that breaches of financial services firms tripled over 

the past five years.123 Notably, in September 2017, Equifax publicly reported that the personal 

details of as many as 143 million U.S. consumers were exposed between May and July 2017.124 

With regard to the insurance industry in particular, one survey found that the average insurer was 

the target of 113 cyber incidents every year, and that one in three targeted incidents resulted in a 

security breach.125 Insurers (and other financial services firms) are attractive targets, at least in 

part, because of the substantial amount of personally identifiable information in their systems. In 

addition, insurers writing commercial policies (such as cyber insurance products) may have 

access to sensitive commercial information, possibly including sensitive security information. 

Insurers therefore have strong incentives to put in place an appropriate cybersecurity framework. 

Many insurance industry participants recognize the importance of sharing information about 

cybersecurity vulnerabilities and threats, as well as best practices and regulatory challenges, and 

therefore share cybersecurity information through a variety of formal and informal mechanisms. 

For example, the Financial Services-Information Sharing and Analysis Center (FS-ISAC), a 

member-owned non-profit organization, provides a forum for cyber and physical threat 

intelligence analysis and sharing for the financial sector as a whole. In addition, the FS-ISAC 

 

121 See, e.g., European Union Agency for Network and Information Security, Commonality of Risk Assessment 

Language in Cyber Insurance (November 15, 2017), https://www.enisa.europa.eu/publications/commonality-of-riskassessment-language-in-cyber-insurance. 

122 Financial Stability Board, “FSB Publicly Consults on Cyber Lexicon,” news release, July 2, 2018, 

http://www.fsb.org/2018/07/fsb-publicly-consults-on-cyber-lexicon/. 

123 Phil Muncaster, “Financial Services Sector Breaches Triple in Five Years,” Infosecurity Magazine, February 14, 

2018, https://www.infosecurity-magazine.com/news/financial-services-breaches-triple/. 

124 See, e.g., Noor Zainab Hussain “Equifax Data Breach to Cost Insurers $125 Million – Property Claims Services,” 

Reuters, October 2, 2017, https://www.reuters.com/article/legal-equifax-breach-insurance/equifax-data-breach-tocost-insurers-125-mln-property-claim-services-idUSKCN1C7265. 

125 Accenture, Insuring Your Future: Cybersecurity and the Insurance Industry (2017), 

https://ins.accenture.com/rs/897-EWH-515/images/Accenture-Security-Report-2016-Key-Insights-for-InsurancePOV.pdf. 
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hosts the Insurance Risk Council, an insurance-specific committee which shares information and 

best practices particularly relevant to insurers.

126

Regulators and policymakers at the state, federal, and international levels also are continuing to 

enhance the cybersecurity posture of the insurance industry. Treasury serves as the federal 

interface for matters involving cyber threats and cybersecurity for institutions within the 

domestic and international financial services sector, including insurers.127 In this role, Treasury 

serves as the sector-specific agency for the financial services sector as designated by Presidential 

Policy Directive 21.128 Treasury, with the Department of Homeland Security and other federal 

agencies, including the regulatory, law enforcement, and intelligence communities, work 

together to protect the nation’s critical infrastructure. Treasury also coordinates with state 

government agencies and insurance regulators, the NAIC, and the private sector.

Treasury continues to collaborate with insurers and state regulators to help identify and adopt 

best practices and baseline protections to enhance cybersecurity. In August 2017, together with 

the Financial Services Sector Coordinating Council for Critical Infrastructure Protection and 

Homeland Security (FSSCC),

129 Treasury led a public-private tabletop exercise with participants 

from the insurance industry, state regulators and the NAIC, and the law enforcement community. 

A follow-up exercise, focused on third-party risk, was held in August 2018. These tabletop 

exercises, hosted at Treasury, simulated cyber incidents and helped identify key challenges for 

effective public-private response and coordination. 

FIO is also forming a cybersecurity working group with Treasury’s Office of Critical 

Infrastructure Protection and Compliance Policy and others, which intends to host a series of 

stakeholder discussions in the coming months to assess cybersecurity challenges for the 

insurance industry, particularly for small and regional insurers, and, as warranted, formulate 

recommendations for insurance industry participants and relevant regulators. 

Insurance regulators and legislators are continuing to act at the state level. The New York 

Department of Financial Services (NYDFS) has implemented cybersecurity requirements for 

 

126 See generally “Financial Services – Information Sharing and Analysis Center,” FS-ISAC, 

https://www.fsisac.com/. See also Deloitte Center for Financial Services and FS-ISAC, The State of Cybersecurity 

at Financial Institutions (2018), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/risk/statecybersecurity-financial-institutions.pdf. 

127 FIO, 2017 Annual Report, 60.

128 The White House, Office of the Press Secretary, “Presidential Policy Directive – Critical Infrastructure Security 

and Resilience,” news release, February 12, 2013, https://obamawhitehouse.archives.gov/the-pressoffice/2013/02/12/presidential-policy-directive-critical-infrastructure-security-and-resil. 

129 FSSCC was established by the financial sector in 2002 and works collaboratively with key government agencies 

to protect U.S. critical infrastructure from cyber and physical incidents. Its 70 members include financial trade 

associations, financial utilities, and other financial firms. “About FSSCC,” FSSCC, https://www.fsscc.org/AboutFSSCC. 
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financial services companies.130 The NAIC adopted, in October 2017, the Insurance Data 

Security Model Law, which is designed to “establish the exclusive standards for data security 

and investigation and notification of a breach of data security applicable” to insurance licensees 

in the states which adopt the model.131 The model will become law only if a state adopts it; to 

date, only South Carolina has done so.132 Many have indicated their intent to seek changes to the 

Insurance Data Security Model Law as it is considered by other state legislatures, potentially 

undermining uniformity.133

FIO is involved in international initiatives related to insurance industry cybersecurity, including 

through the IAIS Financial Crime Task Force (FCTF), which is chaired by a member of FIO’s 

staff. In August 2016, the IAIS released its Issues Paper on Cyber Risk to the Insurance Sector, 

which was developed by the FCTF.134 More recently, the IAIS has followed up by developing 

an Application Paper on Supervision of Insurer Cyber Security. The Application Paper – which 

is “intended to provide further guidance to supervisors seeking to develop or enhance their 

approach to supervising the cyber risk, cybersecurity, and cyber resilience of insurers” – was 

released in draft for public comment between June 29, 2018 and August 13, 2018,135 and is 

expected to be finalized and published this year. 

D. Mitigation and Coordination with Other State and Federal Agencies

Severe weather events caused devastating losses in 2017. Millions of Americans were affected 

by Hurricanes Harvey, Irma, and Maria; wildfires which burned over nine million acres; 

mudslides; tornados; earthquakes; and other severe weather events.136 In 2017 alone, 16 separate 

severe weather events in the United States had costs at or above $1 billion per event. The 

cumulative economic costs of these billion-dollar events was over $300 billion, a new U.S. 

 

130 N.Y. Comp. Codes R. & Regs. tit. 23, § 500 (2017), http://www.dfs.ny.gov/legal/regulations/adoptions/rf23-

nycrr-500_cybersecurity.pdf. 

131 NAIC, “NAIC Passes Insurance Data Security Model Law,” news release, October 24, 2017, 

https://www.naic.org/Releases/2017_docs/naic_passes_data_security_model_law.htm; Insurance Data Security 

Model Act, § 1 (NAIC 4th Quarter 2017), https://www.naic.org/store/free/MDL-668.pdf. 

132 See, e.g., Thomas Harman, “South Carolina Becomes First State to Pass Cybersecurity Law,” Best’s News 

Service, May 14, 2018, http://www3.ambest.com/ambv/bestnews/newscontent.aspx?AltSrc=104&RefNum=208442. 

133 See, e.g., Thomas Harman, “Insurance Groups Seek Changes to NAIC Data Security Model Law When Bills 

Reach State Lawmakers,” Best’s News Service, November 1, 2017, 

http://www3.ambest.com/ambv/bestnews/newscontent.aspx?AltSrc=104&RefNum=204088. 

134 IAIS, Issues Paper on Cyber Risk to the Insurance Sector (August 2016), 

https://www.iaisweb.org/file/61857/issues-paper-on-cyber-risk-to-the-insurance-sector. 

135 IAIS, Application Paper on Supervision of Insurer Cybersecurity: Public Consultation (June 29, 2018), 

https://www.iaisweb.org/page/consultations/closed-consultations/2018/application-paper-on-cyber-security. 

136 CoreLogic, 2017 Natural Hazard Risk Summary & Analysis (2018), 

https://corelogic.maps.arcgis.com/apps/MapSeries/index.html?appid=c380cfce638441fbb6336334802792ed. 
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annual record.137 Weather-related natural catastrophes also set a new global record for losses, of 

which less than half were insured.138

Insurance is a critical component for disaster recovery, providing benefits directly to 

policyholders when natural disasters strike. As FEMA has explained: 

Experience has shown repeatedly that individuals, communities, and 

businesses that manage risk through insurance recover faster and more fully 

after a disaster.... While the [federal] Disaster Relief Fund supports survivors in 

the immediate aftermath of a presidentially-declared disaster, this Federal support 

only serves as a temporary safety net for immediate needs and does not provide for 

complete financial recovery. Financial preparedness, including having an 

insurance policy on personal and public properties, is critical to helping rebuild a 

home, replace belongings, and restore order to a family and community.139 

(emphasis in original)

The insurance industry also plays a significant role in supporting “mitigation,” that is, actions to 

reduce loss of life and property by lessening disasters’ impact.140

The federal government recognizes the importance of insurance, both before and after disasters 

strike.141 FIO supports ongoing federal efforts to lessen the impact of disasters through 

mitigation, and to improve the availability and take-up of insurance. 

Treasury, through FIO, participates in the MitFLG, a national structure to coordinate mitigation 

efforts across the federal government and with state, local, tribal, and territorial representatives. 

Among other things, MitFLG is developing a national mitigation investment strategy with 

voluntary recommendations designed to better communicate the need for mitigation, improve 

coordination of existing mitigation efforts, and increase mitigation investments nationwide.142

 

137 “Billion-Dollar Weather and Climate Disasters: Time Series,” NOAA National Centers for Environmental 

Information, https://www.ncdc.noaa.gov/billions/time-series. 

138 Munich Re, “Natural Catastrophe Review: Series of Hurricanes Makes 2017 Year of Highest Insured Losses 

Ever,” news release, January 4, 2018, https://www.munichre.com/en/media-relations/publications/pressreleases/2018/2018-01-04-press-release/index.html.

139 FEMA, 2018-2022 Strategic Plan (March 15, 2018), 15, https://www.fema.gov/medialibrary/assets/documents/160940. 

140 “What is Mitigation?” FEMA, last updated June 7, 2018, https://www.fema.gov/what-mitigation. 

141 See, e.g., FIO, Report Providing an Assessment of the Current State of the Market for Natural Catastrophe 

Insurance in the United States (September 2015), https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/Natural%20Catastrophe%20Report.pdf; FIO, 2016 Annual Report; FIO, Report on Protection of 

Insurance Consumers and Access to Insurance (2016), https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/2016_FIO_Consumer_Report.pdf; FIO, 2017 Annual Report. 

142 See “National Mitigation Framework: National Mitigation Investment Strategy (NMIS),” FEMA, last updated 

May 8, 2018, https://www.fema.gov/national-mitigation-framework. 
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FEMA released a draft strategy for public comment in January 2018, underscoring the benefit of 

pre-disaster mitigation by noting that a National Institute of Building Sciences report found, on 

average, federal mitigation grants save $6 for every $1 spent.143 The public comment period has 

closed, and MitFLG is revising the draft strategy.

FIO, FEMA, and NOAA co-hosted a financial sector stakeholder discussion in May 2018, 

“Financing Mitigation and Promoting Resilience.” The discussion had three objectives: 

(1) developing a shared understanding of the value of mitigation, and the connection to 

enhancing resilience; (2) increasing awareness of federal and private sector initiatives focused on 

leveraging and incentivizing investment in mitigation and resilience; and (3) discussing 

opportunities to advance partnerships that can maximize mitigation investment. The federal 

initiatives discussed included the MitFLG’s draft national mitigation investment strategy, as well 

as FEMA’s “mitigation moonshot” with the twin goals of doubling flood insurance coverage and 

quadrupling mitigation investments by 2023. 

The NFIP, the federal insurance and risk management program managed by FEMA, continued to 

expand its private sector reinsurance program in 2017 and 2018. Beginning in January 2017, and 

following a test program in 2016, FEMA purchased reinsurance to help diversify and lessen the 

NFIP’s net exposure to catastrophic losses. During 2018, FEMA recovered the entire $1.042 

billion in reinsurance from its 2017 placement, for claims resulting from Hurricane Harvey.144 

In addition, the NFIP secured $1.46 billion in reinsurance for qualifying flood losses in calendar 

year 2018.145 Also in 2018, for the first time, FEMA transferred a portion of the NFIP’s 

financial risk to capital markets investors through a $500 million catastrophe bond, for claims 

from a qualifying flood event between August 1, 2018 and July 31, 2021. FEMA worked with 

brokers, book runners, and a catastrophe modeler to structure this transaction.

146 FIO continued 

to provide FEMA with information and advice about reinsurance and alternative risk instruments 

(discussed in Section VI.B.2 of this Report). 

 

143 FEMA, “FEMA Releases Draft National Mitigation Investment Strategy for Public Comment,” news release, 

January 11, 2018, https://www.fema.gov/news-release/2018/01/11/fema-releases-draft-national-mitigationinvestment-strategy-public-comment, (citing National Institute of Building Sciences, Natural Hazard Mitigation 

Saves: 2017 Interim Report, 1 (December 2017), https://www.fema.gov/media-library-data/1516812817859-

9f866330bd6a1a93f54cdc61088f310a/MS2_2017InterimReport.pdf).

144 See, e.g., “National Flood Insurance Program’s (NFIP) Reinsurance Program,” FEMA, last updated July 31, 

2018, https://www.fema.gov/nfip-reinsurance-program. As another consequence of the 2017 hurricanes, FEMA 

exhausted its then-existing borrowing authority. Congress forgave $16 billion of NFIP debt through supplemental 

appropriations. See Additional Supplemental Appropriations for Disaster Relief Requirements Act, 2017, Pub. L. 

No. 115-72, 131 Stat. 1224 (2018).

145 See, e.g., “NFIP Reinsurance Program,” FEMA. 

146 See “National Flood Insurance Program’s (NFIP) Reinsurance Program: Summary of the August 2018 

Reinsurance Placement Engaging the Capital Markets,” FEMA, last updated July 31, 2018, 

https://www.fema.gov/nfip-reinsurance-program. 
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The NFIP is subject to periodic reauthorization by Congress, and received several short-term 

extensions over the past year. The next statutory deadline for reauthorization is November 30, 

2018.147

 

147 See National Flood Insurance Program Extension Act of 2018, Pub. L. No. 115-225, 132 Stat. 1624 (2018). See 

also “National Flood Insurance Program: Reauthorization,” FEMA, last updated August 1, 2018, 

https://www.fema.gov/national-flood-insurance-program/national-flood-insurance-program-reauthorizationguidance. 
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IV. INTERNATIONAL ENGAGEMENT

Section IV addresses structural changes at the IAIS, as well as other IAIS issues. It then presents 

the background, status, and future steps with respect to the U.S.-EU Covered Agreement, and 

concludes with an update on the EU-U.S. Insurance Project. 

A. IAIS

1. Structural Changes at the IAIS

The IAIS is a voluntary, member-driven non-profit organization of insurance supervisors. With

over 210 Members, the IAIS is the international standard-setting body responsible for developing 

and supporting the implementation of principles, standards, and guidance for the supervision of 

the insurance sector.148 The IAIS is governed by the General Meeting of Members, which may: 

amend bylaws; adopt principles, standards, and guidance developed by the association or other 

persons or entities that have not already been adopted by the Executive Committee; elect 

Executive Committee members, and take other actions specified in the bylaws. The Executive 

Committee then provides strategic direction and manages the IAIS consistent with specific duties 

in the bylaws. It appoints the Secretary General, and makes decisions necessary to achieve the 

IAIS mission.149

Prior to January 1, 2018, there were four committees reporting to the Executive Committee: 

• Audit and Risk Committee – reviews IAIS internal controls and monitors IAIS activities 

to ensure achievement of objectives and compliance with procedures; 

• Budget Committee – proposes an annual budget and annual member fees, and reports on 

the financial situation of the IAIS;

• Financial Stability and Technical Committee – responsible for developing international 

principles, standards, guidance, and other materials related to insurance supervision, and 

works on issues related to financial stability, systemic risk, and macroprudential 

supervision and surveillance; and

• Implementation Committee – responsible for issues related to assessments and assistance 

in implementing IAIS principles, standards, and guidance.150

In November 2017, the General Meeting of Members approved changes to the bylaws that 

disbanded the Financial Stability and Technical Committee and replaced it with two new 

 

148 IAIS, 2016 IAIS Annual Report (November 2017), 6, https://www.iaisweb.org/page/about-the-iais/annualreport//file/70097/annual-report.

149 IAIS, 2016 Annual Report, 6.

150 IAIS, 2016 Annual Report, 6-7.
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committees, effective January 1, 2018.151 The standard-setting activities of the Financial 

Stability and Technical Committee were allocated to the new Policy Development Committee, 

while the financial stability activities were allocated to the newly-formed Macroprudential 

Committee, along with those of the Systemic Risk Assessment Drafting Group (formerly the 

Systemic Risk Assessment Task Force).152 Also, the name of the Implementation Committee 

was changed to the Implementation and Assessment Committee, with no change in its charges. 

Figure 1 depicts the IAIS organizational structure as of January 1, 2018. 

Figure 1: IAIS Organizational Structure as of January 1, 2018 

Source: IAIS

 

151 IAIS, By-Laws, 9-10, https://www.iaisweb.org/page/about-the-iais/by-laws. 

152 “IAIS Newsletter,” IAIS, January 2018, 6, https://www.iaisweb.org/page/news/newsletter/file/71696/iaisnewsletter-january-2018.
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2. FIO’s Role Within the IAIS

U.S. engagement in international financial regulatory standard-setting bodies, such as the IAIS, 

is important to promote financial stability and level the playing field for U.S. financial 

institutions.

153 Throughout 2017 and 2018, FIO has continued to fulfill its statutory role 

representing the United States in the IAIS in various IAIS committees, subcommittees, working 

groups, and task forces. 

FIO staff have been actively engaged in the development of ICS Version 2.0 through the Capital, 

Solvency & Field Testing Working Group, as discussed in Section II.B of this Report. In 

addition, a FIO staff member chairs the IAIS Resolution Working Group, and represents the 

IAIS at relevant FSB bodies such as the Resolution Steering Group and the FSB Cross-Border 

Crisis Management Group for Insurers (iCBCM). Another member of FIO’s staff chairs the

IAIS Financial Crimes Task Force and, in that capacity, chairs the IAIS delegation to the 

Financial Action Task Force (FATF),

154 as well as representing the IAIS on various other 

international work streams including (1) the Joint Working Group on Cyber Resilience of the 

Committee on Payments and Marketing Infrastructure and the International Organization of 

Securities Commissions, and (2) the Cyber Lexicon Working Group (discussed in Sections 

III.C.2 and IV.D of this Report) established by the FSB in response to an October 2017 request 

of the G-20 Finance Ministers and Central Bank Governors. In addition, a FIO staff member 

chairs the Systemically Important Banks and Insurers Task Force, and is vice chair of the 

Systemic Risk Assessment Drafting Group (discussed in Section II.B.3 of this Report). FIO staff 

also participate in the IAIS’s: Policy Development Committee; Coordination Group; Governance 

Working Group; G-SII Analysts Working Group; Insurance Groups Working Group; 

Macroprudential Policy & Surveillance Working Group; Strategic Plan and Financial Outlook 

Task Force; and Supervisory Materials Review Task Force.155

To assist in the furtherance of its core mission and to promote U.S. economic interests, Treasury 

believes that FIO should have a permanent, voting membership on the IAIS Executive 

Committee.

156

In all of its IAIS-related (and other international) work, FIO continues to prioritize coordination 

and collaboration with the other U.S. members of the IAIS, as well as facilitating formal and 

informal opportunities for U.S. stakeholders to engage with FIO about matters before the IAIS. 

The U.S.-based members of the IAIS, “Team USA,” include FIO, the 56 state and territory 

insurance regulators who represent the individual sovereign jurisdictions within the United 

 

153 Treasury, EO Report, 132.

154 FATF is an inter-governmental body established in 1989 and has the objectives of setting standards and 

promoting effective implementation of legal, regulatory, and operational measures to combat money laundering, 

terrorist financing, and certain other threats. The IAIS is an Observer Organization to FATF. See “Who We Are,” 

FATF, http://www.fatf-gafi.org/about/.

155 See also FIO, 2017 Annual Report, 98-108; IAIS, IAIS Committee and Subcommittee Membership List (June 

2018), https://www.iaisweb.org/page/about-the-iais/organisational-structure//file/75208/iais-committees-andmembers-public. 

156 Treasury, EO Report, 136.
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States, the NAIC, and the Federal Reserve. FIO collaborates and communicates regularly with 

its Team USA counterparts. 

3. Insurance Core Principles/ComFrame

In 2017, the IAIS released for public consultations major revisions to the ICPs and ComFrame. 

The revisions, and subsequent consultations, were the next step in the thematic approach adopted 

by the IAIS in September 2015 aimed at ensuring a more efficient process of developing 

supervisory materials by theme across the three tiers of standard setting – ICPs, ComFrame, and 

G-SII policy measures – each of which builds on the previous one. In June 2016, the IAIS 

decided to restructure the ICPs and ComFrame and directly integrate ComFrame materials into 

the relevant ICPs. Thus, ComFrame is no longer a standalone document with material 

duplicative of the ICPs.157

The March 2017 consultations were the first documents to reflect the new structure. This 

restructuring itself did not create or alter any substantive provisions within ComFrame or the 

ICPs, but re-oriented and re-formatted ComFrame’s presentation. The restructuring, however, 

took place concurrently with revisions to the ICPs, which were made to reflect developments 

since the publication of the 2014 version. Additionally, because there were elements of 

ComFrame that had not been fully developed in the 2014 version, many of these elements were 

addressed as part of the revision process. Additional 2017 structural changes to the ICPs 

included the elimination of ICP 11 (Enforcement), which was integrated into ICP 10 (Preventive 

and Corrective Measures), and the elimination of ICP 26 (Cross-Border Cooperation and 

Coordination on Crisis Management) as such while moving its requirements into ICPs 12 

(Winding-up and Exit from the Market) and 25 (Supervisory Cooperation and Coordination), 

respectively.

158

The IAIS conducted further consultations in 2018. Figure 2 lists the public consultations, from 

2017 through July 31, 2018, related to the ICPs and ComFrame revisions, including the 

consultation for Overall ComFrame159 and ICS Version 2.0 (discussed in Section II.B.2 of this 

Report). 

 

157 “Consultation: Revised Insurance Core Principles (ICPs) and ComFrame Material Integrated with ICPs (for 

consultation period March 3, 2017 to June 1, 2017),” IAIS, https://www.iaisweb.org/page/consultations/closedconsultations/2017/revision-of-icps-and-comframe. 

158 “Consultation: Revised ICPs and ComFrame Material Integrated with ICPs (for consultation period March 3, 

2017 to June 1, 2017),” IAIS.

159 IAIS, Cover Note for Draft Overall ComFrame Released for Public Consultation on 31 July 2018 (July 31, 

2018), https://www.iaisweb.org/page/consultations/current-consultations/overall-comframe-including-ics-version20//file/76106/cover-note-on-draft-overall-comframe.
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Figure 2: 2017 and 2018 Public Consultations Related to ICP and ComFrame Revisions

ICP ComFrame

Introduction and Assessment Methodology 2017 2017

ICP 1 (Objectives, Powers, and Responsibilities of the 

Supervisor) 2017

ICP 2 (Supervisor) 2017

ICP 3 (Information Sharing and Confidentiality Requirements) 2017

ICP 5 (Suitability of Persons) 2017

ICP 6 (Changes in Control and Portfolio Transfers) 2018

ICP 7 (Corporate Governance) 2017

ICP 8 (Risk Management and Internal Controls) 2018 2017

ICP 9 (Supervisory Review and Reporting) 2017 2017

ICP 10 (Preventative and Corrective Measures) 2017 2017

ICP 11 (Enforcement) (incorporated into ICP 10) 2017 2017

ICP 12 (Exit from the Market and Resolution) 2017 2017

ICP 13 (Reinsurance and Other Forms of Risk Transfer) 2017

ICP 15 (Investments) 2018 2018

ICP 16 (Enterprise Risk Management for Solvency Purposes) 2018 2018

ICP 18 (Intermediaries) 2017

ICP 20 (Public Disclosures) 2018

ICP 19 (Conduct of Business) 2017

ICP 24 (Macroprudential Surveillance and Insurance 

Supervision)

2017

ICP 25 (Supervisory Cooperation and Coordination) 2017 2017

ICP 26 (Cross-Border Cooperation and Coordination on Crisis 

Management) (eliminated and incorporated into other ICPs)

2017 2017

Proposed definitions of Enterprise Risk Management-related 

terms

2018 2018

Overall ComFrame 2018

Revised ICS Version 2.0 2018

Source: FIO

The IAIS currently intends to adopt the revised ICPs and ComFrame (including ICS Version 2.0) 

in late 2019. In February 2017, however, the IAIS announced that it will develop an 

activities-based approach to assessing systemic risk in the insurance sector, and adopted a work 

plan involving a public consultation at the end of 2018, and including the finalization of any 

policy measures to address potential systemically risky activities as part of the ICPs and 

ComFrame (including ICS Version 2.0) to be adopted in 2019.160 This work may have 

implications for the existing ICPs and ComFrame.

 

160 “Revision of ICPs 1, 2, 18, and 19 (public consultation from June 30, 2017 to August 29, 2017),” IAIS,

https://www.iaisweb.org/page/consultations/closed-consultations/2017/revision-of-icps-12-18-19-and-24.
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B. U.S.-EU Covered Agreement

1. Background; Benefits; and Transparency

a) Introduction

In September 2017, the Secretary and the United States Trade Representative, together with EU 

officials, signed the Bilateral Agreement between the United States of America and the European 

Union on Prudential Measures Regarding Insurance and Reinsurance, generally known in the 

United States as the U.S.-EU Covered Agreement.161 This step was preceded by a multi-year 

project convened by FIO to increase mutual understanding and enhance cooperation between the 

EU and the United States regarding insurance supervision;162 approximately a year of 

international negotiations in 2016; and several months of stakeholder consultation and 

completion of certain administrative steps in 2017. 

A covered agreement is an international bilateral or multilateral agreement on insurance or 

reinsurance that “relates to the recognition of prudential measures” and that “achieves a level of 

protection for insurance or reinsurance consumers that is substantially equivalent to the level of 

protection achieved” under U.S. state-based regulation.163 Negotiation of the first and only 

covered agreement to date was jointly led by Treasury and its Federal Insurance Office and the 

USTR, pursuant to the Federal Insurance Office Act of 2010.164

b) Benefits to the United States

The U.S.-EU Covered Agreement addresses three areas of prudential insurance supervision: 

group supervision; reinsurance, including reinsurance collateral; and exchange of information 

between supervisory authorities. The agreement resolves longstanding concerns arising both 

from the prudential approach of U.S. states to insurers that cede business to EU reinsurers, and 

from the prudential approach of EU member states to U.S. insurance groups conducting business 

in the EU.

165 The agreement addresses these matters while protecting consumers and affirming

 

161 The U.S. Department of State maintains the U.S.-EU Covered Agreement on its website. See “Texts of 

International Agreements to which the US is a Party (TIAS),” U.S. Department of State,

https://www.state.gov/s/l/treaty/tias/index.htm; covered agreement itself available at 

https://www.state.gov/documents/organization/282149.pdf. Background information and a collection of related 

documents are also accessible on FIO’s website. “Initiatives: U.S. and EU Covered Agreement,” FIO,

https://www.treasury.gov/initiatives/fio/Pages/EU_Covered_Agreement.aspx. See also FIO, 2017 Annual Report, 

96-98. 

162 “Initiatives: EU-U.S. Insurance Dialogue Project,” FIO, last updated September 10, 2018, 

https://www.treasury.gov/initiatives/fio/EU-US%20Insurance%20Project/Pages/default.aspx. 

163 Federal Insurance Office Act of 2010, § 313(r).

164 Federal Insurance Office Act of 2010, § 314(a). 

165 Treasury, “Treasury, USTR Sign Covered Agreement on Prudential Insurance and Reinsurance Measures with 

the European Union,” news release, September 26, 2017, https://home.treasury.gov/news/press-releases/sm0164. 

See generally FIO, How To Modernize And Improve The System Of Insurance Regulation In The United States
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the U.S. system of insurance regulation, including the role of state insurance regulators as the 

primary supervisors of the business of insurance in the United States.166 As stated by Secretary 

Mnuchin at the time of signing: “By providing regulatory clarity and reducing regulatory burden, 

the Agreement enables American companies to be more competitive in the EU, enhances 

opportunities for U.S. insurers and reinsurers at home and abroad, and furthers the 

administration’s goal of sustained economic growth.”167 The benefits to the United States of key 

agreement provisions are further described later in this discussion. 

c) Transparency and the U.S. Policy Statement 

Throughout the negotiations, which concluded in January 2017,168 Treasury and USTR consulted 

with the congressional committees designated in the Federal Insurance Office Act,169 and 

worked closely with other federal government agencies, and a task force of state insurance 

supervisors.170 Prior to the announcement in July 2017 that the United States would sign the 

U.S.-EU Covered Agreement,171 Treasury and USTR consulted closely with a range of industry 

stakeholders concerning the final text of the agreement, as well as with the NAIC, individual 

state insurance supervisors, and other interested parties.172

 

(December 2013), 37-38, https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/How%20to%20Modernize%20and%20Improve%20the%20System%20of%20Insurance%20Reg

ulation%20in%20the%20United%20States.pdf. 

166 Treasury and USTR advised Congress in 2015 that achievement of a covered agreement with the EU would 

“further confirm that the existing U.S. insurance regulatory system serves the goals of insurance sector oversight, 

policyholder protection, and national and global financial stability.” Letter from Anne Wall, Assistant Secretary for 

Legislative Affairs, Department of the Treasury and Mike Harney, Assistant U.S. Trade Representative for 

Congressional Affairs, Office of the U.S. Trade Representative to Senator Richard Shelby, et al. (November 20, 

2015), https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/Covered%20Agreement%20Letters%20to%20Congress.pdf. 

167 Treasury, “Treasury, USTR Sign Covered Agreement on Prudential Insurance and Reinsurance Measures with 

the European Union,” news release, September 26, 2017, https://home.treasury.gov/news/press-releases/sm0164; 

Treasury, “Joint Statement on Upcoming Signature of the Bilateral Agreement between the European Union and the 

United States of America on Prudential Measures Regarding Insurance and Reinsurance,” news release, September 

22, 2017, https://home.treasury.gov/news/press-releases/sm0163.

168 USTR, “Joint Statement on U.S.-EU Negotiations for a Bilateral Agreement on Insurance and Reinsurance 

Measures,” news release, January 13, 2017, https://ustr.gov/about-us/policy-offices/press-office/pressreleases/2017/january/joint-statement-us-eu-negotiations. 

169 The designated congressional committees are the House of Representatives Committee on Financial Services, 

House Committee on Ways and Means, Senate Committee on Banking, Housing, and Urban Affairs, and Senate 

Committee on Finance. See 31 U.S.C. § 314(b)(1).

170 FIO, 2017 Annual Report, 96-98.

171 Treasury, “Treasury, USTR Notice of Intent to Sign,” news release, July 14, 2017, 

https://www.treasury.gov/press-center/press-releases/Pages/sm0124.aspx. 

172 Congress also heard from a range of stakeholders, including the NAIC, in two public hearings convened during 

this period. Financial Services Committee, “Subcommittee Assesses U.S.-EU Covered Agreement,” news release, 

(February 16, 2017), https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401523; 

Assessing the U.S.-EU Covered Agreement: Hearing Before the Subcommittee on Housing and Insurance of the 
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These consultations were followed by a reaffirmation from Treasury and USTR to work closely 

with the NAIC, state insurance regulators, and other stakeholders regarding implementation and 

administration of the U.S.-EU Covered Agreement. That undertaking is reflected in a “Policy 

Statement” published by Treasury and USTR on the same date the United States and European 

Union signed the agreement, stating in part:

• “The United States commits to regular and substantive engagement with stakeholders 

throughout its implementation of this Agreement;” and

• “Because U.S. state regulators will be largely responsible for implementing the 

Agreement, the United States is committed to the direct involvement of state insurance 

regulators, including their staff, in the work of the Joint Committee. To this end, the 

United States will consult with state insurance regulators, and will establish a robust 

consultative process to ensure that discussions in the Joint Committee will be wellinformed of the views and interests of state insurance regulators.”173

The Policy Statement, which was acknowledged with appreciation by the NAIC and other 

stakeholders,174 also: restates the benefits of the U.S.-EU Covered Agreement for the United 

States; notes that the United States will make every effort to ensure that the EU implements its 

obligations under the agreement, while carrying out the United States’ own obligations; and 

provides additional clarity for U.S. insurance regulators and industry participants by addressing

the U.S. understanding of several provisions of the agreement on which some stakeholders 

sought additional detail.175

 

Committee on Financial Services, U.S. House of Representatives, 115th Cong. (February 16, 2017), 

https://financialservices.house.gov/uploadedfiles/115-2.pdf; Examining the U.S.-EU Covered Agreements, Senate 

Committee on Banking, Housing, and Urban Affairs, 115th Cong. (May 2, 2017),

https://www.banking.senate.gov/hearings/examining-the-us-eu-covered-agreements. 

173 United States, Statement of the United States on the Covered Agreement with the European Union (September 

22, 2017), https://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/US_Covered_Agreement_Policy_Statement_Issued_September_2017.pdf. As noted in the Policy 

Statement, the U.S.-EU Covered Agreement is the final legal text negotiated between the Parties and it contains 

important legal conditions and other terms not summarized in the Policy Statement.

174 “We appreciate the Treasury and USTR working constructively with us to resolve our concerns with the covered 

agreement, but would caution against using this mechanism in the future.” NAIC, “9/22/17 – NAIC Responds to 

Covered Agreement,” news release, September 22, 2017, 

https://www.naic.org/newsroom_statement_170922_responds_to_covered_agreement.htm. See also “NAMIC, 

NAIC Laud U.S. Policy Statement Issued with Covered Agreement,” World Trade Online, September 25, 2017, 

https://insidetrade.com/daily-news/namic-naic-laud-us-policy-statement-issued-covered-agreement.

175 See, e.g., written testimony concerning “a list of provisions ... that we would like clarified before the United 

States moves forward with implementation of the Agreement.” Examining the United States-European Covered 

Agreement, Before the Senate Committee on Banking, Housing, and Urban Affairs, 115th Cong. (May 2, 2017), 

(statement of Julie Mix McPeak, NAIC President-Elect),

https://www.banking.senate.gov/imo/media/doc/McPeak%20Testimony%205-2-17.pdf. 
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2. Implementation by Federal and State Authorities

The U.S.-EU Covered Agreement advances U.S. reinsurance collateral reform, an effort that the 

NAIC and state insurance regulators began nearly two decades ago, but which had lost 

momentum at the time the Federal Insurance Office Act was passed, and which was still 

progressing slowly when the U.S.-EU negotiations were announced in 2015.176 The U.S.-EU 

Covered Agreement builds on the work of the states by establishing that EU reinsurers of 

sufficient financial strength, and which meet consumer protection provisions established in the 

agreement, will not have to post collateral for liabilities they assume from U.S. ceding insurers as 

a condition for state regulators permitting those insurers to take “credit” for the reinsurance 

under statutory insurance accounting.177

In addition, the U.S.-EU Covered Agreement resolves issues arising under Solvency II (the EU 

insurance regulatory directive that went into effect in 2016) for U.S. insurance groups with 

operations in the EU, and for U.S. reinsurers assuming business from EU insurers. Under the 

agreement, the EU agrees not to apply aspects of its prudential approach to solvency regulation 

to U.S. insurers and reinsurers. Instead, the agreement establishes specific conditions whereby

both the EU and the United States will respect the group supervision of the home country as to 

group capital, governance, and reporting. Among other benefits, a U.S. insurer will now be able 

to operate in the EU without subjecting its U.S. parent to costly worldwide group capital 

requirements which may otherwise have been applicable under EU law,

178 and U.S. reinsurers 

will not be required to establish a local EU presence in order to assume business from EU ceding 

insurers.

179

Successful implementation of the U.S.-EU Covered Agreement contemplates action by the states 

to conform relevant laws to the provisions of the agreement, particularly regarding the conditions 

for elimination of collateral requirements currently applicable to EU reinsurers accepting 

business from U.S. ceding insurers. If that does not occur within the implementation periods set 

out in the agreement,

180 the possibility exists that inconsistent state insurance measures may be 

 

176 On the role of international reinsurance in the United States, and related U.S. prudential regulation, including 

collateral requirements and reform efforts, see FIO, The Breadth and Scope of the Global Reinsurance Market and 

the Critical Role Such Market Plays in Supporting Insurance in the United States (December 2014), 23-25, 

https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/FIO%20-Reinsurance%20Report.pdf; FIO, 

Annual Report on the Insurance Industry (September 2014), 45-47, https://www.treasury.gov/initiatives/fio/reportsand-notices/Documents/2014_Annual_Report.pdf. 

177 “Credit for reinsurance” describes the degree to which, under U.S. statutory insurance accounting, ceding 

insurers are permitted to recognize transfers of risk to reinsurers as reductions of policy liabilities or as assets, 

thereby freeing up regulatory capital to support new and existing business. FIO, Reinsurance Report, 11. 

178 Article 4 of the U.S.-EU Covered Agreement.

179 Article 3 of the U.S.-EU Covered Agreement.

180 Under Article 9, Paragraph 4 of the U.S.-EU Covered Agreement, the United States is obligated to begin 

evaluating state laws for potential preemption not later than the first day of the month, 42 months after the date the 

agreement was signed, i.e., by March 1, 2021, and it “shall complete any necessary preemption determination” not 
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federally preempted in accordance with the Federal Insurance Office Act.

181 However, Treasury 

would not need to exercise this authority with respect to any state that conforms its laws to the 

provisions of the U.S.-EU Covered Agreement within the specified time period. In this regard, 

since the agreement was signed, the NAIC has demonstrated its commitment to, and has made 

considerable progress toward, setting the stage for state implementation, including through the 

recent activities described below.

a) Reinsurance Collateral

NAIC February 2018 Hearing. In February 2018, the NAIC held a public hearing to consider 

the reinsurance collateral provisions of the U.S.-EU Covered Agreement. Among other 

questions, interested parties were asked to address “[a]mending the Credit for Reinsurance 

Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) to eliminate 

reinsurance collateral requirements for EU-based reinsurers meeting the conditions of the 

Covered Agreement.”182 Multiple state insurance supervisors – including those in leadership 

positions at the NAIC – attended the hearing, as did representatives of Treasury and USTR.183 

Thereafter, the NAIC Executive Committee was asked to approve development of model law and 

regulation provisions to implement the U.S.-EU Covered Agreement.184

NAIC Spring National Meeting. At its Spring National Meeting in March 2018, the NAIC 

took steps to continue development of model law and regulation provisions to operationalize the 

U.S.-EU Covered Agreement. In a meeting of the Reinsurance Task Force, its Chair 

summarized the progress to date, including the February 2018 hearing submissions and the 

 

later than the first day of the month, 60 months after signature (September 1, 2022). See also Article 10, Paragraph 

2(d) of the U.S.-EU Covered Agreement. 

181 Subject to certain procedures, including providing notice and an opportunity for public comment, a state 

insurance measure shall be preempted if the FIO Director determines that it results in less favorable treatment of a 

non-United States insurer domiciled in a foreign jurisdiction that is subject to a covered agreement than a United 

States insurer domiciled, licensed, or otherwise admitted in that state, and is inconsistent with the covered 

agreement. 31 U.S.C. § 313(f).

182 “NAIC Notice of Public Hearing and Request for Comments,” NAIC, December 21, 2017, 

https://www.naic.org/documents/cmte_e_reinsurance_related_180220_public_hearing_notice.pdf. The notice and 

hearing were also directed to extending similar treatment to reinsurers from jurisdictions which might, in the future, 

be party to a covered agreement with the United States, and to reinsurers from NAIC “qualified jurisdictions.” 

NAIC considerations concerning non-EU jurisdictions are discussed below.

183 A summary of the February 20, 2018 hearing appears in the draft minutes of the NAIC Spring National Meeting, 

which were included in materials provided to the Reinsurance Task Force for the 2018 Summer National Meeting. 

NAIC, Draft Pending Adoption (March 30, 2018), 2, 

https://www.naic.org/meetings1808/cmte_e_reinsurance_2018_summer_nm_materials.pdf. A compilation of the 20 

comment letters submitted in advance of the February 20, 2018 NAIC hearing is also available. See NAIC, Covered 

Agreement Public Hearing Held on February 20, 2018: Comment Letters, 

https://www.naic.org/documents/cmte_e_reinsurance_related_180220_public_hearing_comment_letters.pdf. 

184 NAIC, Executive Committee Conference Call (April 17, 2018), contained within NAIC, 2018 Summer National 

Meeting: Executive Committee Agenda (August 5, 2018), Attachment 4, 

https://www.naic.org/meetings1808/cmte_ex_2018_summer_nm_materials.pdf. 
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subsequent correspondence to the Financial Condition Committee. The Chair reported, further, 

that a meeting of the Executive Committee had been scheduled to consider adoption of the model 

law development request.185

Formal NAIC Decision to Move Forward and Draft Model Revisions. In April 2018, the 

NAIC Executive Committee approved the request for work to commence on the model law and 

regulation revisions and considered how the revisions would be expected in due course to 

become a standard that each State would need to implement as law in accordance with the NAIC 

accreditation process.

186 The work proceeded and, on June 21, 2018, the Reinsurance Task 

Force exposed for public comment proposed revisions to the NAIC Credit for Reinsurance 

Model Law (#785) and Credit for Reinsurance Model Regulation (#786) intended to incorporate 

relevant provisions of the U.S.-EU Covered Agreement.187

NAIC Summer National Meeting. The NAIC Reinsurance Task Force met on August 6, 2018. 

The meeting agenda included discussion of the recently proposed revisions to the NAIC model 

law and regulation on credit for reinsurance that were published by the NAIC in June to address 

the U.S.-EU Covered Agreement.188

Stakeholder comments presented at this meeting were generally supportive of the NAIC work on 

conforming its model law and regulation to the U.S.-EU Covered Agreement, and reiterated 

points made in the written submissions in advance of the meeting.189 These submissions 

generally addressed the following: (1) with respect to provisions applicable to EU reinsurers, the 

 

185 NAIC, Draft Pending Adoption. See also NAIC, Spring Volume I: 2018 Proceedings of the National Association 

of Insurance Commissioners, 1656-1820, https://www.naic.org/documents/PRC-ZS-18-01.pdf. 

186 NAIC, Executive Committee Conference Call. The NAIC Accreditation Program was established to develop and 

maintain uniform baseline standards in all states, for the purpose of promoting effective insurance company 

financial solvency regulation. “Accreditation,” NAIC, last updated July 18 2018, 

https://www.naic.org/cipr_topics/topic_accreditation.htm. 

187 Draft Credit for Reinsurance Model Law (NAIC 2018), 

https://www.naic.org/documents/cmte_e_reinsurance_180621_model_law.pdf; Draft Credit for Reinsurance Model 

Regulation (NAIC 2018), https://www.naic.org/documents/cmte_e_reinsurance_180621_model_regulation.pdf. 

188 NAIC, 2018 Summer National Meeting: Reinsurance Task Force Agenda (August 6, 2018), 

https://www.naic.org/meetings1808/cmte_e_reinsurance_2018_summer_nm_materials.pdf. Supporting documents 

for the Reinsurance Task Force meeting, including minutes from its Spring 2018 meeting, draft model law revisions, 

and public comments, are available in the Spring 2018 Proceedings. Final committee minutes and proceedings of 

NAIC national meetings are typically available at no cost following adoption at the subsequent meeting, (i.e., those 

for the August 2018 Summer National Meeting should be posted after the Fall meeting and available on the NAIC 

website. “Proceedings of the NAIC,” NAIC, https://www.naic.org/prod_serv_alpha_listing.htm#proceedings. 

189 A compilation of the 18 comments letters submitted to the Reinsurance Task Force in advance of the NAIC 

August 2018 Summer National Meeting is available at on the NAIC website. See NAIC, Comment Letters, 

https://www.naic.org/documents/cmte_e_reinsurance_180724_comment_combined.pdf. Although FIO has reviewed 

the draft minutes of the August 6, 2018 Reinsurance Task Force meeting, as of this writing they are not yet publicly 

available. Various meeting summaries are available. See Eversheds Sutherland, Legal Alert: NAIC Report – 2018 

Summer National Meeting (August 15, 2018), https://us.eversheds-sutherland.com/NewsCommentary/LegalAlerts/213648/Legal-Alert-NAIC-Report-2018-Summer-National-Meeting. 
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importance of ensuring the model revisions conform accurately and fully to the terms of the 

U.S.-EU Covered Agreement; (2) the need to move rapidly to next steps, and to ensure timely 

and uniform adoption and administration by the states of the prudential laws and regulations 

which implement the U.S.-EU Covered Agreement; and (3) with respect to provisions applicable 

in the case of reinsurers from (non-EU) “qualified jurisdictions,” the importance of minimizing 

differences in treatment as compared to that of U.S. and EU reinsurers. The NAIC’s plan to 

extend to certain non-EU jurisdictions treatment of reinsurance collateral analogous to that under 

the U.S.-EU Covered Agreement is discussed below. 

At the conclusion of the August 2018 Reinsurance Task Force meeting, the Chair announced that 

the Task Force would work with NAIC staff to develop updated drafts, targeted for public 

exposure in mid-September 2018, with the goal of having final drafts ready for consideration by 

the time of the NAIC’s Fall National Meeting (November 15-18, 2018).190

b) Group Capital 

Under the U.S.-EU Covered Agreement, if U.S. insurance supervisors do not develop and 

implement a group capital assessment applicable to U.S. groups with EU insurance operations, 

EU regulators would not be barred from imposing Solvency II group capital requirements on 

such groups.191 The NAIC’s interest in developing a group capital calculation, however, 

predates the U.S.-EU Covered Agreement. The NAIC has noted that its decision to develop an 

analytical framework for evaluating the capital positions of insurance group members (both 

insurers and non-insurers) is an outgrowth of the financial crisis and, to that end, an NAIC 

working group published a discussion paper addressing “group capital methodologies concepts” 

in 2014,192 followed by publication of a Discussion Draft on Approaches to a Group Capital 

Calculation in July 2015.193

State insurance regulators are working on a group capital calculation “intended to provide 

additional analytical information to the lead state for use in assessing group risks and capital 

 

190 The NAIC stated in a model law development report that it will be in a position to finalize these changes by the 

end of 2018. See NAIC, Model Law Development Report (August 2, 2018), contained within 2018 Summer 

National Meeting: Joint Meeting of Executive Committee and Internal Administration Subcommittee (August 4, 

2018), Attachment 10, https://www.naic.org/meetings1808/cmte_ex_2018_summer_nm_materials.pdf. 

191 Article 10 of the U.S.-EU Covered Agreement. 

192 NAIC ComFrame Development and Analysis Working Group, U.S. Group Capital Methodology Concepts 

Discussion Paper (November 16, 2014), 

https://www.naic.org/documents/committees_g_cfwg_exposure_disc_paper_us_grp_cap_method_concepts.pdf. 

193 NAIC ComFrame Development and Analysis Working Group, Discussion Draft on Approaches to a Group 

Capital Calculation (July 23, 2015), 

https://www.naic.org/documents/committees_g_cfwg_related_us_group_capital_calc_draft.pdf. 
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adequacy” as an additional tool to current holding company analysis.194 That work – focused on 

developing an RBC aggregation methodology – is ongoing.195

c) Implementation by the United States

The U.S.-EU Covered Agreement provides for a period of up to five years after signature for the 

United States to have in place measures which implement the terms of Article 3 of the 

agreement, relating to the prudential conditions for elimination of collateral requirements for EU 

reinsurers assuming business from U.S. insurers.196 Even after appropriate NAIC model law 

revisions are finalized, codification in state law will require legislative or administrative steps in 

each state, the District of Columbia, and U.S. territories. Therefore, the U.S.-EU Covered 

Agreement includes a post-signature implementation period, both allowing for state-level action 

and reflecting the necessity for steady progress by the states in achieving the required 

reinsurance collateral reforms.

Beginning on the earlier of the date of provisional application, which was November 7, 2017,197

or the date of entry into force, which was April 4, 2018,198 the United States has the following 

obligations concerning implementation and measures prior to implementation: 

• to “encourage relevant authorities to refrain from taking any measures which are 

inconsistent with any of the conditions or obligations of the Agreement, including with 

respect to the elimination of collateral and local presence requirements pursuant to 

Article 3.” (Article 9, Paragraph 1); 

• to “take all measures, as appropriate, to implement and apply this Agreement as soon as 

possible in accordance with Article 10.” (Article 9, Paragraph 2); 

• to “encourage each U.S. State to promptly... implement[] ... relevant U.S. State credit 

for reinsurance laws and regulations consistent with Article 3, as the method for adopting 

measures in conformity with paragraphs 1 and 2 of that Article,” i.e., with respect to not 

maintaining or adopting requirements for collateral or local presence with respect to 

relevant EU reinsurers, nor maintaining or adopting any new requirement with 

 

194 “Supervision of Insurance Groups,” NAIC, last updated July 12, 2018, 

https://www.naic.org/cipr_topics/topic_group_supervision.htm. See also NAIC, Group Capital Calculation 

Working Group 2018 Charge, https://www.naic.org/cmte_e_grp_capital_wg.htm. 

195 For more on the NAIC work on group capital, see Section II.A.1 of this Report.

196 Articles 9 and 10 of the U.S.-EU Covered Agreement. 

197 Article 10, Paragraph 2 of the U.S.-EU Covered Agreement. See Notice Concerning the Provisional Application 

of the Bilateral Agreement between the European Union and the United States of America on Prudential Measures 

Regarding Insurance and Reinsurance (EU), 2017 O.J. (L 288), https://eurlex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2017:288:TOC. 

198 Article 8 of the U.S.-EU Covered Agreement. See Notice Concerning the Entry into Force of the Bilateral 

Agreement between the European Union and the United States of America on Prudential Measures Regarding 

Insurance and Reinsurance, (EU), 2018 O.J. (L 91), https://eurlex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2018:091:TOC.
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substantially the same regulatory impact on relevant EU reinsurers. (Article 9, Paragraph

3(b)); and

• to “encourage each U.S. State to promptly ... reduce[], in each year following the date of 

entry into force or provisional application of the Agreement ... the amount of collateral 

required by each State to allow full credit for reinsurance by 20 percent of the collateral 

that the U.S. State required as of January 1 before signature of this Agreement” (i.e., 

January 1, 2017) with respect to relevant EU reinsurers. (Article 9, Paragraph 3(a).

Treasury remains committed to ensuring that the United States complies with the U.S.-EU 

Covered Agreement, and encourages the states to fulfill the applicable steps outlined above. 

Together with USTR, Treasury has publicly encouraged state insurance regulators to take the 

steps outlined above, including making the following statement even before the date of 

provisional application: 

In accordance with Article 9, the United States encourages each U.S. state to 

promptly adopt relevant credit for reinsurance laws and regulations consistent with 

Article 3, and to phase-out the amount of collateral required by each U.S. state to 

allow full credit for reinsurance cessions to EU reinsurers. 199

This encouragement to the states is ongoing, and applies to state-level implementation both with 

respect to Article 3 (reinsurance) and Article 4 (group supervision), recognizing that expeditious 

movement toward full implementation in both reinsurance and group supervision is in both the 

national interest and the best interests of the U.S. insurance sector.200

d) Application of the Agreement

As noted above, under Article 9 certain implementation provisions were triggered as of the 

November 7, 2017 date of provisional application. A key obligation of the Parties under Article 

9 is to “take all measures, as appropriate, to implement and apply this Agreement as soon as 

possible in accordance with Article 10.”201 Article 10 addresses “Application of the 

Agreement.” Under Paragraph 1 of Article 10, the agreement shall apply 60 months from the 

date of signature, except as otherwise specified. Much of the rest of Article 10 addresses the 

parties’ obligations in the interim, some of which are briefly summarized below.

 

199 United States, Statement of the United States on the Covered Agreement, 1. In the same statement, the United 

States publicly encouraged U.S. insurance supervisory authorities to “enhance cooperation and information sharing 

[with EU member state insurance supervisors], while respecting a high standard of confidentiality protection,” 

through use of the voluntary practices and the Model Memorandum of Understanding Provisions on Exchange of 

Information” per Article 5 and the Annex.

200 See, e.g., United States and European Union, “First Joint Committee Meeting Under the Bilateral Agreement 

between the European Union and The United States of America on Prudential Measures Regarding Insurance and 

Reinsurance,” news release, March 27, 2018, https://home.treasury.gov/news/press-releases/sm0334. 

201 Article 9, Paragraph 2 of the U.S.-EU Covered Agreement. 
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Under Article 10, the EU is obligated as of provisional application to ensure that supervisors and 

other competent authorities follow the Group Supervision practices outlined in Article 4 with 

respect to U.S. insurers with EU operations.202 Unless the United States does not meet its 

obligations under the agreement, U.S. insurance groups with operations in the EU are therefore 

no longer subject to worldwide prudential insurance group supervision by EU authorities – 

including worldwide group governance, solvency and capital, and reporting203 – as could 

otherwise be the case under Solvency II. This means that U.S. groups with insurance operations 

in the EU will not be subject at the worldwide level to the EU’s Solvency II group capital 

requirement, pursuant to Article 4 of the agreement. As noted above, avoidance of such steps 

under Solvency II – which are not consistent with the U.S. state approach to prudential 

supervision and could have led the EU to apply costly and unnecessarily burdensome standards 

to U.S. insurance groups with EU operations – is an important U.S. achievement under the 

U.S.-EU Covered Agreement. 

Under Article 4, Paragraph (h) of the U.S.-EU Covered Agreement, however, it is necessary for 

U.S. groups with insurance operations in the EU to be subject to a U.S. group capital assessment 

in order to avoid potential application by EU regulators of the Solvency II group capital 

requirement. As noted above, there is not presently a group capital assessment in the United 

States, but the NAIC is now engaged in developing a group capital calculation.204 Under the 

agreement, the United States currently enjoys a 60-month period (which commenced on 

November 7, 2017), during which EU authorities have agreed that U.S. insurance groups will not 

be subject to Solvency II group capital requirements, notwithstanding the absence of a U.S. 

group capital assessment.205 FIO will continue to closely monitor the NAIC and state insurance 

regulators on the group capital calculation. 

Under Article 10, the EU is also obligated to ensure that within two years from signature, its 

member states have revised applicable laws to implement the provisions of Article 3, Paragraph 

3, permitting U.S. reinsurers to assume business from EU ceding insurers without establishing a 

“local presence” in the EU, as otherwise could be demanded when an assuming reinsurer is not 

from either an EU member state or a supervisory jurisdiction deemed equivalent pursuant to the 

Solvency II Directive.206 FIO understands that such requirements, which had been an 

operational concern for some U.S. reinsurers before the legal text of the U.S.-EU Agreement was 

finalized in January 2017, are no longer an impediment to such business,207 because of the EU’s 

 

202 See Article 10, Paragraph 2(a) of the U.S.-EU Covered Agreement. 

203 Article 4, Paragraph (a) of the U.S.-EU Covered Agreement. 

204 See also Section II.A.1 of this Report.

205 Article 10, Paragraph (e) of the U.S.-EU Covered Agreement. 

206 Article 10, Paragraph 2(g) of the U.S.-EU Covered Agreement. 

207 The German Federal Financial Supervisory Authority (BaFin) stated “The EU and the USA have signed a 

bilateral agreement that will make it possible for contracts to be concluded between a reinsurer from the USA and a 

primary insurance undertaking or reinsurance undertaking in the EU without a branch being required in the 

respective EU member state.” “Authorisation: Bilateral Agreement between the European Union and the United 

States of America on Prudential Measures Regarding Insurance and Reinsurance,” BaFin, last updated November 8, 
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encouragement to member states to refrain, as contemplated by Article 9, Paragraph 1. 

However, for some EU member states, the relevant formal changes in law are not yet completed.

Within the EU’s integrated system of national (member state) and European financial 

supervision, the European Insurance and Occupational Pensions Authority (EIOPA) is an 

independent advisory body to the European Commission, the European Parliament, and the 

Council of the European Union. According to EIOPA, its powers with respect to insurance 

include issuing guidelines and recommendations and developing draft regulatory and 

implementing technical standards and in that capacity it has a substantial role concerning 

implementation of the EU’s insurance regulatory standards under Solvency II.208 Earlier this 

year, EIOPA explained its plans to “further improve the functioning of the internal market, in 

particular by preventing supervisory arbitrage and by guaranteeing a level playing field.”209 FIO 

welcomes and appreciates EIOPA’s inclusion among its “priorities” outlined in the Supervisory 

Convergence Plan its intention to “[m]onitor and ensure the consistent implementation by NCAs 

[National Competent Authorities] of the provisions of the covered agreement.”210

3. Transparency and the Joint Committee

Article 7 of the U.S.-EU Covered Agreement establishes a “Joint Committee” and calls for it to 

meet at least once within 180 days after the earlier of the date entry into force or provisional 

application of the agreement. Accordingly, the United States and the EU held the first meeting 

of the Joint Committee on March 6, 2018, in Brussels.211 In addition to officials from Treasury 

and USTR, the U.S. delegation included two U.S. state insurance commissioners (who are also 

senior NAIC officers).212 Similarly, officials of the European Commission’s Directorate-General 

for Financial Stability, Financial Services and Capital Markets Union and Directorate-General

for Trade were joined by representatives from EIOPA. The meeting was an opportunity for 

exchange of information on implementation progress as reflected in the parties’ joint statement:

[T]he EU and the United States affirmed their commitment to continuous review of 

progress on the Agreement and close coordination between each side. Consistent 

with the Agreement, both sides shall encourage relevant authorities to refrain from 

taking any measures which are inconsistent with any of the conditions or 

obligations of the Agreement.213

 

2017, https://www.bafin.de/EN/Aufsicht/VersichererPensionsfonds/Zulassung/US-Rueckversicherer/usrueckversicherer_node_en.html. 

208 “Insurance,” EIOPA, https://eiopa.europa.eu/regulation-supervision/insurance. 

209 EIOPA, Supervisory Convergence Plan 2018-2019 (April 23, 2018), 3, 

https://eiopa.europa.eu/Publications/Reports/Supervisory%20Convergence%20Plan%202018-2019.pdf. “In the 

European context, EIOPA should ensure a high, effective and consistent level of supervision with the aim of 

guaranteeing a similar level of protection of policyholders and beneficiaries across jurisdictions, regardless of the 

location of the insurance undertaking’s head office.” EIOPA, Supervisory Convergence Plan, 1.

210 EIOPA, Supervisory Convergence Plan, 11. 

211 United States and European Union, “First Joint Committee Meeting Under the Bilateral Agreement.” 

212 A Federal Reserve official attended as well.

213 United States and European Union, “First Joint Committee Meeting Under the Bilateral Agreement.” 
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The state insurance commissioners assisted both in updating EU officials on the progress to date 

(e.g., concerning NAIC/state work concerning reinsurance collateral and a group capital 

assessment), and in demonstrating the cooperation of federal and state representatives on these 

matters. At the same time, U.S. federal and state officials were able to hear from EU 

counterparts regarding the progress and future steps to be taken toward full and timely 

implementation of EU obligations under the agreement. Additional Joint Committee meetings 

will be held as needed, and in any event at least once each calendar year.

4. The Path Forward 

a) The Path Forward for the U.S.-EU Covered Agreement

As described above, both the United States and the EU have agreed to continue work to fully 

implement the agreement. Accordingly, it is expected that each side will work within its own 

processes and with relevant regulatory authorities to advance and monitor progress, including 

with respect to the following steps under the agreement: 

• elimination of local presence requirements as regards U.S. reinsurers assuming business 

from EU ceding insurers;214

• elimination of collateral requirements for EU reinsurers assuming business from U.S. 

ceding insurer;215

• development and deployment of a U.S. group capital assessment; 

• other group supervision issues as regards U.S. groups with EU operations and as regards 

EU groups with U.S. operations, including with respect to group level governance, 

solvency and capital, and reporting requirements; 

• cooperation of U.S. and EU supervisory authorities in exchanging information, including 

through the (non-mandatory) practices outlined in the agreement;216

• compliance with those Articles of the Agreement which currently apply in full, e.g., 

Articles 7 (Joint Committee), and certain technical provisions governing the agreement

 

214 The United States has a reciprocal obligation not to impose local presence requirements on EU reinsurers that 

meet the conditions of Article 4 of the U.S.-EU Covered Agreement. FIO understands that U.S. state law does not 

have such requirements.

215 The EU has a reciprocal obligation not to impose collateral requirements on U.S. reinsurers that meet the 

conditions of Article 4 of the U.S.-EU Covered Agreement. Although Solvency II generally bars requirements for 

reinsurers to post collateral (“pledging of assets”), absent the U.S.-EU Covered Agreement, EU member state 

authorities could impose collateral requirements for cessions to reinsurers from non-equivalent third-party 

jurisdictions. FIO has not been informed that EU member states are imposing this on U.S. reinsurers.

216 See Article 5 of the U.S.-EU Covered Agreement. 
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such as Articles 11 (Termination and Mandatory Consultation), and 12 

(Amendment);217 and

• conduct and timing of U.S. preemption analysis.218 

FIO expects that the United States and the EU will also keep each other informed of their 

respective progress and processes, including through the Joint Committee. Within the United 

States, Treasury will continue encouraging NAIC officials and staff, together with state 

insurance supervisors, to finalize their work on developing reinsurance collateral model law and 

regulation revisions, as well as on developing a group capital calculation that meets the 

requirements of the U.S.-EU Covered Agreement. As such work becomes more advanced, 

Treasury believes that it will become increasingly important to enhance federal and state 

cooperation and collaboration regarding the requirements and mechanisms under consideration 

for both reinsurance collateral and the group capital calculation. 

b) The Path Forward Concerning Non-EU Jurisdictions 

At its February 2018 hearing concerning steps to implement the U.S.-EU Covered Agreement, 

the NAIC requested comments from stakeholders in response to two points concerning treatment 

of reinsurers from jurisdictions which may in the future be party to a covered agreement, and 

concerning non-U.S. (and non-EU) reinsurers from the NAIC qualified jurisdictions,219 i.e., 

Bermuda, Switzerland, Japan, and the U.K. after Brexit:

• “Extending similar treatment to reinsurers from other jurisdictions covered by potential 

future covered agreement(s) that might be negotiated pursuant to the Dodd-Frank Wall 

Street Reform and Consumer Protection Act.” 

 

217 See Article 10, Paragraph 2(i) of the U.S.-EU Covered Agreement. See also Article 10, Paragraph 3 of the U.S.-

EU Covered Agreement, whereby if a Party does not adhere to Article 10, Paragraph 2 (concerning schedules and 

conditions for application by the United States and the EU of certain provisions of Article 3 and Article 4 by the 

dates stipulated therein), the other Party may seek mandatory consultation through the Joint Committee.

218 See Article 9, Paragraph 4 of the U.S.-EU Covered Agreement. 

219 A “Qualified Jurisdiction” is one which the NAIC has determined meets certain standards concerning prudential 

supervision and other matters, such that U.S. insurers ceding risk to NAIC “certified reinsurers” from such qualified 

jurisdiction may be permitted to recognize full credit for reinsurance while the reinsurer posts a specified reduced 

percentage of reinsurance collateral. A jurisdiction may be added to the qualified jurisdiction list maintained by the 

NAIC based on evaluations performed by NAIC committees and staff. It is up to individual states, however, to 

determine whether to treat a jurisdiction as qualified. Some states have not yet adopted the revisions to the model 

law framework that incorporates the qualified jurisdiction and certified reinsurer approach. See generally NAIC 

Reinsurance Task Force, Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions (August 

17, 2014), 

https://www.naic.org/documents/committees_e_reinsurance_related_qualified_jurisdictions_final_130827.pdf. 
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• “Providing reinsurers domiciled in NAIC Qualified Jurisdictions with similar reinsurance 

collateral requirements.”220

In response, many commenters, both from the United States and from non-U.S. jurisdictions, 

suggested (with varying levels of detail) that the NAIC should amend the relevant models to add 

a new category whereby collateral could be eliminated for certain reinsurers domiciled in NAIC 

qualified jurisdictions.221

At the March 2018 NAIC Reinsurance Task Force meeting discussed above, the Chair observed 

that it was “the general consensus among many of the impacted parties that the NAIC should 

amend [Models #785 and #786] to afford reinsurers domiciled in other NAIC-qualified 

jurisdictions with similar reinsurance collateral requirements as that provided under the Covered 

Agreement [with the EU].” The Chair also observed that U.S. insurers were clear that changes in 

law to accommodate full reinsurance collateral elimination for additional jurisdictions must be 

accompanied by requirements for those jurisdictions to accord the U.S. regulatory system the 

same treatment and recognition addressed in the U.S.–EU Covered Agreement.222 

The draft model law and regulation revisions put forward by the NAIC in June 2018, and 

discussed by the NAIC Reinsurance Task Force in August 2018, introduce the concept of a 

“reciprocal jurisdiction,” generally defined in the draft NAIC documents as a non-U.S. 

jurisdiction that has entered into a covered agreement with the United States; or an NAIC 

qualified jurisdiction which is not party to a covered agreement but which meets certain 

additional specified requirements.223 As described by the Task Force at its August meeting, a 

U.S. ceding insurer transferring risk to reinsurers from such “reciprocal” jurisdictions would be 

able to take full credit for the reinsurance without obtaining collateral from reinsurers, provided 

that such reinsurers also satisfy consumer protection requirements analogous to those applicable 

to EU reinsurers under the U.S.-EU Covered Agreement.

224

FIO is closely monitoring these NAIC efforts to introduce collateral elimination on a wider and 

more uniform basis for reinsurers from jurisdictions with strong prudential frameworks. As 

 

220 “NAIC Notice of Public Hearing and Request for Comments,” NAIC, December 21, 2017, 

https://www.naic.org/documents/cmte_e_reinsurance_related_180220_public_hearing_notice.pdf

221 See, e.g., comments of the Association of Bermuda Insurers and Reinsurers stating: “The tremendous work done 

by the NAIC and states to evaluate regulatory regimes and qualify jurisdictions should be recognized by extending 

the same terms for EU-based certified reinsurers to those reinsurers domiciled in qualified jurisdictions and 

individually certified.” Letter from John M. Huff, Association of Bermuda Insurers and Reinsurers President and 

CEO to Superintendent Maria T. Vullo et al. (February 6, 2018), contained within NAIC, Covered Agreement 

Public Hearing held on February 20, 2018: Comment Letters, 

https://www.naic.org/documents/cmte_e_reinsurance_related_180220_public_hearing_comment_letters.pdf. 

222 NAIC, Draft Pending Adoption (March 30, 2018), 2, 

https://www.naic.org/meetings1808/cmte_e_reinsurance_2018_summer_nm_materials.pdf. 

223 Draft Credit for Reinsurance Model Law (NAIC 2018), § 2.F(2).

224 § 2.F(1). FIO expresses no view at this time as to whether the current draft model law revisions, if enacted into 

law, would place affected reinsurers on a level playing field with U.S. reinsurers or even with EU reinsurers.
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noted above, FIO has long advocated development and uniform implementation of collateral 

reform. FIO also notes that the NAIC, state regulators, and other stakeholders generally 

expressed a similar view that the United States should continue to seek parallel commitments 

from affected non-U.S. jurisdictions to appropriate prudential treatment of U.S. insurers and 

reinsurers by the relevant non-U.S. regulator. 

Finally, FIO recognizes the importance of maintaining continuity on prudential insurance matters 

with the UK as it exits the EU, including with respect to the areas covered by the U.S.-EU 

Covered Agreement. A U.S.-UK covered agreement that is based on the U.S.-EU Covered 

Agreement, which currently applies to the UK as a member of the EU, may be beneficial to both 

jurisdictions, as the UK exits the EU, and is a topic that FIO will be watching closely. The UK is 

the fourth largest global insurance market by life and nonlife direct written premium, and UK 

insurers (such as the Lloyd’s market) are important sources of insurance and reinsurance 

capacity in the United States.225

C. EU-U.S. Insurance Project

FIO has continued its work with the EU-U.S. Insurance Project, which was established in 2012 

as a collaborative effort among U.S. and EU authorities in the insurance sector to contribute to an 

increased mutual understanding and enhanced cooperation between the EU and the United States 

to promote business opportunity, consumer protection, and effective supervision.226 In 2017 and 

2018, the EU-U.S. Insurance Project focused on: insurer cybersecurity and cyber risk insurance 

products; the use and implications of big data in insurance underwriting; and building increased 

cooperation and understanding on insurance-related intracompany transactions.227

On January 25, 2018, the EU-U.S. Insurance Project Steering Committee hosted its fifth public 

event in Washington, D.C. to discuss: the use of big data; cyber risks and the regulator’s role; 

and business opportunities, challenges, and emerging risks impacting the United States and the 

European Union.228 The public event allowed stakeholders to hear from the Steering Committee 

on current project initiatives. The Steering Committee is planning to host its sixth public event 

on November 10, 2018, in Luxembourg. The public event will include discussions of key areas 

linked to the EU-U.S. Insurance Project initiatives.

 

225 Treasury, EO Report, 140.

226 See EU-U.S. Dialogue Project, EU-US Dialogue Project: The Way Forward, Objectives and Initiatives for the 

Future (December 2012), https://www.treasury.gov/initiatives/fio/EUUS%20Insurance%20Project/Documents/eu_us_dialogue_wayforward_2012. In addition to FIO, current members 

of the EU-U.S. Insurance Project include the NAIC, state insurance commissioners, the Federal Reserve, EIOPA, 

the European Commission, ACPR/ Banque de France, the Bank of England, the Central Bank of Ireland, and the De 

Nederlandsche Bank.

227 For a more detailed description of 2018 target outcomes and deliverables, see EU-U.S. Dialogue Project, EU-US 

Insurance Dialogue Project: New Initiatives for 2017-2019; Focus Areas for 2018 (2018), 

https://www.treasury.gov/initiatives/fio/EU-US%20Insurance%20Project/Documents/EU-US_Initiatives_2017-

2019.pdf. 

228 See NAIC, “U.S. and EU Focus on Regulatory Cooperation,” news release, January 25, 2018, 

https://www.naic.org/Releases/2018_docs/naic_us_eu_focus_on_regulatory_cooperation.htm. 
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D. Financial Stability Board 

In April 2009, the G-20 established the FSB to monitor and make recommendations about the 

global financial system. One FSB initiative, as discussed in Section II.B.1 of this Report, is the 

identification of systemically important financial institutions, i.e., financial institutions whose 

distress or disorderly failure, because of their size, complexity, and systemic interconnectedness, 

would cause significant disruption to the wider financial system and economic activity. With 

respect to the insurance sector, the IAIS developed an assessment methodology in July 2013 to 

recommend insurers that may be eligible for identification as G-SIIs. In 2013, in consultation 

with the IAIS and national authorities, the FSB identified an initial list of G-SIIs. Similar annual 

identification processes were subsequently conducted in 2014 and 2015. In June 2016, the IAIS 

released an updated G-SII Assessment Methodology. Later that year, the FSB identified nine 

insurers as G-SIIs, including the same three U.S. groups (AIG, MetLife, and Prudential) that had 

also been identified under the previous methodology. In 2017, the FSB decided not to publish a 

new list of G-SIIs. The FSB noted that the policy measures set out in its 2016 communication on 

G-SIIs, as updated in February 2017 with respect to the higher loss absorbency standard, will 

continue to apply to the G-SIIs identified in 2016.229 At the same time, the FSB also welcomed 

work at the IAIS to develop an activities-based approach to systemic risk in the insurance sector, 

which could have implications for the identification of G-SIIs and for G-SII policy measures.

In addition, as noted in Section III.C.1 of this Report, in July 2018, the FSB published for public 

consultation a draft Cyber Lexicon with a set of core terms related to cybersecurity and cyber 

resilience in the financial sector. After considering the responses to the consultation, the FSB 

plans to finalize the Lexicon for delivery to the G-20 in November 2018.230 The FSB working 

group for this project is chaired by an official of the Federal Reserve. Treasury serves on the 

working group through staff from its Office of Critical Infrastructure Protection and Homeland 

Security. In addition, a member of FIO’s staff serves on the working group, having been 

nominated for that role by the IAIS. 

 

229 FSB, Review of the List of Global Systemically Important Insurers (G-SIIs) (November 21, 2017),

http://www.fsb.org/wp-content/uploads/P211117-2.pdf. 

230 Financial Stability Board, “FSB Publicly Consults on Cyber Lexicon,” news release, July 2, 2018, 

http://www.fsb.org/2018/07/fsb-publicly-consults-on-cyber-lexicon/. 
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V. ECONOMIC GROWTH AND INFORMED CHOICES

This Section V provides an update on regulatory developments at the federal and state levels 

relating to the standards of care for retail sales of insurance and other financial products. The 

section then reviews regulatory developments in retirement income and LTCI, as well as the 

state of the LTCI industry. The section concludes with a discussion of InsurTech and regulatory 

responses to InsurTech. 

A. Standards of Conduct

On March 15, 2018, the United States Court of Appeals for the Fifth Circuit issued a 2-1 

decision vacating the Fiduciary Rule in its entirety. The decision became effective nationwide 

on June 21, 2018.231

On April 18, 2018, the SEC proposed a comprehensive package of rulemakings and 

interpretations to govern the standards of conduct applicable to broker-dealers and investment 

advisers that provide retail investment advice. Under the SEC’s proposed “Regulation Best 

Interest,” a broker-dealer would be required to act in the best interest of a retail customer when 

making a recommendation of any securities transaction or investment strategy involving 

securities. In addition, the SEC proposed an interpretation to reaffirm and, in some cases, clarify 

its views regarding the fiduciary duty that investment advisers owe to their clients under federal 

securities laws. Both broker-dealers and investment advisers would be required to summarize 

their relationship to retail customers in a new short-form disclosure document. Finally, proposed 

Rule 15l-2 would restrict firms registered solely as broker-dealers and their associated financial 

professionals from using the term “adviser” or “advisor” as part of a name or title when 

communicating with a retail investor.232

During 2017 and continuing into 2018, the NAIC’s Annuity Suitability Working Group 

considered amendments to the Suitability in Annuity Transactions Model Regulation to 

incorporate a best interest standard. Under the draft amendments, the Model Regulation would 

have been renamed the Suitability and Best Interest Standard of Conduct in Annuities 

Transactions Model Regulation, and would have required recommended annuity transactions to 

be in the consumer’s best interest. On March 24, 2018, shortly after the Fifth Circuit’s decision, 

 

231 Chamber of Commerce of the United States of America v. United States Department of Labor, 885 F.3d 360 (5th 

Cir. 2018). 

232 Regulation Best Interest; Proposed Rule, 83 Fed. Reg. 21574 (May 9, 2018), https://www.gpo.gov/fdsys/pkg/FR2018-05-09/pdf/2018-08582.pdf, (proposing SEC Interpretation Regarding Standard of Conduct for Investment 

Advisers); Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request 

for Comment on Enhancing Investment Adviser Regulation, 83 Fed. Reg. 21203 (May 9, 2018), 

https://www.federalregister.gov/documents/2018/05/09/2018-08679/proposed-commission-interpretationregarding-standard-of-conduct-for-investment-advisers-request-for; Form CRS Relationship Summary; 

Amendments to Form ADV, Required Disclosures in Retail Communications and Restrictions on the Use of Certain 

Names or Titles; Proposed Rule, 83 Fed. Reg. 21416 (May 9, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-05-

09/pdf/2018-08583.pdf. 
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the Working Group decided to instead open up the existing Model Regulation for a 30-day 

public comment period. The Working Group discussed selected public comments at meetings on 

May 31 and August 4, 2018.233

On July 18, 2018, the NYDFS finalized Regulation 187, which imposes a best interest standard 

on the sale of both annuity and life insurance products in New York.234 The regulation places a 

duty on the producer (or, where there is no producer, the life insurer) to ensure that a 

recommendation of an annuity or life insurance policy furthers the consumer’s needs and 

objectives when taking into consideration only the interests of the consumer and without regard 

to the producer’s or insurer’s financial compensation or incentives. The regulation imposes a 

number of detailed requirements on producers and insurers, including specified disclosures, 

establishment of a comprehensive supervisory program to achieve compliance with the 

regulation, producer training, and recordkeeping. The regulation becomes effective for annuity 

contracts on August 1, 2019, and for life insurance products on February 1, 2020. It is unclear 

whether and to what extent other states may follow New York’s lead with respect to a best 

interest standard. At a meeting on May 31, 2018, the NAIC’s Annuity Suitability Working 

Group decided not to expand the scope of the Suitability in Annuity Transactions Model 

Regulation to include life insurance products. 

B. Retirement Income

The Retirement Enhancement and Savings Act of 2018 (RESA) was introduced in the Senate on 

March 8, 2018.235 The Senate Finance Committee unanimously approved an earlier version of 

RESA in 2016, but the bill was not put to a vote by the full Congress before lawmakers 

adjourned for that year. The proposed legislation would amend the Code and ERISA to modify 

requirements for tax-favored retirement savings accounts and employer-provided retirement 

plans. Several provisions of the bill are designed to encourage wider awareness and availability 

of guaranteed lifetime income solutions, including annuity products.236 Specifically, RESA 

would: require statements for employer-sponsored retirement plans (such as 401(k) plans) to 

include disclosure of lifetime income stream equivalents of the participant’s total accrued 

benefits; improve the portability of lifetime income options from one plan to another so that 

participants could preserve these options and avoid surrender charges and fees when they change 

 

233 See NAIC, Annuity Suitability Working Group Meeting Materials (August 4, 2018), 

https://naic.org/meetings1808/cmte_a_aswg_2018_summer_nm_materials.pdf. 

234 NYDFS, 11 NYCRR 224 (Insurance Regulation 187) (July 17, 2018), 

https://www.dfs.ny.gov/insurance/r_finala/2018/rf187a1txt.pdf. 

235 Retirement Enhancement and Savings Act of 2018, S.2526, 115th Cong. (2018), 

https://www.congress.gov/bill/115th-congress/senate-bill/2526. An identical bill was introduced in the House of 

Representatives on March 14, 2018. See Retirement Enhancement and Savings Act of 2018, H.R.5282, 115th Cong. 

(2018), https://www.congress.gov/bill/115th-congress/house-bill/5282. 

236 In an annuity contract, in exchange for a premium, a life insurer agrees to make scheduled payments for the 

lifetimes of one or more persons, or for a specified number of years.
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employers; and provide a safe harbor for plan sponsors in complying with their fiduciary duty 

obligations under ERISA in selecting annuity providers for plans.237

C. Long-Term Care Insurance

In recent years, Treasury and FIO have commented on the growing social need for long-term 

care and the steady decline of the private LTCI market.238 As of year-end 2017, an estimated 4.6 

million individual LTCI coverages were in force,239 with LTCI policies paying $9.2 billion in 

claims to 295,000 individuals during the year.240 Despite these contributions, market contraction 

continued in 2017, as individual sales of standalone LTCI policies totaled $176 million, 23 

percent lower than in 2016, and the estimated number of Americans purchasing new policies 

(67,000) dropped 27 percent from the prior year.241 The number of insurers offering LTCI 

remained at an historical low (about a dozen compared to more than 100 in the early 2000s). 

The financial performance of in-force LTCI policies also remains a concern for the industry, 

investors, and regulators. In the fourth quarter of 2017, one insurer incurred a $9.5 billion 

pre-tax charge arising mainly from deteriorating results in a block of approximately 310,000 

LTCI policies in runoff since 2006.242 During 2018, an insurer disclosed that it expects to incur 

an LTCI-related charge that “is likely not to exceed $750 million after tax,”243 while another 

reported a second quarter $1.5 billion pre-tax loss arising from revised actuarial assumptions for 

its LTCI legacy business.244 In an ongoing effort to improve their operating results, companies 

with LTCI exposure continue to aggressively seek state regulatory approval of premium rate 

increases on existing policies. For example, in the first quarter of 2018, ten leading LTCI 

carriers filed for approval of rate increases totaling $97 million (compared to $49 million in the 

first quarter of 2017) and affecting nearly 135,000 policyholders (compared to 87 million).245 

 

237 The EO Report also recommended adoption of a safe harbor for the selection of annuity providers. See Treasury, 

EO Report, 142-143.

238 See, e.g., Treasury, EO Report, 143; FIO, 2017 Annual Report, 83-88.

239 LIMRA, U.S. Individual Long-Term Care Insurance (2017 Annual Review) (March 16, 2018), 7.

240 American Association for Long-Term Care Insurance, “Long Term Care Insurance Industry Paid $9.2 Billion in 

Claims in 2017,” news release, January 17, 2018, http://www.aaltci.org/news/long-term-care-insurance-associationnews/long-term-care-insurance-industry-paid-9-2-billion-in-claims-in-2017. 

241 LIMRA, 2017 Annual Review, 3.

242 GE, “GE Provides Update on Insurance Review; $6.2B After-Tax GAAP Charge in 4Q’17,” news release, 

January 16, 2018, 

https://www.ge.com/investor-relations/sites/default/files/pressrelease%20insurance%20011618_1_1.pdf. 

243 Unum Group, “Unum Group Reports Second Quarter 2018 Results,” news release, July 30, 2018, 

https://investors.unum.com/file/Index?KeyFile=394419968. 

244 Prudential Financial, Inc., “Second Quarter 2018 Earnings Conference Call Presentation,” August 2, 2018, 

http://s22.q4cdn.com/600663696/files/doc_financials/quarterly_reports/2018/q2/2Q18-Earnings-CallPresentation.pdf. The insurer exited the individual LTCI market in 2012 and the group LTCI market in 2013.

245 Jason Woleben, “Rate Increases for In-Force Individual LTC Policies Continued in Q1,” S&P Global Market 

Intelligence, May 14, 2018, https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=44552426; 
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Partially offsetting the continued decline in the market for standalone LTCI policies, 2017 saw 

healthy growth in both new policy issuance and new premiums for “combination” products, 

which combine a traditional life insurance policy (or, less frequently, an annuity) with a longterm care benefit. The market for these products expanded for the third consecutive year, as life 

combination products generated $4.1 billion in premiums in 2017, 18 percent higher than in 

2016, and covered 260,000 new lives, a five percent increase over the prior year. This growth 

was driven by the introduction of new combination products by multiple companies, together 

with higher awareness of these types of products among insurance distributors. Measured by 

new lives insured, combination products now represent more than 80 percent of the market for 

individual LTCI solutions.246

State insurance regulators and the NAIC are actively reviewing a range of LTCI issues and 

potential policy changes to help stabilize and potentially grow the private market. In April 2017, 

the NAIC’s Long-Term Care Innovations Subgroup released a list of federal policy changes 

which the Subgroup believed could help to increase private long-term care financing options.247 

In December 2017, in response to concerns raised by health insurers in connection with the 

liquidation of Penn Treaty America Corporation,248 the NAIC adopted amendments to the Life 

and Health Insurance Guaranty Association Model Act to recalibrate the cost of assessments 

against solvent insurers to provide coverage to policyholders of insolvent LTCI carriers. 

Because the guaranty association laws classify LTCI as a health insurance product, a number of 

health insurers were assessed for Penn Treaty’s failure even though they wrote little to no LTCI, 

which historically has been written primarily by life insurers. Most notably, the amendments to 

the Model Act: expand the assessment base for LTCI policies to include both the life/annuity 

account and the health account; add health maintenance organizations to the assessment base; 

and split the liability for an LTCI insolvency by allocating 50 percent to life and annuity 

insurance companies and 50 percent to health insurance companies.249

The NAIC has continued its review of the LTCI market and public policy options during 2018. 

The Long Term Care Insurance Task Force is charged with coordinating all aspects of the 

NAIC’s LTCI work, including areas related to financial solvency and reporting, actuarial 

valuation standards, transparency and predictability of rate increases, product innovations, and 

state and federal market stabilization solutions.250

 

Jason Woleben, “Northwestern Mutual Led the Way in Long-Term Care Rate Increases in Q1,” SNL Financial, May 

8, 2017, https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=40579694. 

246 LIMRA, U.S. Individual Life Combination Products (2017 Annual Review).

247 NAIC, Long Term Care Innovations Subgroup; Federal Policy Options to Present to Congress (April 3, 2017), 

https://www.naic.org/documents/cmte_b_senior_issues_related_ltc_federal_policy_issues.pdf. 

248 See FIO, 2017 Annual Report, 85-87. 

249 See NAIC, “Regulators Adopt Amendments to Life and Health Guaranty Association Model Act,” news release, 

December 21, 2017, https://www.naic.org/Releases/2017_docs/life_health_guaranty_association_model_act.htm. 

250 NAIC, Long Term Care Insurance (B/E) Task Force 2018 Charges, https://www.naic.org/cmte_b_e_ltc_tf.htm. 
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Treasury has convened an inter-agency task force, including representatives of the Department of 

Health and Human Services (HHS), Treasury, the IRS, and the Office of Management and the 

Budget, to develop policies to complement reforms at the state level relating to the regulation of 

LTCI.251 Under the direction of Treasury and HHS, the task force has been organized and held 

its first meeting on July 11, 2018, and a second meeting on August 7, 2018. The task force 

intends, among other objectives, to review the federal policy options identified by the NAIC’s 

Long-Term Care Innovations Subgroup (discussed above), and other potential policy changes. 

The task force also plans to solicit feedback from a range of stakeholders, including regulators, 

consumer groups, academics, and insurance industry representatives. 

D. InsurTech

“InsurTech,” the insurance analog to “Fintech,” is a broad term used to describe the innovative 

use of technology in insurance.252 Examples of innovations affecting the insurance industry 

include: the Internet of Things (IoT); big data; cloud infrastructure; machine learning and 

artificial intelligence; blockchain; and peer-to-peer, usage-based, and on-demand insurance.253

Given its potential impact on the insurance industry, regulators and policymakers have been 

closely observing InsurTech’s development and assessing its possible effects on regulatory 

practices. Treasury examined InsurTech in the Fintech EO Report and concluded that 

lawmakers, policymakers, and regulators should: 

take coordinated steps to encourage the development of innovative insurance 

products and practices in the United States. Domestically, this includes 

consideration of improving product speed to market, creating increased regulatory 

flexibility, and harmonizing inconsistent laws and regulations. Treasury’s Federal 

Insurance Office ... should work closely with state insurance regulators, the NAIC, 

and federal agencies on InsurTech issues.254

1. The InsurTech Market and Recent InsurTech Developments

InsurTech funding totaled $2.3 billion in 2017, the second highest annual total to date, and a 36 

percent increase from 2016.255 In the first quarter of 2018, 66 InsurTech funding transactions 

 

251 Treasury, EO Report, 144.

252 See, e.g., Treasury, Fintech EO Report, 142; FIO, 2017 Annual Report; Organisation for Economic Co-operation 

Development (OECD), Technology and Innovation in the Insurance Sector (2017),

https://www.oecd.org/finance/Technology-and-innovation-in-the-insurance-sector.pdf. 

253 See, e.g., FIO, 2017 Annual Report; IAIS, Fintech Developments in the Insurance Industry (February 21, 2017), 

https://www.iaisweb.org/page/supervisory-material/other-supervisory-papers-and-reports//file/65440/report-onfintech-developments-in-the-insurance-industry. 

254 Treasury, Fintech EO Report, 144.

255 Willis Towers Watson, Quarterly InsurTech Briefing Q4 2017 (January 2018), 

https://www.willistowerswatson.com/-/media/WTW/PDF/Insights/2018/01/quarterly-insurtech-briefing-q4-2017. 
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took place, the highest number ever recorded.256 Insurers themselves have helped fund this 

growth, with some establishing units for venture capital deals or employing their own funds to 

invest in InsurTech startups.257 One analysis found that, in 2017 alone, 14 InsurTech startups 

received financial backing from some of the world’s largest insurers.258

The insurance industry (among other sectors) continues to explore the potential for using 

blockchain, a technology that uses a distributed, decentralized ledger to maintain a list of data 

records that are certifiable, permanent, and secure.259 Essentially, blockchain is four 

technologies in one: distributed ledger (a decentralized, peer-to-peer network); cryptography; 

consensus (the process by which transactions are verified); and smart contracts (programmable 

contracts that are automatically executed when pre-defined conditions are met).260 Industry 

members are collaborating to explore this technology’s potential through efforts such as the 

Blockchain Insurance Initiatives (B3i),261 and The Institutes RiskBlock Alliance.262

The U.S. life insurance industry is engaging with possibilities presented by new technologies, 

including platforms designed to simplify and streamline the traditionally cumbersome 

underwriting process. Emerging underwriting platforms include: digital labor (encompassing 

robotic process automation, machine learning, and other cognitive technologies); blockchain; 

data analytics; and behavior driven models such as wearable devices.263

 

256 Willis Towers Watson, Quarterly InsurTech Briefing Q1 2018 (May 2018), 

https://www.willistowerswatson.com/-/media/WTW/PDF/Insights/2018/05/quarterly-insurtech-briefing-q1-2018.pdf. 

257 Oliver Suess, “InsurTech Startups Attract Growing List of Traditional Insurer Partners,” Insurance Journal, 

November 28, 2016, http://www.insurancejournal.com/news/international/2016/11/28/433226.htm. 

258 Rachel Stone and Thomas Mason, “Some Insurtech Firms Win Funds from Incumbents, While Some Go It 

Alone,” S&P Global Market Intelligence, December 20, 2017, 

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=42930472.

259 See, e.g., “Blockchain Technology,” NAIC and CIPR, last updated December 13, 2017, 

http://www.naic.org/cipr_topics/topic_blockchain.htm; Hannah Murphy and Philip Stafford, “Blockchain Explainer: 

A Revolution Only In Its Infancy,” Financial Times, February 1, 2018, https://www.ft.com/content/6c707162-ffb1-

11e7-9650-9c0ad2d7c5b5. 

260 B3i, “B3i Development and Priorities” (presentation, FACI, Washington, DC, May 10, 2018), 

https://www.treasury.gov/initiatives/fio/Documents/May2018FACI_B3i.pdf. 

261 B3i was formed in 2016 as a collaboration of 15 insurers and reinsurers to “explore the potential of using 

Distributed Ledger Technologies within the industry for the benefit of all stakeholders in the value chain.” B3i 

became a legal entity in March 2018 with its own capital and intellectual property, in order to “streamline the 

development, testing, and commercialisation of blockchain solutions.” “B3i: About Us,” B3i, https://b3i.tech/aboutus.html.

262 The RiskBlock Alliance is a blockchain consortium that has 30 members, including national and international 

insurers, reinsurers, agencies, and brokerages. The Institutes, “The Institutes RiskBlock Alliance Adds 12 New Risk 

Management & Insurance Corporate Members, Bringing Total to 30,” news release, August 14, 2018, 

https://www.theinstitutes.org/about-us/media-center/articles/institutes-riskblocktm-alliance-adds-12-new-riskmanagement-insurance. 

263 KPMG, Enabling the Future of Underwriting: A Digital Roadmap (June 1, 2017), 5-7, 

https://assets.kpmg.com/content/dam/kpmg/us/pdf/2017/05/enabling-the-future-of-underwriting.pdf. 
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Despite these innovations, some observers believe that insurers still have a long road ahead. 

Industry surveys suggest that the industry “lags behind other industries when it comes to 

technological innovation” and that “companies are thus focusing on four areas they consider to 

be most in need of technological improvement: customer experience; legacy administrative and 

claims systems; data aggregation and mining; and underwriting systems.”264 Another survey 

found that “the extent to which [insurers] have leveraged data, to date, is minor in comparison 

with what the IoT will bring.”265

2. Regulatory Responses to InsurTech

State, federal, and international regulators and policymakers continue to work to address 

InsurTech and its implications for the insurance industry and insurance regulation. Most 

recently, Treasury examined InsurTech and other fintech issues in the Fintech EO Report, 

described above. InsurTech and related issues also have been the subject of several FACI 

meetings.

At the state and local level, the private and public sectors are coming together to foster start-ups 

and create InsurTech “hubs.”266 The NAIC is aiming to adopt technologies such as cloud 

capabilities which would “enable the organization to explore opportunities with big data.”267 

The NAIC is also researching resources needed to assist states in their review of complex 

predictive models used in rate filings.268 In addition, the NAIC’s Innovation and Technology 

Task Force continues to provide a “forum for the discussion of innovation and technology 

developments in the insurance sector,”269 including discussion of a potential state-based 

regulatory sandbox.270 The nonprofit advisory organization American Association of Insurance 

 

264 “Insurers ‘remain at the initial stage of data maturity’: A.M. Best,” Reinsurance News, March 19, 2018, 

https://www.reinsurancene.ws/insurers-remain-intial-stage-data-maturity-m-best/. 

265 LexisNexis Risk Solutions, Are You Prepared for the Insurance Data Tsunami? Challenges and Opportunities 

from the Internet of Things (March 2018), http://solutions.lexisnexis.com/97109confirmation. 

266 See, e.g., City of Hartford, “Hartford: The Next InsurTech Capital” (presentation, FACI, Washington, DC, May 

10, 2018), https://www.treasury.gov/initiatives/fio/Documents/May2018FACI_Hartford.pdf. 

267 NAIC, State Ahead: Strategic Plan 2018 2019 2020 (2018), 14 

https://www.naic.org/documents/state_ahead_strategic_plan.pdf. 

268 See, e.g., Thomas Harman, “NAIC to Look Into Resources Needed to Help States Review Predictive Models,” 

Best’s News Service, April 18, 2018, 

http://www3.ambest.com/ambv/bestnews/newscontent.aspx?AltSrc=104&RefNum=207863. 

269 “Innovation and Technology Task Force,” NAIC, https://www.naic.org/cmte_ex_ittf.htm. 

270 American Insurance Association, “Update on the AIA’s Innovation Initiative & Design Principles for U.S. StateBased Regulatory Sandbox” (presentation, NAIC, Milwaukee, WI March 26, 2018), 

https://www.naic.org/meetings1803/cmte_ex_ittf_2018_spring_nm_aia_pres.pdf. 
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Services announced, in August 2018, the introduction of an open Insurance Data Link 

(openIDL), a pilot blockchain platform to help automate insurance regulatory reporting.271

Insurance and other financial regulators around the world continue to open and operate 

regulatory “sandboxes,” which allow firms to test innovative products and business models 

without being subject to all of the usual legal and regulatory requirements. The United 

Kingdom’s Financial Conduct Authority (FCA) launched a sandbox in June 2016 “to test 

innovative products, services or business models in a live market environment, while ensuring 

that appropriate protections are in place.”272 By October 2017, the FCA sandbox had supported 

50 firms selected from 146 applications.273 In September 2017, the Hong Kong Insurance 

Authority launched a regulatory sandbox and a licensing “fast track” in order to increase Hong 

Kong’s appeal as a Fintech hub in the region.274 

U.S. insurers continue to advocate for improvements in 21st century insurance regulation, 

beyond regulatory sandboxes, including a framework in which: 

• all states permit electronic delivery of policyholder notices and insurance coverage 

confirmation; 

• all information is available electronically;

• blockchain (or other secure technology) is used; 

• a streamlined rate and form filing process is available; 

• mutual recognition is established between state regulators; and

• use of big data is recognized and trusted for policy underwriting.275

 

271 American Association of Insurance Services, “AAIS Collaborates with IBM to Transform Insurance Regulatory 

Reporting Using Blockchain,” news release, August 15, 2018, https://www.aaisonline.com/web/guest/aaiscollaborates-with-ibm-to-transform-insurance-regulatory-reporting-using-blockchain. 

272 “Regulatory Sandbox Lessons Learned Report,” FCA, last updated October 20, 2017, 

https://www.fca.org.uk/publications/research/regulatory-sandbox-lessons-learned-report. 

273 FCA, Regulatory Sandbox Lessons Learned Report (October 2017), https://www.fca.org.uk/publication/researchand-data/regulatory-sandbox-lessons-learned-report.pdf. 

274 See Kate Smith, “Insurance Authority Exec: Insurtech a High Priority for Hong Kong Regulator,” Best’s News 

Service, October 9, 2017, 

http://www3.ambest.com/ambv/bestnews/newscontent.aspx?AltSrc=104&RefNum=203642. 

275 Chubb, “NAIC Innovation and Technology Task Force Meeting” (presentation, NAIC, Milwaukee, WI, March 

26, 2018), https://www.naic.org/meetings1803/cmte_ex_ittf_2018_spring_nm_chubb_pres.pdf. 
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VI. INSURANCE INDUSTRY FINANCIAL OVERVIEW

A. Domestic Insurance Marketplace Overview

Ten years have passed since the misalignment of pricing relative to risk by market participants

led to the financial crisis in 2008. For insurers, the financial trends over the past decade have 

shown an industry characterized by enhanced capital bases, improved financial flexibility, 

continued profitability, and steady liquidity levels. Reduced leverage has strengthened insurers’ 

balance sheets, while operating ratios have rebounded from a negative return on average equity 

for the life and health insurance (L&H) sector and a return on average equity of less than one 

percent for the property and casualty (P&C) sector. 

In 2017, total direct premiums written for the combined L&H and P&C sectors were $1.33 

trillion, growing by nearly three percent over 2016 levels and close to 15 percent from 2008, as 

shown in Figure 3.276

Figure 3: Total Direct Premiums Written for L&H and P&C Sectors

($ thousands)

Source: S&P Global

While the financial health of both sectors has generally been sound, there are signs of some 

weakening. In the last three years, the L&H sector has been experiencing negative net premium 

growth, while for the P&C sector, underwriting performance has been on a downward trajectory 

276 Except as otherwise indicated, data cited in this section of the Report are as of December 31, 2017, as derived 

from S&P Global Market Intelligence (S&P Global) on May 1, 2018. These data are on a statutory accounting 

basis. S&P Global continuously updates its data for corrections in filings; 2016 data in this Report are based on 

updated data available as of May 1, 2017, and thus may be different in some respects from corresponding figures 

reported in FIO’s 2017 Annual Report. Due to certain conventions used by S&P Global for aggregation of industry 

data, some columns in the accompanying tables may not sum to the totals that have been separately accumulated by 

S&P Global from individual legal entity data. Also, some figures may not add to 100 percent due to rounding.

950,000,000

1,000,000,000

1,050,000,000

1,100,000,000

1,150,000,000

1,200,000,000

1,250,000,000

1,300,000,000

1,350,000,000

1,400,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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since 2013, resulting in a combined ratio277 in excess of 100 in 2016 and 2017 that significantly 

contributed to lowering net income in those years.

1. Financial Performance and Condition 

This section focuses on the financial performance and condition of the 743 L&H insurers, the 

2,620 P&C insurers, and the 1,130 health insurers licensed in the United States.278 Insurers in 

the L&H sector offer products in two segments: (1) life insurance and annuities, which generally 

protect against the risk of financial loss associated with an individual’s death and provide income 

streams for retirement, respectively; and (2) accident and health (A&H) products, which cover 

expenses for health and long-term care or provide income in the event of disability. Insurers in 

the P&C sector offer products that generally protect against the risk of financial loss associated 

with damage to property or exposure to liability for individuals and families (personal lines) or 

for businesses (commercial lines).

Net premiums written for the L&H sector were approximately $597 billion in 2017, or 33 

percent of net premiums written for the combined L&H, P&C, and Health sectors.279 For the 

P&C sector, net premiums written were approximately $557 billion, or 31 percent of net 

premiums written for the combined L&H, P&C, and Health sectors. The Health sector reported 

$664 billion of net premiums written for 2017, or 36.5 percent of the combined total for the three 

sectors.

At the end of 2017, the L&H sector held approximately $7.0 trillion of total assets (including 

$2.7 trillion held in separate accounts), the P&C sector held approximately $2.0 trillion, and the 

Health sector held approximately $404 billion. Capital and surplus in the L&H sector stood at 

approximately $395 billion as of December 31, 2017, the P&C sector reported policyholder 

surplus of approximately $764 billion, and the Health sector reported approximately $183 

billion.

Figures 4 and 5 present snapshots of the L&H sector market, showing the ten largest L&H 

insurance groups measured by direct premiums written, and market share for life insurance 

(including annuities and other deposit-type contracts) and for A&H lines of business, 

respectively. Premiums shown in Figures 4 and 5 aggregate all L&H sector products and all 

geographies of the United States.

 

277 The combined ratio is an accepted metric used to compare underwriting performance in the P&C sector; it is the 

sum of the loss ratio (incurred loss divided by earned premiums), the expense ratio (incurred expenses divided by 

premiums written), and the dividend ratio (policyholder dividends divided by earned premiums).

278 A.M. Best Aggregates and Averages (2018 Editions) and S&P Global. The L&H and P&C sectors are the 

primary insurance sectors in the United States. The Health sector includes companies licensed solely as health 

insurers or as Health Maintenance Organizations, but is not the focus of the remainder of this Report.

279 Net premiums written means direct premiums written less net ceded reinsurance premiums.
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Figure 4: L&H Insurance Groups by 2017 U.S. Life Insurance Lines

Direct Premiums Written

2016 

Rank

2017 

Rank Insurance Group

2016 Direct 

Premiums 

Written ($000)

Share 

of Total 

(%)

2017 Direct 

Premiums 

Written ($000)

Share of 

Total 

(%)

1 1 MetLife Inc. $ 81,351,380 13.01 $ 86,621,636 13.57

2 2 Prudential Financial Inc. 45,902,327 7.34 47,465,693 7.44

3 3 New York Life Insurance Co. 30,922,462 4.95 31,852,412 4.99

4 4 Principal Financial Group Inc. 28,186,098 4.51 28,142,265 4.41

5 5 Massachusetts Mutual Life Insurance Co. 23,458,883 3.75 24,735,091 3.88

7 6 Jackson National Life Insurance Co. 22,132,278 3.54 22,439,071 3.52

6 7 American International Group 22,463,202 3.59 21,465,665 3.36

9 8 Transamerica Corp. 21,068,180 3.37 21,317,714 3.34

8 9 AXA Equitable Life Insurance Co. 21,920,627 3.51 21,290,299 3.34

10 10 Lincoln National Corp. 19,441,555 3.11 20,397,394 3.20

Combined Top 10 $ 316,846,992 50.68 $ 325,727,240 51.05

Combined Top 25 $ 486,154,525 78.73 $ 498,490,823 78.11

Combined Top 100 $ 616,891,016 98.68 $ 629,839,323 98.66

Total U.S. Life Insurance Lines $ 625,198,304 $ 638,277,888 

Source: S&P Global (includes Life Insurance (No Annuity), Annuity Considerations, Deposit-type Contracts (State 

Page), Other Considerations (State Page))

The data presented in Figures 4 and 5 for life and annuity business, and in the comparable figures 

that follow for other lines of business, are aggregated at a group level from filings made with 

state insurance regulators by individual legal entity insurers. For example, premiums shown for 

MetLife Inc. include premiums written by all of its insurance subsidiaries in the United States, 

but exclude business written by affiliated entities in other jurisdictions. Similarly, Jackson 

National Life Group is foreign-owned, and the results shown only include U.S. operations. 

Over 2017, the market share rankings among the five largest writers of life insurance and 

annuities were unchanged. MetLife Inc. remained the largest writer of life insurance products in 

the United States, followed by Prudential Financial Inc., New York Life, Principal Financial 

Group Inc., and Massachusetts Mutual Life Insurance Company. Jackson National 

(sixth-largest) and American International Group (seventh-largest) exchanged places, as did 

Transamerica (eighth-largest) and AXA (ninth-largest). The aggregate market shares of the top 

ten, 25, and 100 companies were little changed compared to 2016. 
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Figure 5: L&H Insurance Groups by 2017 U.S. A&H Lines Direct Premiums Written

2016 

Rank

2017 

Rank Insurance Group

2016 Direct 

Premiums 

Written ($000)

Share 

of Total 

(%)

2017 Direct 

Premiums 

Written ($000)

Share of 

Total 

(%)

1 1 UnitedHealth Group Inc. $ 46,669,151 26.28 $ 52,150,831 27.64

2 2 Aetna Inc. 28,358,852 15.97 30,004,746 15.90

3 3 Cigna Corp. 15,505,890 8.73 17,771,300 9.42

4 4 Aflac Inc. 14,872,435 8.38 14,993,250 7.95

5 5 MetLife Inc. 7,211,544 4.06 7,600,969 4.03

6 6 Unum Group 5,739,627 3.23 5,887,345 3.12

7 7 Mutual of Omaha Insurance Co. 3,740,570 2.11 4,020,341 2.13

8 8 Guardian Life Insurance Co. of America 3,629,131 2.04 3,758,560 1.99

9 9 Genworth Financial Inc. 2,676,522 1.51 2,653,016 1.41

12 10 Reliance Standard Life Insurance Co. 1,923,626 1.08 1,977,031 1.05

Combined Top 10 $130,483,648 73.48 $140,817,389 74.64

Combined Top 25 $154,247,709 86.85 $164,614,040 87.23

Combined Top 100 $176,059,593 99.08 $187,272,791 99.23

Total U.S. A&H Lines $177,559,829 $188,701,996

Source: S&P Global

Figure 5 shows A&H premiums written by insurers authorized to offer both life and health 

insurance; it excludes A&H premiums written by insurers authorized to offer only health 

insurance (see Figure 9 below). Thus, for example, the data presented in Figure 5 for 

UnitedHealth Group Inc. does not reflect that insurer’s total health insurance premiums on a 

consolidated basis, but only premiums written by its subsidiaries licensed to offer both life and 

health insurance. UnitedHealth Group Inc. also writes health insurance business through 

subsidiaries that offer only health insurance, and those premiums are reflected in Figure 9. 

There was little change in the top ten writers of A&H lines of business in 2017. United Health 

Group remained the largest writer of A&H lines in 2017, while Reliance Standard entered the top 

ten in tenth place, replacing AEGON NV.

As noted above, P&C insurers underwrite a variety of products, generally categorized as either 

personal lines or commercial lines. Figure 6 reports market share information on a combined 

P&C sector basis; details for commercial lines and personal lines market shares are provided in 

the discussion below. 
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Figure 6: P&C Insurance Groups by 2017 U.S. Combined Lines Direct Premiums Written

2016 

Rank

2017 

Rank Insurance Group

2016 Direct 

Premiums 

Written ($000)

Share 

of Total 

(%)

2017 Direct 

Premiums 

Written ($000)

Share of 

Total 

(%)

1 1 State Farm Mutual Automobile Insurance Co. $ 62,189,311 10.14 $ 64,892,583 10.13

2 2 Berkshire Hathaway Inc. 33,300,439 5.43 38,408,251 5.99

3 3 Liberty Mutual Group 32,217,215 5.25 33,831,726 5.28

4 4 Allstate Corp. 30,875,771 5.03 31,501,664 4.92

5 5 Progressive Corp. 23,951,690 3.90 27,862,882 4.35

6 6 Travelers Companies Inc. 23,918,048 3.90 24,875,076 3.88

7 7 Chubb Ltd. 20,786,847 3.39 21,208,576 3.31

10 8 United Services Automobile Association 18,213,843 2.97 20,151,368 3.14

9 9 Farmers Insurance Group of Companies 19,677,601 3.21 19,862,472 3.10

8 10 Nationwide Mutual Insurance Co. 19,756,093 3.22 19,218,907 3.00

Combined Top 10 $ 284,886,858 46.44 $ 301,813,505 47.10

Combined Top 25 $ 399,153,226 65.81 $ 417,532,247 65.16

Combined Top 100 $ 528,266,405 86.15 $ 553,998,163 86.49

Total U.S. P&C Sector $ 613,383,631 $ 640,773,840 

Source: S&P Global (includes all lines of business)

On a combined basis (including all lines of P&C business), State Farm Mutual Automobile 

Insurance Company remained the largest writer of P&C business in 2017. Similarly, there was 

no change in the market share rankings of the remaining top seven P&C insurers. USAA rose to 

eighth place from tenth in 2016, replacing Nationwide Mutual Group, which dropped to tenth 

place from eighth in 2016. 

For P&C commercial lines, there was little change among the top five writers, while Berkshire 

Hathaway rose to seventh place in 2017 from ninth in 2016. Among P&C personal lines writers, 

State Farm was again the largest, while Berkshire Hathaway rose to second place from third in 

2016, swapping places with Allstate, and USAA overtook fifth place from Liberty Mutual. For 

both commercial lines and personal lines, there was little change in the aggregate market shares 

of the top 10, 25, and 100 companies in 2017. 

As shown in Figure 7 below, market share rankings among the top ten health insurance groups 

were little changed in 2017. UnitedHealth Group continued to dominate the market, while 

Centene overtook Aetna for fifth place and Kaiser Foundation Health Plan Inc. overtook 

Independence Health Group for seventh place. 
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Figure 7: Health Insurance Groups by 2017 U.S. Health Lines Direct Premiums Written

2016 

Rank

2017 

Rank Insurance Group

2016 Direct 

Premiums 

Written ($000)

Share 

of Total 

(%)

2017 Direct 

Premiums 

Written ($000)

Share 

of Total 

(%)

1 1 UnitedHealth Group Inc. $ 79,472,497 12.42 $ 86,431,430 12.85

2 2 Anthem Inc. 60,809,498 9.50 65,645,632 9.76

3 3 Humana Inc. 53,553,211 8.37 53,176,602 7.90

4 4 HealthCare Services Group, Inc. 32,157,585 5.02 34,304,533 5.10

6 5 Centene Corp. 24,070,448 3.76 28,260,223 4.20

5 6 Aetna Inc. 24,414,237 3.81 20,525,502 3.05

8 7 Kaiser Foundation Health Plan Inc. 16,166,834 2.53 17,406,943 2.59

7 8 Independence Health Group Inc. 17,013,754 2.66 17,010,939 2.53

9 9 Molina Healthcare Inc. 15,317,439 2.39 16,665,219 2.48

11 10 GuideWell Mutual Holding Corp. 13,092,142 2.05 15,253,562 2.27

Combined Top 10 $ 336,427,392 52.56 $ 354,680,585 52.72

Combined Top 25 $ 461,627,586 72.12 $ 486,588,241 72.33

Combined Top 100 $ 611,127,522 95.48 $ 641,581,917 95.37

Total U.S. Life Insurance Lines $ 640,073,026 $ 672,699,981 

Source: S&P Global

2. Life and Health Sector

a) Performance

This section presents additional analysis of the financial performance of the L&H sector in 2017, 

and then assesses the L&H sector’s overall financial condition as of December 31, 2017. 

(1) Net Premiums Written

Net premiums written is a principal measure of the size and growth of the insurance industry. 

Net premiums written accounted for 71 percent of total L&H sector revenues, a level slightly 

lower than the ten-year historical average. In 2017, L&H sector net premiums written were $597 

billion, marking a less than one percent decrease from the $600 billion reported in 2016, but also 

the third consecutive year of negative growth. A ten percent decrease in annuity premiums and 

deposits was not fully offset by a 19 percent rebound in life insurance premiums and a four 

percent increase in accident and health premiums. A number of large reinsurance transactions in 

2017 by Prudential Financial, Inc., MetLife, Inc., Transamerica Life Insurance Company, and 

Forethought Life Insurance Company were cited as the main cause of the drop in net 

premiums.280 In 2017, annuity premiums and deposits represented 48 percent of total net 

premiums written, a decrease from the 53 percent reported in 2016, as shown in Figures 8 and 9. 

Sales of traditional life insurance products rose to make up 23 percent of 2017 L&H sector net 

premiums written from 19 percent in 2016, while the remainder was virtually comprised entirely 

of A&H sector premiums.

 

280 Matthew Coppola, Best’s Special Report: First Look-2017 US Life/Health Financial Results (March 16, 2018), 

http://www3.ambest.com/ambv/sales/bwpurchase.aspx?altsrc=108&record_code=271766.
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Figure 8: L&H Sector Net Premiums Written ($ billions)

$0

$50

$100

$150

$200

$250

$300

$350

$400

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

 Life Insurance Premiums Annuity Premiums & Deposits Accident & Health Premiums

Source: S&P Global

Figure 9: L&H Sector Net Premiums, Considerations, and Deposits ($ thousands)

2013 2014 2015 2016 2017

Life Insurance Premiums $ 125,958,925 $ 133,902,121 $ 151,399,614 $ 115,034,733 $ 137,129,172

Annuity Premiums & Deposits 279,434,360 352,823,672 324,041,791 318,539,213 287,201,782

A&H Premiums 153,284,525 156,605,802 158,826,518 162,860,367 169,245,905

Credit Life & Credit A&H Premiums 1,445,214 1,388,591 1,379,933 1,261,511 1,248,910

Other Premiums & Considerations 2,345,600 2,554,797 2,497,634 2,192,329 2,097,658

Total $ 562,565,306 $ 647,274,984 $ 638,191,067 $ 599,888,152 $ 596,923,435

Share of Total 2013 2014 2015 2016 2017

Life Insurance Premiums 22% 21% 24% 19% 23%

Annuity Premiums & Deposits 50% 55% 51% 53% 48%

A&H Premiums 27% 24% 25% 27% 28%

Credit and Other 1% 1% 1% 1% 1%

100% 100% 100% 100% 100%

Source: S&P Global

(2) Policyholder Contract Benefits, Surrenders, and Other 

Expenses

Policyholder contract benefits are claims or obligations of L&H insurers under life insurance, 

annuity, and other contracts and policies. Contract surrenders occur when a policyholder or 

contract holder elects to cancel a policy or contract before the end of its contractual term and to 

receive its accumulated cash value. Contract benefit payments and contract surrenders comprise 

the majority of total expenses for L&H insurers. Non-benefit-related expenses include general 

administrative and overhead expenses, expenses incurred in acquiring business (particularly 

producer commissions), and expenses related to payments made under contractual provisions of 

polices, including loss verification and adjustment expenses. Figures 10 and 11 show aggregate 

L&H sector benefit payments, surrenders, reserve increases, and all other expenses for recent 

years.
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Figure 10: L&H Sector Expenses ($ billions)

$0

$50

$100

$150

$200

$250

$300

$350

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total Benefits Payments Total Surrenders Total Reserve Increases

Source: S&P Global

Figure 11: L&H Sector Expenses ($ thousands)

2013 2014 2015 2016 2017

Total Benefits Payments $ 250,633,002 $ 251,752,460 $ 263,910,125 $ 271,379,800 $ 281,296,458

Total Surrenders 248,702,088 281,532,892 272,998,652 265,095,216 308,902,292

Total Increase in Reserves 86,224,076 108,734,429 80,546,645 133,139,152 106,346,757

Total Transfers to Separate Accounts (771,523) (16,464,689) 36,922,715 (38,046,582) (65,751,424)

Commissions 53,014,166 52,063,514 55,501,271 64,569,464 57,989,814

General & Administrative Expenses 58,463,296 58,950,563 60,074,097 62,361,334 65,817,079

Insurance Taxes, Licenses and Fees 8,193,402 9,981,158 10,481,379 10,828,070 8,811,447

Other Expenses (187,933) 65,993,619 (4,916,529) (2,712,465) (4,300,494)

Total $ 704,270,574 $ 812,543,945 $ 775,518,356 $ 766,613,988 $ 759,111,928

Source: S&P Global

Total L&H sector expenses decreased by slightly less than one percent in 2017. Total contract 

surrenders increased 17 percent in 2017, while total benefits payments rose four percent; these 

increases were more than offset by the combination of a 20 percent drop in reserve increases, a 

73 percent increase in the net amount transferred from separate accounts, and a ten percent 

decrease in commissions expense.
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(3) Investment Income

Net investment income represented about 22 percent of aggregate L&H sector revenues in 2017, 

the highest level recorded over the past ten years, in part due to a slightly more than five percent 

increase for the year. Figures 12 and 13 show L&H sector net investment income from invested 

assets (excluding net realized gains and losses on the disposition of assets) and the net 

investment yield for recent years.

Figure 12: L&H Sector Annual Net Investment Income ($ billions) and 

Net Yield on Invested Assets (%)

$162

$157

$164

$167 $167 $167

$172 $171 $173

$182

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

$130

$140

$150

$160

$170

$180

$190

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Investment Income Net Yield on Invested Assets

Source: S&P Global

Figure 13: L&H Sector Annual Net Investment Income ($ billions)

and Net Yield on Invested Assets (%)

2013 2014 2015 2016 2017

Net Investment Income $ 167,085,528 $ 171,733,049 $ 170,760,967 $ 173,025,713 $ 182,241,780

Total Cash & Investments 3,482,338,468 3,631,569,037 3,703,872,525 3,891,873,165 4,074,049,889

Net Yield on Invested Assets 4.85% 4.83% 4.66% 4.56% 4.58%

Source: S&P Global

Longer-term interest rates remained relatively flat over 2017, albeit at higher average levels 

compared to 2016 (see Figure 14); this contributed to the first, small increase in the net yield on 

invested assets since 2010. Additionally, the 5.3 percent gain in net investment income outpaced 

the growth in total cash and invested assets in 2017, which was slightly less than five percent. 

Net yield on invested assets was reported at 4.58 percent in 2017, versus the 4.56 percent 

recorded in 2016. Nonetheless, the general interest rate environment remained near historically 

low levels, and continued to present risks to the L&H sector.281 A more detailed discussion of 

these risks can be found in Section VI.D of this Report. 

 

281 See also FIO, 2017 Annual Report, 11.
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Figure 14: Percentage Yield on 10-Year Treasury Bonds

0%

1%

2%

3%

4%

5%

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Dec-17

 Source: S&P Global

In 2017, the L&H sector recorded net realized capital losses of $8.6 billion, 25 percent less than 

the $11.4 billion in realized capital losses reported in 2016; the improvement was due to higher 

realized gains on bonds and unaffiliated equities. Losses on derivative securities (almost 

exclusively used for hedging transactions) were at approximately the same level as in 2016.

(4) Net Income and Return on Equity

Figure 15 presents a summary income statement for the L&H sector. Total revenues in the L&H

sector were $840 billion in 2017, a decrease of slightly more than one percent from the $852 

billion reported in 2016. The decrease in net premiums written (discussed above), a 48 percent 

increase in the reinsurance allowance, i.e. reserve adjustments on reinsurance ceded, and a 20 

percent drop in “other income” were partially offset by the rise in net investment income (also 

discussed above) and a five percent increase in separate accounts revenue. Total expenses 

decreased by one percent to $759 billion, leading to a six percent decrease in pre-tax operating 

income. Net income increased by nearly seven percent to exceed $42 billion in 2017 due to the 

reduction in net realized capital losses.

Figure 16 shows key operating ratios for the L&H sector. The L&H sector’s 2017 pre-tax 

operating margin decreased slightly to 7.5 percent from 7.9 percent in 2016. Similarly, the 

decrease in operating income led to a drop in the sector’s pre-tax operating return on average 

equity to 16.3 percent from the 17.9 percent recorded in 2016; however, the gain in net income 

increased the 2017 return on average equity to 10.9 percent from 10.5 percent. 
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Figure 15: L&H Sector Net Income

2013 2014 2015 2016 2017

Premiums, Consideration & Deposits $ 562,565,306 $ 647,274,984 $ 638,191,067 $ 599,888,152 $ 596,923,435

Net Investment Income 167,085,528 171,733,049 170,760,967 173,025,713 182,241,780

Reinsurance Allowance (21,247,568) (14,987,927) (86,443,933) (16,975,046) (25,108,912)

Separate Accounts Revenue 31,425,593 34,270,975 35,197,929 34,652,744 36,551,982

Other Income 42,834,796 39,700,564 90,478,871 61,314,211 49,007,039

Total Revenue 782,663,655 877,991,645 848,184,900 851,905,776 839,615,325

Total Expenses 704,270,574 812,543,945 775,518,356 766,613,988 759,111,928

Policyholder Dividends 15,660,306 16,430,515 18,271,884 18,230,320 17,498,496

Net Gain from Operations before Tax 62,897,846 49,012,243 54,396,094 67,061,448 63,004,900

Federal Income Tax 8,554,055 10,106,154 10,566,567 16,278,983 12,352,079

Net Income before Capital Gains 54,344,234 38,905,344 43,832,635 50,782,390 50,652,821

Net Realized Capital Gains (Losses) (12,026,143) (1,306,441) (3,543,569) (11,384,838) (8,553,525)

Net Income $ 42,317,305 $ 37,605,615 $ 40,285,063 $ 39,397,552 $ 42,099,297

Source: S&P Global

Figure 16: L&H Sector Operating Ratios

2013 2014 2015 2016 2017

Pre-Tax Operating Margin 8.04% 5.58% 6.41% 7.87% 7.50%

Return on Average Equity 12.85% 10.96% 11.17% 10.54% 10.86%

Pre-Tax Operating Return On Average Equity 19.10% 14.29% 15.08% 17.93% 16.25%

Return on Average Assets 0.73% 0.61% 0.64% 0.61% 0.62%

Source: S&P Global
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b) Condition 

This section presents information on the 2017 financial condition of the L&H sector, 

highlighting common industry metrics associated with solvency and financial stability. It 

describe the elements that have characterized the financial health of the L&H sector over the last 

decade and in the post-crisis period.282

(1) Capital and Surplus

Figure 17 shows the financial condition of the L&H sector as reflected by asset growth and the 

sector’s capital and surplus position. 

Figure 17: L&H Sector Capital Position ($ thousands)

2013 2014 2015 2016 2017

Capital & Surplus $ 331,982,056 $ 353,968,597 $ 367,249,564 $ 380,686,099 $ 394,528,734

Y-Y Growth 1.6% 6.6% 3.8% 3.7% 3.6%

General Account Assets $3,675,915,856 3,835,978,902 3,912,020,651 4,117,531,087 4,300,414,526

Y-Y Growth 2.5% 4.4% 2.0% 5.3% 4.4%

General Account Assets, 

Adjusted283

$3,643,772,397 3,800,613,082 3,867,609,793 4,073,744,432 4,230,419,207

Capital & Surplus to General 

Account Adjusted Assets 

9.11% 9.31% 9.50% 9.34% 9.33%

Source: S&P Global

The L&H insurance sector continued to enhance its capital and surplus position in 2017, with 

year-over-year growth of 3.6 percent to $394.5 billion, contributing to an average annual growth 

rate of 4.1 percent over the last 10 years. Underlying that improvement has been steady annual 

growth in general account assets.

As Figure 17 indicates, the ratio of capital and surplus to general account adjusted assets 

averaged 9.32 percent annually over the last five years. By comparison, the same ratio averaged

8.89 percent annually from 2008 to 2012, resulting in a decade average of about 9.1 percent on a 

yearly basis and demonstrating that in recent years, the L&H sector has enhanced the capital 

levels it maintains to support the risk exposure of the assets backing its obligations. 

The L&H insurance sector’s capital position can largely be attributable to sustained positive 

earnings. Figure 18 shows key contributors to the L&H sector’s capital and surplus. 

 

282 According to the National Bureau of Economic Research, the financial crisis began in December 2007 and lasted 

until June 2009. See “U.S. Business Cycle Expansions and Contractions,” National Bureau of Economic Research, 

http://nber.org/cycles/. The post-crisis period noted throughout this section refers to the period, beginning at yearend 2009 through 2017 and calculations cited for the post-crisis period are based on this time frame.

283 General Account adjusted assets refers to total general account assets less cash and cash equivalents, as such 

holdings pose little risk to the insurer.
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Figure 18: Key Contributors to L&H Sector Capital and Surplus

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percentage of Prior Year-End

Capital & Surplus

Net Income excluding Capital Gains Net Realized Capital Gains (Losses)

Net Unrealized Capital Gains (Losses) Dividends to Stockholders

Source: S&P Global

Growth in the L&H sector’s capital base can be observed more clearly by eliminating the effect 

of capital contributions in the form of surplus notes. Organic growth in capital and surplus has 

averaged 3.9 percent annually in the last decade, mainly due to consistently strong underwriting 

results that have boosted net income.284 Partially offsetting that growth have been stockholder 

dividends. In 2017, stockholder dividends were $28.8 billion, dropping from a 10-year high of 

$32.9 billion at year-end 2016. Though diminishing the sector’s potential level of capitalization 

to some degree, stockholder dividends have comprised only 7.1 percent of prior year-end capital 

and surplus on average annually in the last l0 years. 

Insurers balance two goals: (1) returning a profit by investing the premiums received from 

underwriting activities; and (2) limiting the risk exposure created by the policies that insurers 

underwrite. Insurers may cede premiums to reinsurance companies in order to move some of the 

risks off of their balance sheets. Since the end of the financial crisis, on-balance sheet leverage 

has remained stable, lending to the strength of the L&H sector’s capital position. While an 

uptick was observed in the asset leverage ratio for 2017 from the prior year, primarily due to 

increased investment holdings, Figure 19 shows that general account leverage for the L&H 

sector has held steady overall in the post-2008 period. 

 

284 Capital and surplus, less surplus notes, decreased by 7.3 percent at year-end 2008, the only year in the last decade 

to have experienced a drop. When eliminating 2008, organic growth in capital and surplus averaged 5.2 percent 

annually from 2009 through 2017.
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Figure 19: On-Balance Sheet General Account Leverage for the L&H Sector

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Multiple of Capital and Surplus

Total Reserves & Deposits Asset Leverage Net Leverage (net premiums and liabilities)

Source: S&P Global

The L&H sector’s net leverage ratio285 of 11.42 at year-end 2017 was not materially changed 

from the previous two years and continued to remain below the average of about 11.72 per year 

post-2008.286 Specifically, the liabilities-to-equity multiple of 9.91 at year-end 2017, reflecting 

general account liabilities of $3.9 trillion as a multiple of capital and surplus, was slightly up 

from 9.82 at year-end 2016 and has averaged at a multiple of almost 10 annually in the past nine 

years. Net premiums, annuities, and considerations (collectively referred to as net premiums in 

the net leverage ratio) have averaged 1.75 times capital and surplus per year post-crisis. Surplus 

relief through reinsurance for the L&H sector has been on a gradual ascent since 2014, rising to 

5.22 percent at year-end 2017 from 5.0 percent at year-end 2016 and from 4.4 percent and 3.72 

percent at the years ending 2015 and 2014, respectively.287 Cessions to reinsurers accounted for 

27 percent of gross premiums at year-end 2017, climbing from 24.7 percent at year-end 2016 and 

surpassing the post-crisis annual average of 21.8 percent for the decade.

Exhibiting an annual growth rate of 3.1 percent on average since year-end 2008, total policy 

reserves and deposit-type contract reserves were $3.3 trillion at year-end 2017, up by 3.5 percent 

from $3.2 trillion at year-end 2016. The multiple of policy reserves and deposits to capital and 

 

285 Net leverage ratio is an indicator of the sector’s exposure to pricing and estimation errors, determined by 

calculating total liabilities and net premiums, annuities, and considerations as a multiple of capital and surplus.

286 The annual average calculation of 11.7 covers 2009 through 2017, excluding the impact of the financial crisis and 

any potential skewing that could result with the inclusion of 2008 numbers.

287 The use of reinsurance for surplus relief is most common when an insurer begins to rapidly expand its volume of 

premiums written. The calculation in this Report involves the amount of surplus not yet reported as income from 

commissions and expense allowance on reinsurance ceded during the current year as a share of capital and surplus. 

It captures the amounts related to A&H business as well as life and annuity business for general and separate 

accounts. See generally FIO, The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such 

Market Plays in Supporting Insurance in the United States (December 2014), 

https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/FIO%20-Reinsurance%20Report.pdf. 
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surplus, however, has held firm, standing at 8.35 and 8.36 for the years ending 2017 and 2016, 

respectively, declining from a 10-year high of 10.13 at year-end 2008 when capital and surplus 

declined by 5.7 percent and policy reserves and deposits rose by 5.3 percent. 

The asset leverage ratio aims at measuring the potential impact on the balance sheet arising from 

the volatility and credit quality of the sector’s investment portfolio, reinsurance recoverables, and 

agents’ balances, and is calculated as the sum of cash and invested assets plus reinsurance 

recoverables and agents’ balances to capital and surplus. In the past decade, the L&H sector’s 

asset leverage multiple has ranged between a low of 10.26 at year-end 2015 and a high of 12.15 

at year-end 2008 when risk exposures were at their height compared to subsequent years. When 

removing the 2008 outlier, the peak falls to 10.99 and averages out to 10.58 percent annually, 

suggesting that no substantial deviations have occurred in the sector’s exposure to investment, 

interest rate, and credit risks over the post-crisis period. 

(2) Asset Base 

Underlying the resilience of the L&H sector’s capital position have been positive asset growth 

and investment allocations consistent with policyholder obligations.288 Total L&H insurance 

sector assets, including separate accounts, were $7.0 trillion and $6.6 trillion for the years ending 

2017 and 2016, respectively, growing annually by 4.9 percent on average post-crisis. The annual 

growth rate of separate account assets has exceeded that of general account assets over the 

post-crisis period, averaging 8.1 percent versus 3.4 percent. 

Figure 20 shows the composition of the L&H sector’s asset portfolio and distribution of cash and 

investments. Of total asset holdings, general account assets have continued to exceed 61 percent 

of the portfolio in each of the last five years, while separate account assets have made up the 

remainder.

 

288 Growth in total assets declined by 8.8 percent in 2008 from the prior year, due to a considerable drop in separate 

account asset growth of nearly 28 percent. General account assets, however, showed positive growth in 2008.
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Figure 20: Composition of L&H Sector General Account Asset and Investment Portfolio

2013 2014 2015 2016 2017

General Account Assets / Total Assets 61.2% 61.3% 61.8% 62.3% 61.3%

Separate Account Assets / Total Assets 38.8% 38.7% 38.2% 37.7% 38.7%

Bonds 74.7% 73.9% 73.8% 73.5% 73.0%

Preferred Stocks 0.2% 0.3% 0.3% 0.2% 0.3%

Common Stocks 2.1% 2.1% 2.0% 2.2% 2.3%

Mortgage Loans 10.1% 10.3% 10.9% 11.2% 11.7%

Real Estate 0.6% 0.6% 0.6% 0.6% 0.6%

Contract Loans 3.7% 3.6% 3.4% 3.3% 3.2%

Derivatives 1.1% 1.6% 1.5% 1.6% 1.4%

Cash & Short Term Investments 2.7% 2.8% 2.8% 2.6% 2.6%

Other Investments 4.7% 4.9% 4.7% 4.7% 5.0%

Total Cash & Invested Assets 100% 100% 100% 100% 100%

Share of General Account Assets 94.7% 94.7% 94.7% 94.5% 94.7%

Source: S&P Global

The structure of the investment portfolio has remained generally consistent for the last ten years. 

Cash and invested assets continued to account for nearly 95 percent of the general account asset 

portfolio at year-end 2017, aligned with the yearly trend since 2008 and, as Figure 20 reflects, 

for recent years. Approximately three-quarters of the L&H sector’s investment portfolio has 

consisted of bond holdings on average in each of the last ten years, reflective of the significant 

role that life insurers play in the corporate bond market. Of total bonds, almost 97 percent have 

invariably been long-term – in line with the long-term nature of obligations assumed under life 

policies and contracts. This concentration is indicative of insurer risk management practices that 

match asset and liability durations with the aim of mitigating the impact of interest rate 

fluctuations on capital and surplus and providing the ability to estimate cash flows in order to 

meet debt and policyholder obligations as they fall due.

Mortgage loans remain the second largest investment class held by the L&H sector, averaging 

10.5 percent of cash and invested assets annually over the last decade. 

While Figure 20 captures the details for the past five years, bond investments as a share of the 

L&H investment portfolio have actually decreased by nearly three percentage points to 73.0 

percent of cash and invested assets at year-end 2017 from a high of 75.8 percent at year-end 

2010. At the same time, the L&H sector raised its holdings of mortgage loans by more than two

percentage points. This reallocation may be indicative of the L&H sector’s search for yield in an 

attempt to mitigate the effects of a low interest rate environment, which began post-crisis, on 

investment earnings.
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(3) Liquidity

The L&H sector’s sound financial health is further evidenced by the solidity of its liquidity 

position. Although surrender levels peaked in 2017 when reviewing the past decade, 

consistently positive cash flows from operations, steady growth in cash and invested assets, and a 

stable current liquidity ratio suggest that the L&H sector continues to possess the capacity to 

fulfill its ongoing business needs, as illustrated by Figure 21. 

Figure 21: Cash Flows from Operations for the L&H Sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

As a Share of Net Premium Recipts 

Surrenders Benefit Payments

Source: S&P Global

Benefit payments were $612.6 billion in 2017, comprising more than 99 percent of premium 

receipts, net of reinsurance, up from $553.2 billion and about 90 percent in 2016. On average, 

benefit payments have consumed 88 percent of net premiums collected on an annual basis over 

the past decade. As Figure 21 demonstrates, surrender levels remained below one-half of net

premium receipts from 2008 to 2016. In 2017, surrenders reached 50 percent of net premiums 

collected – the highest in the last ten years, followed only by 48 percent in 2008. Surrenders 

were $308.9 billion in 2017, a 16.5 percent increase from $265.1 billion in 2016. By contrast, 

year-over-year growth in net premiums collected was considerably lower. Net premium receipts 

were $616.1 billion and $616.2 billion in 2017 and 2016, respectively. 

While it remains to be seen whether 2017 is the start of a new trend, several factors could result 

in the continuation of increased surrender levels in the near future. These factors include

expectations of higher interest earnings from other sources as the Federal Reserve seeks to 

contain inflationary pressures, and the December 2017 passage of the Tax Cuts and Jobs Act, 

which made changes that could reduce the use of life insurance as an estate protection vehicle.

289

With an average annual growth rate of 3.3 percent over the last decade, cash and invested assets 

rose to $4.1 trillion at year-end 2017 from $3.9 trillion at year-end 2016, resulting in a ratio of 

 

289 See Individual Tax Reform and Alternative Minimum Tax, Pub. L. No. 115-97, 131 Stat. 2054 (2017).
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general account liabilities to cash and invested assets of 95.9 percent compared to 96.1 percent at 

year-end 2016 and an annual average of 96 percent for the decade. Bonds have steadily made up 

the bulk of cash and investments, totaling $3.0 trillion at year-end 2017 and $2.9 trillion at yearend 2016. 

About 30 percent of the bond portfolio had maturities that ranged between five and 10 years in 

2017, not materially changed from 2016. Another 38.6 percent, or $1.2 trillion of bonds, had 

maturities of greater than 10 years as of year-end 2017, up slightly from 37.1 percent and $1.1 

trillion as of year-end 2016 – more than half of which consisted of bonds with maturities in 

excess of 20 years at both points in time. In short, at least 60 percent of the entire bond portfolio 

has consistently been allocated to holdings that are medium to long term in duration in each of 

the last 10 years, supporting the longer time horizon of a life insurer’s obligations.

With a current liquidity ratio ranging between 90 percent and 93.2 percent since 2008, the L&H 

sector’s near-term ability to satisfy liabilities has held firm.290 Recent emerging trends, however, 

may point to some potential weakening in the quality of the L&H sector’s investment portfolio. 

As a share of capital and surplus, cash and short-term investments have continually declined

from a high of 57.8 percent at year-end 2008 to 26.5 percent at year-end 2017, as illustrated in 

Figure 22. 

Figure 22: A View of L&H Sector Liquidity

Source: S&P Global

 

290 Current liquidity is used to determine the amount of liabilities that can be covered with liquid assets. It is 

calculated as follows: the numerator equals net admitted cash and investments less the sum of net admitted first lien 

real estate loans, net admitted real estate loans less first liens, net admitted occupied properties, net admitted income 

generating properties, net admitted properties held for sale, affiliated long-term bonds, and affiliated preferred stock; 

the denominator equals total liabilities less the sum of net transfers to separate accounts due, asset valuation reserve, 

transfers from separate accounts, and protected cell liabilities.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cash and ST Investments as a Share of

Capital and Surplus

Liquid Assets as a Share of Liabilities

Public Bonds to Total Bonds

Current Liquidity Ratio Public Bonds Cash & Short-Term Investments
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Furthermore, privately-placed bonds are accounting for a greater share of total bond holdings, 

while public bonds have declined from a high of nearly 76 percent as of year-end 2008 to less 

than 69 percent as a percentage of total bond holdings as of year-end 2017. Because 

private-placement bonds are not assigned credit ratings, the degree of risk and whether the risk 

assumed is commensurate with the compensation received are difficult to ascertain. 

Private-placement bonds have gradually risen from a 2.2 multiple of capital and surplus at yearend 2008 to more than 2.4 at year-end 2017. 

Moreover, the value of mortgage loans in foreclosure or past due by at least 90 days has been 

higher during the last three years compared to prior years in the past decade. These loans

accounted for 0.22 percent of capital and surplus at year-end 2017 relative to 0.24 percent and 

0.23 percent at years ending 2016 and 2015, respectively, climbing gradually from 0.13 at 

year-end 2008 and a post-crisis low of 0.08 percent at year-end 2013. 

Due to the illiquid nature of affiliated holdings – i.e., a market does not exist for such types of 

investments, making it difficult to ascertain their value – significant growth in affiliated 

investments can erode the strength of an entity’s capital base. The L&H sector’s affiliated 

holdings of cash and invested assets have progressively mounted in the post-crisis period, 

averaging an annual growth rate of 7.6 percent.291 Affiliated cash and invested assets of $184.7 

billion as of year-end 2017 represented 46.8 percent of capital and surplus, up from $167.7 

billion and 44 percent as of year-end 2016 and in sharp comparison to $107.1 billion and 36.9 

percent of capital and surplus as of year-end 2009 during the early stages of economic recovery 

from 2008. Affiliated investments accounted for 32 percent of common stock holdings at 

year-end 2017, while other investments292 made up another 45.6 percent. By comparison, 

affiliated common stock and affiliated other investments made up 33 percent and 43.3 percent of 

total affiliated holdings, respectively, at year-end 2016. 

These recent negative trends observed in liquidity are mitigated by the L&H sector’s overall 

financial profile. Specifically, publicly-traded and privately-placed bonds together have largely 

consisted of investment-grade bonds, averaging close to 94 percent of the entire bond portfolio 

annually over the past decade. The value of mortgage loans in foreclosure or past due by at least 

90 days accounted for only 0.18 percent of the total value of mortgage loan holdings as of 

year-end 2017, down from 0.21 percent as of year-end 2016. The value of mortgage loans in 

good standing, on the other hand, has consistently made up more than 99 percent of the 

aggregate value of the L&H sector loan portfolio. Affiliated cash and investments have averaged 

only 3.9 percent of total cash and invested assets annually since 2008. Finally, the bulk of the 

unaffiliated investment holdings is aligned with the L&H sector’s asset/liability matching 

philosophy, with long-term bonds dominating the portfolio. Unaffiliated cash and invested 

assets were $3.9 trillion at year-end 2017, up by 4.4 percent from $3.7 trillion at year-end 2016. 

The ratio of unaffiliated investments to capital and surplus was a multiple of 9.9 at year-end 

2017, rising slightly from 9.8 at year-end 2016, while the ratio of unaffiliated cash and invested 

 

291 Affiliated investments declined by nearly four percent in 2008 from the prior year, the only year in the past 

decade to show a reduction.

292 “Other” investments include, but are not limited to, surplus notes, limited partnerships, joint ventures, hedge 

funds, private equity funds, and direct investments.
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assets to total general account liabilities has remained at a multiple of 1 in each year of the last 

ten years.

3. Property and Casualty Sector 

This section presents additional analysis of the financial performance of the P&C sector in 2017, 

and then assesses the P&C sector’s overall financial condition as of December 31, 2017. 

a) Performance

(1) Net Premiums Written 

Figure 23 shows the level and composition of P&C sector direct premiums written by major lines 

of business, and Figure 24 shows the corresponding dollar values and a reconciliation to net 

premiums earned (i.e., direct premiums written less net reinsurance premiums ceded and the 

change in unearned premiums reserve). For 2017, total P&C sector net premiums written

reached a record level at $557 billion, marking a 4.4 percent increase over 2016 levels. Direct 

premiums written for personal lines of business grew by six percent, while direct premiums 

written for commercial lines of business increased by nearly three percent. Net reinsurance 

premiums ceded increased by five percent, but the dollar amount of this increase was small 

relative to the gain in personal lines premiums, and allowed for the growth in net premiums 

written. Economic growth in the United States and rate increases continued to drive premium 

growth, with private passenger and commercial auto liability showing solid premium gains.

293

Figure 23: P&C Sector Direct Premiums Written ($ billions)

$0

$50

$100

$150

$200

$250

$300

$350

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Personal P&C Direct Premiums Commercial P&C Direct Premiums Accident & Health Direct Premiums

 Source: S&P Global

 

293 NAIC Financial Regulatory Services Division, U.S. Property and Casualty and Title Insurance Industries – 2017 

Full Year Results (2018), 

https://www.naic.org/documents/topic_insurance_industry_snapshots_2017_property_casualty_industry_report.pdf. 
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Figure 24: P&C Sector Direct Premiums Written ($ thousands)

2013 2014 2015 2016 2017

Personal P&C Direct Premiums $ 272,367,335 $ 287,272,384 $ 300,054,135 $ 317,762,245 $ 337,535,767 

Commercial P&C Direct Premiums 259,943,105 271,209,044 280,072,580 284,084,864 291,440,657 

A&H Direct Premiums 6,701,202 5,766,660 6,142,327 6,565,978 7,131,256 

Direct Premiums Written 546,334,118 570,782,303 591,757,789 613,383,327 640,773,840 

Net Reinsurance Premiums (64,406,185) (67,958,293) (71,247,200) (79,397,787) (83,534,870)

Net Premiums Written 481,927,933 502,824,010 520,510,588 533,985,541 557,238,970 

Change in Unearned Premiums Reserve 9,853,047 9,093,095 8,400,547 4,801,742 12,079,515 

Net Premiums Earned $ 472,074,886 $ 493,730,916 $ 512,110,041 $ 529,183,799 $ 545,159,455 

Source: S&P Global

(2) Underwriting Results

Figure 25 shows the P&C combined ratio and its construction for the past several years.294 The 

combined ratio for the P&C sector increased significantly to approximately 103.8 percent in 

2017, rising from 100.8 in 2016 and above 100 percent for the second consecutive year since 

2012. A combined ratio greater than 100 percent indicates that premiums did not cover losses 

and expenses in a given period (i.e., underwriting operations made a negative contribution to net 

income). Investment income, realized capital gains/losses, and income taxes are not considered 

in the combined ratio. Three major Category 4 hurricanes and one Category 1 storm that hit the 

United States, combined with severe California wildfires, pushed catastrophe losses to near 

record levels in 2017 and drove the increase in the combined ratio.295 The expense ratio 

decreased slightly in 2017 compared with 2016. 

Figure 25: P&C Sector Operating Ratios

2013 2014 2015 2016 2017

Loss Ratio 55.60% 57.21% 57.48% 60.68% 64.11%

Loss Adjustment Expense Ratio 11.94% 11.82% 11.83% 11.61% 11.76%

Loss and Loss Adjustment Expense Ratio 67.54% 69.04% 69.31% 72.29% 75.87%

Net Commission Ratio 10.24% 10.38% 10.55% 10.41% 10.27%

Salaries & Benefits Ratio 8.54% 8.14% 8.24% 8.32% 7.91%

Tax, License & Fees Ratio 2.60% 2.51% 2.55% 2.51% 2.47%

Administrative & Other Expense Ratio 6.78% 6.55% 6.72% 6.68% 6.66%

Expense Ratio 28.17% 27.58% 28.05% 27.92% 27.31%

Policyholder Dividend Ratio 0.64% 0.60% 0.59% 0.56% 0.61%

Combined Ratio 96.35% 97.21% 97.95% 100.76% 103.79%

Source: S&P Global

 

294 S&P Global ratios include the policyholder dividend ratio for transparency because dividends represent a cash 

outlay.

295 Matthew Coppola, Best’s Special Report: First Look – 2017 Property/Casualty Financial Results (March 16, 

2018), http://www3.ambest.com/bestweek/DisplayBinary.aspx?TY=P&record_code=271765. 
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(3) Investment Income

In 2017, net investment income for the P&C sector reversed its declining trend from the previous 

two years, increasing by over four percent to nearly $50 billion. Nonetheless, growth of over six 

percent in cash and invested assets led to another, albeit very slight, decrease in the net yield on 

invested assets to 3.03 percent, marking the lowest level in net yield in the past ten years. Figure 

26 depicts a longer-term view of the trend in net investment income and net yield on invested 

assets for the P&C sector, and Figure 27 provides this data for the past five years. Realized 

capital gains and losses are reported separately and are not a component of net investment 

income. As P&C insurers are less dependent than L&H insurers on net investment income to 

fund losses and expenses, net investment income accounted for nine percent of total P&C sector 

revenues in 2017 (compared to approximately 20 percent in the L&H sector). 

Figure 26: P&C Sector Annual Net Investment Income ($ billions) and 

Net Yield on Invested Assets (%)

$53.1

$48.4 $48.1

$50.9 $50.3

$49.3

$54.9

$48.8

$47.5

$49.6

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

$42

$44

$46

$48

$50

$52

$54

$56

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Investment Income (left axis) Net Yield on Invested Assets (right axis)

 Source: S&P Global

Figure 27: P&C Sector Annual Net Investment Income ($ thousands) and

Net Yield on Invested Assets (%)

2013 2014 2015 2016 2017

Net Investment Income $ 49,280,948 $ 54,904,547 $ 48,765,011 $ 47,461,564 $ 49,614,978 

Total Cash & Investments 1,483,929,648 1,532,509,401 1,531,415,182 1,587,548,848 1,687,814,104 

Net Yield on Invested Assets 3.43% 3.64% 3.18% 3.04% 3.03%

Source: S&P Global

Realized capital gains on investments made a significant contribution to profitability over 2017, 

as the P&C sector recorded net realized capital gains of nearly $20 billion, marking a 132 

percent increase from 2016. This reversed two years of declining realized capital gains. Higher 

gains on common stocks were the main driver of the increase in net realized capital gains, but 

gains on fixed income investments also contributed. 
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(4) Net Income

The P&C sector’s net income decreased for the fourth consecutive year in 2017, dropping eight 

percent to almost $41 billion from $44 billion reported in 2016, as shown in Figure 28. An eight 

percent increase in losses and loss adjustment expenses exceeded the three percent gain in 

premiums, leading to a $21 billion underwriting loss in 2017, and was the main cause of the 

decrease in net income. The increases in investment results, both investment income and 

realized capital gains (discussed above), blunted the decline in net income. Pre-tax operating 

income fell 23 percent, but a shift from an expense to a refund of federal income taxes led to the 

eight percent decrease in net income for 2017. Figure 29 provides a summary income statement 

for the P&C sector.

Figure 28: P&C Sector Net Income ($ billions)

-$40

-$20

$0

$20

$40

$60

$80

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Underwriting Gain (Loss) Net Investment Income Net Income

 Source: S&P Global

Figure 29: P&C Sector Summary Income Statement ($ thousands)

2013 2014 2015 2016 2017

Net Premiums Earned $ 472,074,886 $ 493,730,916 $ 512,110,041 $ 529,183,799 $ 545,159,455 

Losses and Loss Adjustment Expense 

Incurred

318,842,292 340,855,210 354,958,963 382,522,845 413,620,019 

Other Underwriting Expense Incurred 136,211,881 139,137,758 145,136,437 148,012,217 150,581,388 

Other Underwriting Deductions (471,225) (475,218) 857,268 1,073,235 1,602,941 

Net Underwriting Gain (Loss) 17,489,999 14,213,165 11,157,373 (2,424,498) (20,606,908)

Policyholder Dividends 3,017,264 2,943,412 3,016,579 2,943,624 3,308,785 

Net Investment Income 49,280,948 54,904,547 48,765,011 47,461,564 49,614,978 

Net Realized Capital Gains (Losses) 18,399,919 11,789,595 10,073,274 8,484,994 19,646,329 

Finance Service Charges 3,403,200 3,271,709 3,333,008 3,452,738 3,628,618 

All Other Income (1,892,032) (6,158,765) (1,808,648) (2,410,690) (9,058,594)

Net Income After Capital Gain 

(Loss) Before Tax

83,663,527 75,076,697 68,503,439 51,620,483 39,915,638 

Federal Income Tax 12,038,618 10,318,140 10,188,465 7,314,692 (701,068)

Net Income $ 71,624,732 $ 64,757,509 $ 58,314,974 $ 44,305,791 $ 40,616,706 

Source: S&P Global
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Figure 30 displays key measures of returns for the P&C sector. Each of these metrics declined 

for a fourth consecutive year. The 2017 return on average equity of 5.5 percent was well below 

the average of nine percent for the past ten years, and marked the second-lowest post-crisis 

measure.

Figure 30: P&C Operating Ratios

2013 2014 2015 2016 2017

Pre-Tax Operating Margin 12.48% 11.60% 10.39% 7.47% 3.44%

Return on Average Equity (Capital & Surplus) 11.35% 9.56% 8.47% 6.33% 5.50%

Pre-Tax Operating Return on Average Equity 10.34% 9.34% 8.49% 6.16% 2.75%

Return on Average Assets 4.23% 3.66% 3.24% 2.40% 2.10%

Source: S&P Global

b) Condition 

This section analyzes the financial condition of the P&C sector at the end of 2017, focusing on 

surplus, assets, and liquidity. 

(1) Surplus as Regards Policyholders

The strength and flexibility of the P&C sector’s capital position are demonstrated by continued 

year-over-year growth and reduced leverage in the post-crisis years. 

Figure 31: Reduced Leverage Improving Financial Flexibility of P&C Sector 

 -

 0.5

 1.0

 1.5

 2.0

 2.5

 3.0

 3.5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Mulitple of Policyholder Surplus

Total Loss & LAE Reserves Asset Leverage Net Leverage (net writings and liabilities)

Source: S&P Global

Policyholder surplus was $764 billion at year-end 2017, sharply up by 7.3 percent from $712.2 

billion at year-end 2016. The annual growth rate in surplus has averaged 4.0 percent over the 
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last decade.296 Removing capital infusions in the form of surplus notes did not materially change 

the annual growth rate in policyholder surplus on average for the last 10 years.297 Organic 

surplus growth for the P&C sector can mainly be attributed to positive earnings including net 

realized capital gains in addition to net unrealized capital gains, offset in part by stockholder 

dividends of $29.4 billion and $28.5 billion in 2017 and 2016, respectively. As a share of prior 

year-end policyholder surplus, stockholder dividends have averaged 5.0 percent annually over 

the last decade, less than the L&H sector average due to the P&C sector’s larger surplus base. 

With the exception of 2009 in the post-crisis period, the P&C sector has generated capital year 

after year from net realized capital gains.298 As a share of prior year-end policyholder surplus, 

net realized capital gains have averaged about 1.4 percent annually post-crisis. Unrealized 

capital gains and losses have been even more impactful, netting an additional 2.6 percent to prior 

year-end policyholder surplus on average each year in the post-crisis period.

As shown in Figure 31, and similar to observations for the L&H sector, leverage ratios for the 

P&C sector have shown improvement since 2008, enhancing the sector’s financial capacity. 

Though they measure different exposures, the asset and net leverage ratios presented in Figure 

31 began to converge in 2013 to almost a single point in 2017. 

Balance sheet strength can be affected by the volatility and credit quality of the investment 

portfolio, reinsurance recoverables, and agents’ balances. Reduced leverage on the balance sheet 

has generated greater financial flexibility, enabling the P&C sector to use its capital more 

efficiently in mitigating potential risk exposures. Specifically, the P&C sector’s asset leverage 

ratio was 2.35 at year-end 2017, dropping from 2.37 at the prior year end and representing a 

decade low from a high of 2.79 at year-end 2008 – suggesting effective risk management in 

mitigating investment, interest rate, and credits risks. The combined liabilities-to-equity ratio 

and the operating leverage ratio (together representing the net leverage ratio) was 2.34 at 

year-end 2017, declining from 2.38 at year-end 2016 while averaging 2.53 annually during the 

past decade. Liabilities were 1.6 times surplus at year-end 2017, not changing significantly since 

year-end 2013 but contrasting with a high point of 2.14 at year-end 2008 when policyholder 

surplus decreased by 12.7 percent while liabilities grew by 0.9 percent. 

The post-crisis period has generally been characterized by growth in reinsurance activity, in 

particular for ceded business. Ceded premiums were $145.7 billion in 2017, increasing by 5.8 

percent from $137.8 billion in 2016. The P&C sector has been ceding premiums at an annual 

rate of 4.1 percent on average post-2008, while retaining premiums at an average annual growth 

rate of 2.7 percent. Lower growth in net writings has contributed to a drop in operating leverage 

from a high of 0.95 at year-end 2008 to 0.73 at year-end 2017. On average, net premiums 

written have comprised about 0.76 times policyholder surplus each year post-crisis.

 

296 In 2008, the P&C sector experienced a 12.7 percent decrease in policyholder surplus – the only year in the last 

decade during which the sector sustained such a substantial drop. Excluding this outlier results in average annual 

growth in policyholder surplus of 5.8 percent over the post-crisis period.

297 Policyholder surplus, less surplus notes, decreased 13.4 percent in 2008. When eliminating that outlier, annual 

organic growth in policyholder surplus averaged 6.0 percent from 2009 through 2017.

298 The P&C sector reported net realized capital losses of $7.8 billion in 2009. In 2008, net realized capital losses 

were $20.1 billion.
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At year-end 2017, the ratio of loss and loss adjustment reserves to policyholder surplus was 0.85, 

decreasing from 0.88 at year-end 2016. The ratio has averaged at a multiple of less than one 

annually over the last 10 years, demonstrating that the P&C sector in the aggregate has 

maintained the financial capability to meet potential policyholder obligations. 

(2) Asset Base

Contributing to the strength of the P&C sector’s capital position has been the growth and 

composition of asset holdings. Total assets of $2.0 trillion as of year-end 2017, relative to $1.9 

trillion as of year-end 2016, have grown at an annual rate of nearly 3 percent on average over the 

past decade, helping the sector maintain a stable level of capital relative to the risk exposure 

from its asset holdings. Policyholder surplus covered 39.2 percent of the sector’s asset holdings 

exposed to risk299 as of year-end 2017, rising from 38.5 percent and 38.7 percent as of the years 

ending 2016 and 2015, respectively, and in comparison to an annual average of 37.8 percent each 

year post-crisis.

The configuration of the sector’s asset portfolio has remained virtually constant for the last 

decade, with the bulk of holdings allocated to cash and investments. Figure 32 illustrates the 

composition of the P&C sector’s assets at year-end 2017, which largely mirrors the distribution 

of assets in previous years. 

Figure 32: 2017 Composition of Asset Portfolio for the P&C Sector 

Total Cash & 

Investments

84.7%

Premiums and 

Considerations Due

8.9%

Reinsurance 

Recoverable

2.4%

Receivable from 

Parent, Subsidiary or 

Affiliates

1.1% All Other Admitted 

Assets

2.9%

Source: S&P Global

On average, cash and invested assets have accounted for nearly 85 percent of total assets each 

year over the last decade, while premiums and considerations due have averaged in excess of 8 

percent annually.

 

299 Because the risk exposure related to cash and cash equivalents is negligible to the insurer, asset holdings exposed 

to risk refer to total assets less cash and cash equivalents.
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The P&C sector has allocated more than 61 percent to bonds on average annually in recent years, 

as detailed in Figure 33, while common stock holdings have averaged 22 percent of the 

investment portfolio. 

Figure 33: Composition of Investment Portfolio for P&C Sector

2013 2014 2015 2016 2017

Bonds 62.5% 61.5% 62.1% 61.3% 57.9%

Preferred Stocks 0.8% 1.0% 0.9% 0.7% 0.3%

Common Stocks 21.4% 21.5% 21.1% 21.8% 24.2%

Mortgage Loans 0.5% 0.7% 0.8% 0.9% 1.0%

Real Estate 0.7% 0.7% 0.8% 0.8% 0.8%

Contract Loans 0.0% 0.0% 0.0% 0.0% 0.0%

Derivatives 0.0% 0.0% 0.0% 0.0% 0.0%

Cash & Short Term Investments 5.6% 5.9% 5.8% 5.8% 6.8%

Other Investments 8.4% 8.7% 8.5% 8.6% 8.9%

Total Cash & Invested Assets 100% 100% 100% 100% 100%

Source: S&P Global

This composition of investment holdings aligns with the risk management practices employed by 

the P&C sector to address both the shorter-term obligations of some P&C lines (such as auto 

liability) as well as longer-tailed liabilities (such as medical malpractice and workers’ 

compensation). Annual growth in total bonds has held steady, averaging 1.4 percent in the last 

decade, whereas common stocks have grown by 6.8 percent300 on average. Total bonds were 

$1.1 trillion in 2017, relative to $1.0 trillion in the previous three years. Of the entire bond 

portfolio, more than 91 percent has consistently been comprised of long-term bonds, while 

durations have largely ranged between one and ten years. With less than ten percent of total 

bonds on average comprised of private placements each year, bond holdings have largely been 

publicly-traded issuances. Of note is the shift in the allocation of the investment portfolio to 

equities, with a steady increase in the share of common stock holdings from 2010 through 2017. 

Since year-end 2010, bond holdings as a share of cash and investments declined by more than 8 

percentage points, while common stock holdings rose by exactly the same magnitude. Figure 33 

reflects this trend between 2013 and 2017. 

Finally, total mortgages, though still a small percentage of total cash and invested assets, have 

shown consistent year-over-year growth, beginning at year-end 2011. Total mortgage loans were 

$17.3 billion as of year-end 2017, accounting for one percent of cash and invested assets but 4.2 

times the value of mortgage holdings as of year-end 2010. 

As with the L&H sector, the P&C sector demonstrated a shift in investment holdings, which can 

be attributed to both market performance and the search for yield. Specifically, the risk 

exposures highlighted by the financial crisis compelled insurers to increase their holdings of safe 

 

300 The 6.8 percent annual average growth rate of common stocks takes into account the impact of the financial 

crisis. Growth in common stock declined sharply in 2008 by 21.3 percent from 2007, which appears to be an outlier 

across the last 10 years. Common stocks showed an average annual growth rate of 9.9 percent from 2009 through 

2017.
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but low-yielding bonds. As funding gaps widened, pressure to close these exposures also grew, 

leading insurers to specifically increase their equity holdings with the prospect of higher returns. 

(3) Liquidity

The P&C sector has managed its liquidity needs effectively in meeting the day-to-day needs of 

its business operations, thereby maintaining a sound liquidity position over the past decade. 

With benefits and loss-related payments consuming significantly less of total net premiums 

collected annually, the sector has reported positive net cash flows from operations in each of the 

last 10 years. Recent net cash flows from operations were $52.5 billion and $57.8 billion in 2017 

and 2016, respectively. On a cash basis, net premium receipts have averaged an annual growth 

rate of 2.1 percent, covering benefit and loss-related payments by 1.7 times on average since 

year-end 2008. As Figure 34 illustrates, premiums collected, net of reinsurance, exceeded 

benefit and loss-related payments by more than 65 percent and 73 percent at years ending 2017 

and 2016, respectively, while the current liquidity ratio301 improved from 124 percent at yearend 2008, stabilizing at an average annual rate of 141 percent over the last five years.302

Figure 34: P&C Sector Cash Flows from Operations 

0%

50%

100%

150%

200%

 $-

 $10

 $20

 $30

 $40

 $50

 $60

 $70

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$ in Billions

Net Cash Flows from Operations (left axis)

Net Premiums Collected / Benefit and Loss-Related Payments (right axis)

Current Liquidity (right axis)

Source: S&P Global

Positive net cash flows from operations have contributed to annual growth in cash and invested 

assets by averaging 2.8 percent over the last decade, expanding the P&C sector’s financial 

 

301 Current liquidity is used to determine the amount of liabilities that can be covered with liquid assets. It is 

calculated as follows: the numerator equals net admitted cash and investments less the sum of net admitted first lien 

real estate loans, net admitted real estate loans less first liens, net admitted occupied properties, net admitted income 

generating properties, net admitted properties held for sale, affiliated long-term bonds, and affiliated preferred stock; 

the denominator equals total liabilities less ceded reinsurance premium payable.

302 This liquidity analysis is based on cash inflows and outflows – premiums that were collected as well as benefit 

and loss-related payments made during the year. The combined ratio referenced in the income statement discussion 

refers to premiums earned and written, and captures dividends and other expenses. These include commissions, 

salaries and benefits, administrative expenses, and taxes, in addition to incurred loss and loss adjustment expenses.
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flexibility. Liquid assets (the numerator of the current liquidity ratio) have represented at least 

2.2 times the level of aggregate policyholder surplus each year since 2008. 

Certain concentrations of risk within the sector’s investment portfolio have evolved since 

year-end 2008, likely reflective of the P&C sector’s response to a sustained low interest rate 

environment in the post-crisis period and the search for yield. Within the bond portfolio, 

private-placement bonds as a share of aggregate surplus was 18.2 percent at year-end 2017, 

slightly down from the decade high of 18.6 percent at year-end 2016 but 2.4 times the 10-year 

low of 7.7 percent at year-end 2008. Annual growth in private placements has averaged 16.2 

percent over the decade, whereas annual growth in publicly-traded bonds has averaged 0.3 

percent.

Nearly 30 percent of the P&C sector’s bond portfolio has consistently been comprised of 

securities issued by U.S. federal, state, and municipal governments. More than two-thirds of 

bond holdings have consisted of some form of revenue bond investments, including special 

revenue and industrial revenue bonds. While revenue bonds can often be issued by local or 

municipal governments, the debt service is typically paid by a private company. Thus, the credit 

risk exposure for these types of bond holdings is heightened for the bondholder, i.e., repayment 

becomes a risk exposure to the insurer if the entity responsible for repayment becomes 

distressed. At year-end 2017, revenue bond holdings were $720.8 billion, up from $710.7 billion 

at year-end 2016. Revenue bond investments by the P&C sector have grown at a rate of 2.1 

percent on average each year in the last decade, at least 14 times the average annual growth rate 

for government bond holdings. 

In addition, there has been a recent uptick in the P&C sector’s holdings of structured securities. 

Total structured securities held by the P&C sector were $150.1 billion and $144.4 billion as of 

the years ending 2017 and 2016, respectively, compared to $152.2 billion at year-end 2008 and 

$158.9 billion at year-end 2007. Of the structured securities portfolio, mortgage-backed 

securities (MBS) have comprised an increasing share – 41.5 percent at year-end 2017 relative to 

37.7 percent at year-end 2008. Within the MBS portfolio, MBS issued by the Federal National 

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 

Mac) have accounted for a greater proportion of the total, steadily rising from 74.4 percent at 

year-end 2012 to 85.7 percent at year-end 2017. In 2008 and 2007, Fannie Mae and Freddie 

Mac-issued MBS represented 80.9 percent and 84.4 percent of the sector’s MBS portfolio, 

respectively. Fannie Mae and Freddie Mac are both under government conservatorship and 

operate in accordance with written capital support agreements with Treasury. As such, their 

MBS are not explicitly guaranteed by the federal government. By contrast, holdings of 

Government National Mortgage Association (Ginnie Mae) MBS, which are guaranteed in full by 

the federal government, have steadily declined since 2012. Ginnie Mae MBS accounted for 10.7 

percent of total MBS holdings at year-end 2017 compared to 14.7 percent and 9.9 percent at the 

years ending 2008 and 2007, respectively. 

Growth in affiliated investments presents another potential liquidity risk exposure for the P&C 

sector. Though 2008 saw a decrease in affiliated holdings from the prior year, they have been on 

the rise ever since. In particular, affiliated cash and investments were $201.9 billion at year-end 

2017, rising by 8.6 percent from $185.8 billion at the prior year end. Affiliated cash and 
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investments represented 11.9 percent of total cash and invested assets and 26.4 percent of 

policyholder surplus at year-end 2017, up from 7.8 percent of cash and investments and 19.1 

percent of policyholder surplus at year-end 2009. Figure 35 shows the growth and shift in the 

composition of affiliated investments over the past decade.

Figure 35: P&C Sector’s Affiliated Investments

 $-

 $40

 $80

 $120

 $160

 $200

 $240

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$ in Billions

Bonds Common Stocks Other

Source: S&P Global

Other types of investments have come to dominate affiliated holdings, more than doubling their 

share of total affiliated investments from year-end 2009 and surpassing common stock 

investments. More than 98 percent of affiliated other investments in Figure 35 were investments

outside of preferred stock, mortgage loans, and cash and invested assets at year-end 2017.303

There are several factors that mitigate the P&C sector’s vulnerability to these risk exposures, 

should market conditions weaken. First, when observing financial trends over the last five years, 

it becomes apparent that high quality bonds continue to make up the bulk of the sector’s portfolio 

of fixed-income securities, including MBS. Investment-grade bonds have averaged about 96 

percent of the P&C sector’s bond portfolio and about 62 percent of cash and invested assets 

annually since 2013. Second, investment-grade bonds have encompassed 1.4 times policyholder 

surplus on average in each of the last five years. Third, unaffiliated bond holdings have 

accounted for close to 70 percent of the unaffiliated investment portfolio on average each year, 

while unaffiliated common stocks have averaged 19 percent annually. Finally, unaffiliated cash 

and invested assets have remained twice the level of policyholder surplus since year-end 2013. 

 

303 Affiliated other investments include, but are not limited to, surplus notes, limited partnerships, joint ventures, 

hedge funds, private equity funds, and direct investments.
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4. Market Performance

Stock price movements are indicators of investors’ perceptions about the recent financial results 

and future financial prospects of a firm, an industry sector, or in a broader context, the general 

economy. The discussion that follows considers the price performance of stock indices for the 

L&H and P&C sectors, as compared to the performance of the Standard and Poor’s 500 Index 

(S&P 500). 

Over the ten-year period from December 31, 2007 through the end of 2017, the P&C sector 

outperformed the S&P 500, as shown in Figure 36. On the other hand, the L&H sector stock 

index underperformed the S&P 500 during this period. The P&C sector was generally a market 

performer leading up to the financial crisis, but has outperformed the S&P 500 since then. The 

L&H sector slightly outperformed the S&P 500 leading up to the financial crisis, and has 

underperformed during and since then. Since the end of 2007, the P&C stock index gained 119 

percent and the L&H stock index increased 39 percent; over the same period, the S&P 500 

gained 84 percent. In the short-term, for 2017 both the P&C stock index and L&H stock index 

underperformed the S&P 500 with each gaining 12 percent, compared to a 20 percent increase 

for the S&P 500 (see Figure 37).

Figure 36: Insurance Sector Stock Prices vs. S&P 500

 -

 50

 100

 150

 200

 250

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Dec-17

SNL U.S. Insurance L&H SNL U.S. Insurance P&C S&P 500

 Source: S&P Global

Figure 37: Insurance Sector Stock Prices vs. S&P 500

Dec 2016 Mar 2017 Jun 2017 Sep 2017 Dec 2017 Qtr/Qtr Yr/Yr

SNL Life 125 127 130 132 139 5.11% 11.60%

SNL P&C 195 199 204 210 219 4.08% 12.03%

S&P 500 154 162 167 173 184 6.56% 19.64%

Source: S&P Global
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The price-to-book value multiple, which compares on a per share basis the market value of a 

firm to its book value (i.e., reported equity on its balance sheet), is a popular metric by which to 

measure valuation. If a share of an insurer’s stock is selling for less than its book value per 

share, the market is valuing the firm at less than its assets minus its liabilities (net worth); the 

opposite is true if the stock is trading at a premium to its book value. Figure 38 compares L&H

and P&C sector price-to-book value ratios from year-end 2007 through year-end 2017. The 

narrowing in the premium of L&H sector stocks to book value that occurred from 2014 through 

2016 reversed in 2017, settling at a multiple of 1.21 times book value at the end of the year, up 

meaningfully from the 0.99 multiple at the end of 2016. P&C sector stocks saw the market 

premium over book value increase, ending 2017 at a multiple of 1.53 times book value compared 

to a multiple of 1.37 times book value at the end of 2016. 

Figure 38: Insurer Price/Book Value Ratios

 -

 0.2

 0.4

 0.6

 0.8

 1.0

 1.2

 1.4

 1.6

 1.8

 2.0

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Dec-17

SNL U.S. Insurance L&H SNL U.S. Insurance P&C

Source: S&P Global

B. Capital Markets Activity 

Equity markets fared well over 2017, affording the U.S. domestic insurance industry continued 

access to the capital markets. During the year, 14 insurance-related public equity offerings were 

completed, with an aggregate value of $4.4 billion.304 This level of activity was lower in terms 

of both the number of deals and the aggregate value compared to 2016 (22 offerings valued at 

$5.4 billion). Of the total offerings, only four transactions valued at $137 million were initial 

public offerings (IPO), marking a significant decrease from the three IPOs valued at $1.3 billion 

that occurred in 2016. The largest single public equity offering in 2017 was a $1.5 billion 

offering by Athene Holding, Ltd. Private placement equity transactions were also a source of 

new capital for insurers, with $1.2 billion raised in 2017. 

 

304 All data in this section with respect to capital markets and mergers and acquisitions is sourced from S&P Global, 

as collected and calculated by FIO. This data includes Bermuda-based holding companies for which primary 

insurance underwriting subsidiaries are domiciled in the United States.
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Debt markets continued to be the preferred source of additional capital for insurers in 2017, 

despite a slight rise in interest rates. During the year, U.S. insurers raised an aggregate $54.3 

billion in 116 separate debt offerings.305 Debt issuance decreased from the $64.7 billion raised 

in 96 offerings in 2017. Approximately 63 percent of 2017 debt sales were transacted in public 

markets, with the remaining 37 percent coming from private placements. MetLife Inc. 

(combined with its subsidiaries) was the largest issuer of debt in 2017, raising $7.4 billion (14 

percent of the industry total) through 17 separate offerings. The second- and third-largest issuers 

of debt in 2017 were both health insurers: Anthem, Inc. and UnitedHealth Group, which raised 

$5.5 billion and 5.4 billion, respectively. The remainder of the top five issuers of debt in 2017 

included New York Life Insurance Company ($4.2 billion) and Jackson National Life Insurance 

Company ($3.5 billion). In the aggregate, the funds raised by the top five issuers of debt 

accounted for 48 percent of the 2017 industry total. The largest single offering during 2017 was 

a $1.6 billion issue sold by Anthem Inc. 

1. Mergers & Acquisitions of U.S. Insurers

Over the course of 2017, there were 93 merger and acquisition (M&A) transactions announced 

involving U.S. insurers, with a total value of $87.1 billion.306 The number of deals was little 

changed from the 91 transactions in 2016, but the aggregate value of the 2017 deals far surpassed 

the $21.6 billion in 2016 due to one significant merger announced late in 2017. The aggregate 

value of 2017 M&A activity was somewhat higher than recent historical figures other than 2015. 

The largest transaction in 2017 was the December announcement of the acquisition of health 

insurer Aetna Inc. by CVS Health Corporation, a retail pharmacy chain, a deal valued at 

approximately $70 billion.307 The second-largest deal in 2017 was the acquisition of New York 

State Catholic Health Plan, Inc. by Centene Corporation, valued at $3.8 billion. Two of the 

remaining top five 2017 deals, the third- and fifth-largest, involved acquisitions of insurance 

operations by private equity firms: Cerberus Capital Management L.P. acquired IASIS 

Healthcare LLC for $1.9 billion, while CF Corporation acquired Fidelity & Guaranty Life for 

$1.8 billion. The fourth-largest deal in 2017 was the acquisition of Warranty Group, Inc. by 

Assurant, Inc. for $1.9 billion. 

2. Alternative Risk Transfer Insurance Products

Modern insurance markets include a growing and innovative role for alternative risk transfer 

(ART) instruments. The lion’s share of this market is comprised of insurance linked securities 

(ILS), such as catastrophe (cat) bonds and collateralized reinsurance. Other segments include 

industry loss warranties, reinsurance “sidecar” transactions, longevity swaps, and catastrophe 

 

305 Foreign currency-denominated transactions converted to U.S. dollars by S&P Global.

306 Transactions were announced between January 1, 2017 and December 31, 2017, and were either completed 

during the year or remained pending at the end of 2017. S&P Global did not report transaction values for all deals.

307 See, e.g., Bruce Japsen, “CVS Says Aetna Merger ‘Making Good Progress’ on Regulatory Front,” Forbes, May 

2, 2018, https://www.forbes.com/sites/brucejapsen/2018/05/02/cvs-says-aetna-merger-making-good-progress-onregulatory-front/. 
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futures.

308 By using the capital and derivatives markets to attract investors from outside the 

insurance industry, ART instruments increase the capacity for reinsurance and retrocession, and 

thereby increase the industry’s supply of insurance and enhance its efficiency.

Most risks covered through ART are from severe wind, flood, earthquake, and other natural 

disasters. Innovation has broadened the scope of coverage to include longevity risk, credit risk 

(such as guarantees for mortgages and municipal debt securities), and operational risk. 

Moreover, the range of market participants has broadened to include state governments, such as 

Texas and Florida, emerging market governments, such as Turkey, and the U.S. federal 

government, which recently brought to market a cat bond for some of the risks under the NFIP, 

as also discussed in Section III.D of this Report.309 The following section provides more detail 

on the scale and scope of this market and its developments. 

a) Catastrophe Bonds and Other Insurance-Linked Securities

A large share of the ART market is comprised of ILS, first introduced to the market over twenty 

years ago,

310 and now having $35.3 billion in outstanding securities.311 Figure 39 shows the 

growth in both the outstanding amount and annual issuance of ILS. The outstanding amount at 

the end of the second quarter of 2018 was $9.4 billion, 20.5 percent larger than the end of the 

second quarter of 2017.312 As a result, catastrophe bonds and other ILS represent a large share 

of the ART market, as shown in Figure 40. The growth is measured by the amount of risk 

capital used to collateralize insurance coverage. Most ILS are issued with a maturity between 

two and three years, and therefore roughly a half to a third of the total outstanding amount 

matures every year. 

 

308 The Chicago Board of Trade introduced catastrophe futures in 1992. See Commodity Futures Trading 

Commission, Annual Report (2004), https://www.cftc.gov/sites/default/files/files/anr/anr2004.pdf. 

309 Part of the NFIP’s reinsurance efforts include the transfer of flood risk to the private sector through the issuance 

of cat bonds. See “National Flood Insurance Program’s (NFIP) Reinsurance Program,” NFIP, last updated July 31, 

2018, https://www.fema.gov/nfip-reinsurance-program. 

310 ILS issuances date back to market recovery efforts following losses from Hurricane Andrew in 1992. See, e.g., 

“Catastrophe Bond & Insurance-Linked Securities Deal Directory,” Artemis, http://www.artemis.bm/deal_directory. 

311 Artemis, Q2 2018 Artemis Catastrophe Bond & ILS Market Report (2018), 

http://www.artemis.bm/artemis_ils_market_reports/downloads/q2-2018-cat-bond-ils-marketreport.pdf. 

312 Artemis, Q2 2018 Artemis Catastrophe Bond & ILS Report; Artemis, Q2 2017 Artemis Catastrophe Bond & ILS 

Market Report (2017), 

http://www.artemis.bm/artemis_ils_market_reports/downloads/q2_2017_cat_bond_ils_market_report.pdf. 
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Figure 39: Catastrophe Bond & ILS Risk Capital Issued & Outstanding By Year

($ billions)

 $-

 $5

 $10

 $15

 $20

 $25

 $30

1996199719981999200020012002200320042005200620072008200920102011201220132014201520162017

2018 YTD

Issuance Outstanding

Source: Aon Benfield Securities

In addition to the growth in scale, the ART market has innovated to grow in scope to cover more 

forms of insurance. For example, ILS have provided reinsurance coverage to bond and mortgage 

guaranty insurers, as when Build America Mutual conducted a $100 million issuance to transfer 

credit risk on municipal bonds,313 and Arch Capital obtained $1 billion in reinsurance coverage 

on parts of its mortgage guaranty portfolio.314 Other innovations include Credit Suisse’s use of 

ILS to cede or transfer $222 million of operational risk to capital markets.315 The U.K.’s Pool 

Re has announced plans to investigate the use of ILS to back terrorism risk reinsurance.316

 

313 “Fidus Re Ltd., the First Ever Financial Guarantee ILS Deal Targets $100M,” Artemis, April 9, 2018, 

http://www.artemis.bm/blog/2018/04/09/fidus-re-ltd-the-first-ever-financial-guarantee-ils-deal-targets-100m/. 

314 See, e.g., David Pilla, “Arch Secures $374.5 Million in ILS Coverage for Mortgage Insurance,” Best’s News 

Service, April 19, 2018, http://news.ambest.com/newscontent.aspx?refnum=207912; “Arch MI Buys Indemnity 

Reinsurance from Bellemeade Re,” Bermuda: Re+ILS, August 24, 2018, 

https://www.bermudareinsurancemagazine.com/news/arch-mi-buys-indemnity-reinsurance-from-bellemeade-re4202. 

315 “Catastrophe Bond & Insurance-Linked Securities Deal Directory: Operational Re II Ltd.,” Artemis, 

http://www.artemis.bm/deal_directory/operational-re-ii-ltd/.

316 “Pool Re Investigates Use of UK ILS Structure for Terror Retrocession,” Artemis, March 7, 2018,

http://www.artemis.bm/blog/2018/03/07/pool-re-investigates-use-of-uk-ils-structure-for-terror-retrocession/. 
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Figure 40: ART Market Composition By Type ($ billions)

 $-

 $10

 $20

 $30

 $40

 $50

 $60

 $70

 $80

 $90

 $100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(Q1)

Collateralized Re Cat Bonds Sidecar ILW

Source: Aon Benfield Securities

b) Collateralized Reinsurance

Collateralized reinsurance (CRI), the fastest growing component of alternative capital, is now the 

largest segment of the ART market, as illustrated in Figure 40.317 CRI transactions involve a 

non-insurer third party investor assuming risk from the cedant through a reinsurance agreement 

backed by collateral in the full amount of the coverage limit.318 The collateral assets are placed 

in a trust that is pledged to the cedant, and the assets are invested according to contract terms that 

typically require liquid, low-risk securities. CRI provides reinsurance coverage by mobilizing 

capital (usually from a non-insurance company such as a hedge fund) to assume insured risk by 

posting collateral in amounts equal to the amount of coverage. The collateral provides a high 

level of creditworthiness for the cedant, and this allows the cedant to receive regulatory credit to 

meet reserve and capital requirements. This ability to substitute collateral for the reserves and 

capital of a regulated insurer allows investors such as hedge funds, pension funds, and high net 

wealth individuals to compete for the business in reinsurance markets. In exchange for assuming 

 

317 Aon Benfield, Reinsurance Market Outlook: June and July 2018 (August 7, 2018), 5, 

http://thoughtleadership.aonbenfield.com/sitepages/display.aspx?tl=784. See also Insurance Information Institute, 

Alternative Capital and Its Impact on Insurance and Reinsurance Markets (March 2015), 7, 

https://www.iii.org/sites/default/files/docs/pdf/paper_alternativecapital_final.pdf. 

318 Daniela Collis and Sie Liang Lau, Institute and Faculty of Actuaries, “Alternative Sources of Capital” 

(presentation, Asia Conference, Kuala Lumpur, Malaysia, March 4, 2016), 

https://www.actuaries.org.uk/documents/d02-alternative-capital-insurers-and-reinsurers-and-current-statereinsurance-market. 
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the insured risks, the investors receive the returns on the invested collateral and the premiums 

paid by the cedant.

c) Industry Loss Warranties

An industry loss warranty (ILW) is a derivatives contract structured to provide protection (and 

conversely exposure) akin to insurance policies through options-like contracts. Like typical 

options, the purchaser pays a premium that reflects the expected payoff under the contract. 

ILWs were traded as early as the 1980s, primarily for the purpose of retrocession,319 and became 

more popular after Hurricane Katrina in 2005 and their growth surged again after historic 

catastrophe losses in 2011 when the retrocession and reinsurance market needed to attract 

additional capital.

320

In order to have regulatory treatment as insurance contracts, ILWs are structured with a double 

trigger (a trigger is equivalent to strike prices in options parlance). One trigger is the amount of 

losses as measured by an established industry loss index,321 and the other is the amount of 

indemnified claims losses reported by the purchaser of the ILW. 322 The latter trigger allows the 

ILW purchaser to receive regulatory credit for ceding the insurance risk. ILWs are not the 

largest segment of the ART market, but have played an important role in developing the market 

and continue to serve a key function in the price discovery process. Importantly, ILWs are traded 

in derivatives markets during the period when named storms approach shorelines.323

The use of collateral to secure payments on ILW contracts differs from that of ILS and CRI. 

While some ILW transactions are collateralized, such as the sale of protection by a non-insurer 

(e.g., a hedge fund), in other cases they are not.324

 

319 Swiss Re sigma, The Role of Indices in Transferring Insurance Risks to the Capital Markets (September 2009), 4, 

http://www.swissre.com/sigma/42009_The_role_of_indices_in_transferring_insurance_risks_to_the_capital_market

s_.html. 

320 Nicholas Bradley and Stephen Kilner, “When The Winds Blow Can You Rely On Your ILW?,” InsuranceDay, 

May 20, 2013, https://www.pinsentmasons.com/PDF/Insurance%20Day%20-%20May%202013.pdf. 

321 See, e.g., Nadine Gatzert, Hato Schmeiser, and Denis Toplek, An Analysis of Pricing and Basis Risk for Industry 

Loss Warranties (2007), http://www.aria.org/meetings/2007papers/IVC%20-%202%20-%20Toplek.pdf. Examples 

of industry loss indices include those provided by Property Claims Services, Risk Management Solutions, and Swiss 

Re sigma.

322 Swiss Re sigma, The Role of Indices, 16.

323 “InsuranceERM, “Strong Demand Boosts ILW Market” (Summer 2012), 

http://aon.mediaroom.com/download/InsuranceERM%2B-

%2BStrong%2Bdemand%2Bboosts%2BILW%2Bmarket%2B-%2BJuly%2B2012.pdf. 

324 “A Bluffer’s Guide to Alternative Capital,” Leader’s Edge, March 2015, 

https://leadersedgemagazine.com/articles/%202015/02/a-bluffers-guide-to-alternative-capital. 
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ILWs are easier to transact than other forms of ART because they have lower transactions costs, 

allowing their use to price cat risk on a more frequent basis. One key example is the trading of 

cat risks from a named hurricane as the storm develops and moves towards shore: 

Live Cat industry loss warranty contracts are traded while an event is occurring, 

often while a storm approaches landfall. Dead Cat industry loss warranties can be 

bought and traded on an event which has already happened but where the final loss 

amount is not yet known. Back-up Covers can be arranged after an event has 

occurred to provide protection against follow-on events which certain catastrophes 

can cause (such as flooding or fire following an event).325

d) Sidecars 

A “sidecar” is another means of attracting capital from non-insurance sources to assume

reinsurance risk in a fully collateralized transaction. A typical transaction involves a reinsurer 

setting up a special purpose reinsurance vehicle to which the reinsurer cedes premiums while 

also acting as manager. Other reinsurers and non-insurance investors participate on the other 

side of the transaction by posting collateral in the full amount of the coverage, thus assuming risk 

in exchange for the premiums and returns on the invested collateral.326 The use of reinsurance 

sidecars grew rapidly until 2006, but their market share has diminished with the growth of CRI

and other ART instruments. 

C. International Insurance Marketplace Overview

The United States remained the world’s largest single-country insurance market in 2017, with a 

28 percent market share of global direct premiums written (see Figure 42).327 This market share

was slightly lower compared to the previous two years, but represents a three percent increase 

over 2012. When viewed as a single market, the EU’s share of global direct premiums written

(also 28 percent), including the United Kingdom, is comparable to the market share of the United 

States. Notably, in 2017 China overtook Japan as the second-largest single-country insurance 

market, with 11 percent of global direct premiums written. Globally, direct premiums written

increased only 1.5 percent in real terms (adjusted for inflation) in 2017 with slowing in both the 

life and non-life sectors.328 Growth in non-life premiums of 2.8 percent outpaced the 0.5 percent 

 

325 “What Are Industry Loss Warranties (ILWs)?” Artemis, http://www.artemis.bm/library/what-are-industry-losswarranties.html. 

326 Sie Liang Lau, “Alternative Sources of Capital” (presentation, SOA Actuarial Seminar, Seoul, South Korea, 

November 16, 2015), https://www.soa.org/files/pd/2015/general-insurance/pd-2015-gi-session-3.pdf. 

327 Swiss Re sigma, World Insurance in 2017: Solid, but Mature Life Markets Weigh on Growth (July 5, 2018), 

http://institute.swissre.com/research/library/sigma_3_2018_en.html. Swiss Re sigma examines insurance and 

macroeconomic data from 147 countries sourced through Swiss Re Institute. Growth rates are presented in real 

terms, i.e., adjusted for inflation as measured by local consumer price indices. Swiss Re sigma separates the 

insurance industry into “life” and “non-life” sectors as is the practice outside the United States; under this 

convention, the “non-life” sector includes health insurance.

328 See Swiss Re sigma, World Insurance in 2017, 1.
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increase in life premiums.329 Both overall and sectoral premiums growth trailed the 3.3 percent 

gain in global gross domestic product in 2017.330

Consistent with the past several years, emerging markets exhibited a considerably greater rate of 

premium growth than advanced markets, in total and in both the life and non-life sectors. The 

modest growth in global life premiums was driven mainly by a 2.7 percent drop in life premiums 

in advanced economies, while emerging economies experienced very strong life premiums 

growth of 14 percent. The figures for non-life premiums were not as dramatic, with advanced 

economies recording non-life premiums growth of 1.9 percent and emerging economies 

recording non-life premiums growth of 6.1 percent.331

Figure 42: Gross Premiums Written and Market Share by Country, 2012 vs. 2017

2012 

Rank

2017 

Rank Country

2012 

Premium 

Volume 

($ millions)

2012 World 

Market 

Share (%)

2017 

Premium 

Volume 

($ millions)

2017 World 

Market 

Share (%)

Change in 

World 

Market 

Share (%)

1 1 United States $ 1,272,005 27.38 $ 1,377,114 28.15 2.83

4 2 PR China 245,511 5.28 541,446 11.07 109.46

2 3 Japan 653,174 14.06 422,060 8.63 -38.63

3 4 United Kingdom 322,306 6.94 283,331 5.79 -16.51

5 5 France 237,605 5.11 241,603 4.94 -3.42

6 6 Germany 232,437 5.00 222,978 4.56 -8.89

7 7 South Korea 166,184 3.58 181,218 3.70 3.57

8 8 Italy 144,218 3.10 155,509 3.18 2.41

9 9 Canada 124,637 2.68 119,520 2.44 -8.92

13 10 Taiwan 87,752 1.89 117,474 2.40 27.15

15 11 India 65,830 1.42 98,003 2.00 41.40

14 12 Brazil 82,267 1.77 83,315 1.70 -3.81

12 13 Australia 86,214 1.86 80,061 1.64 -11.80

10 14 Netherlands 95,384 2.05 79,013 1.62 -21.32

14 15 Spain 72,179 1.55 70,547 1.44 -7.17

18 16 Ireland 45,297 0.97 64,306 1.31 34.84

NR 17 Hong Kong 32,627 0.70 61,286 1.25 78.41

16 18 Switzerland 60,814 1.31 57,904 1.18 -9.57

17 19 South Africa 54,365 1.17 47,796 0.98 -16.50

19 20 Sweden 37,079 0.80 36,580 0.75 -6.30

World $ 4,646,040 $ 4,891,694

Source: Swiss Re sigma, World Insurance in 2017

 

329 Swiss Re sigma, World Insurance in 2017, 1-2.

330 Swiss Re sigma, World Insurance in 2017, 1.

331 Swiss Re sigma, World Insurance in 2017, 1-2. Swiss Re sigma’s country classifications of “advanced” and 

“emerging” generally follows the International Monetary Fund’s classification system.
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FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY

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D. Domestic Insurance Market Outlook

Full year 2018 insurance industry results will be reviewed by FIO in next year’s Annual Report 

on the Insurance Industry. Based on financial results reported by insurers through the first half

of 2018, the outlook for the U.S. insurance industry appears to be a continuation of the healthy 

trends observed in 2017. The effects of ongoing monetary tightening and recent expansionary 

fiscal measures, however, may be more marked in 2018. Since 2015, the Federal Reserve has 

raised the fed funds rate on seven separate occasions, each by 25 basis points, with the most 

recent increase in June 2018. The fed funds rate currently stands at 2.0 percent, which is also the 

Federal Reserve’s target inflation rate. However, the interest rate hikes have yet to manifest 

themselves fully in the financial results of insurers.332 After a persistent decline in annual yields 

on invested assets since 2007, the L&H sector reported a slight uptick by two basis points in 

2017 and a four basis point increase for the first six months of 2018 relative to the comparable 

period a year ago. For the P&C sector, yields rose by more than 18 basis points during the first 

half of 2018 compared to the same period in 2017, suggesting an improvement may be in store 

for 2018 after the sector reported two consecutive years of flat yields. 

Though U.S. employment has grown past full employment levels,333 with an unemployment rate 

of 3.9 percent as of August 31, 2018, and wages have exhibited some upward movement,334 there 

is little likelihood of a sudden spike in interest rates to negatively affect life insurers through 

increased surrenders by policyholders and unrealized losses in investment portfolios. Both

insurance sectors will likely experience increased relief to their profit margins in 2018, as 

interest rates are expected to rise at a moderate pace. In time, the reversal of a low interest rate 

environment will be beneficial for insurers. In addition to improved earnings, gradually rising 

interest rates will ease spread compression in spread-dependent businesses and enable insurers to 

more closely match their asset and liability cash flows to meet liquidity demands. 

The Tax Cuts and Jobs Act of 2017 represents a substantial change to fiscal policy with changes 

throughout the Code.335 One of the more significant elements reduces the corporate federal 

 

332 When the Federal Reserve sets the discount rate and the target for the fed funds rate, the yields of market 

instruments are not directly influenced. Rather, market forces establish long-term rates and yields in response to 

expectations of future interest rates and the performance of the economy.

333 Full employment or the long-term natural rate of unemployment refers to the lowest rate of unemployment that 

an economy can sustain over the long run. It encompasses frictional and structural sources of unemployment. In the 

post-crisis period from July 2009 through July 2018, the long-term natural rate of unemployment ranged between 

4.6 and 5.1 percent on a quarterly basis (in contrast to a low of 4.9 and as high as 5.2 in the comparable period precrisis). U.S. Congressional Budget Office, “Natural Rate of Unemployment (Long-Term) [NROU],” Federal 

Reserve Bank of St. Louis, September 16, 2018, https://fred.stlouisfed.org/series/NROU. 

334 According to the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), wages and salaries increased 2.8 

percent for the 12-month period ending June 2018 compared to a 2.3 percent increase for the 12-month period 

ending June 2017. BLS, “Employment Cost Index – June 2018,” news release, July 31, 2018, 

https://www.bls.gov/news.release/pdf/eci.pdf.

335 See Individual Tax Reform and Alternative Minimum Tax, Pub. L. No. 115-97, 131 Stat. 2054 (2017). This 

discussion does not address several other important changes to the taxation of insurance companies, including: 

elimination of the special deduction for small life insurance companies; (2) changes to the insurance company 
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FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY

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income tax rate considerably to align with tax rates worldwide. In addition to helping U.S. 

insurers and other businesses remain globally competitive, the change in the corporate federal

income tax rate is aimed at encouraging businesses to make additional investments from tax 

savings, thereby stimulating the U.S. economy. 

At least four specific changes in the tax law are expected to affect the insurance industry 

generally, although the effects on individual insurers will vary by company. First, the reduced 

corporate federal income tax rate facilitates repatriation of cash and profits from abroad; 

however, the tax base was also expanded under the new legislation to include the Base Erosion 

and Anti-Abuse Tax (BEAT), an excise tax that affects cross-border transfers within a group of 

companies.336 The BEAT requires corporations that have significant gross receipts337 to pay an 

additional amount of tax to the extent their liability computed on a modified taxable income base 

with a reduced tax rate exceeds their regular corporate tax liability. Modified taxable income is 

computed like normal taxable income but disallows deductions for certain “base erosion 

payments” to foreign related parties. Base erosion payments generally mean deductible 

payments by a U.S. corporation (or U.S. branch of a foreign corporation) to a foreign related 

party, but several other types of payments are included in the definition.338 In general, relatedparty interest, royalties, the gross amount of reinsurance premiums, any reinsurance recovered in 

respect of annuity and life insurance contracts, and all other types of corporate service fees paid 

to a foreign related party are all effectively taxed under the BEAT. As a result, the BEAT affects 

many cross border transactions between related parties.339 The BEAT tax rate is set at five 

percent in 2018, rises to 10 percent in 2019 and then to 12.5 percent in 2026.340 According to 

S&P Global, the U.S. life insurance industry ceded about $60 billion in total premiums to 

offshore affiliates in 2016.341 Lowering the corporate federal income tax rate while imposing the 

BEAT may cause insurers to re-evaluate the structure of their operations, with some choosing to 

 

“proration” rules, designed to reduce the tax exclusion for tax-exempt interest income and to reduce the deduction 

for dividends received; (3) changes to the method by which companies calculate life insurance and annuity tax 

reserves, and to the method for taking a change in accounting for a life company’s reserves into account; (4) changes 

to the method for capitalizing policy acquisition expenses of life insurance products: and (5) modification of the 

unpaid loss discounting rules for property and casualty insurance companies.

336 Richard Rubin, “Companies Hope to Beat a New Tax Called the BEAT,” The Wall Street Journal, June 26, 2018. 

https://www.wsj.com/articles/companies-hope-to-beat-a-new-tax-called-the-beat-1530005401. 

337 The BEAT only applies to large U.S. corporate taxpayers (other than S corporations, REITS and RICs) and 

foreign corporations with large taxable U.S. branches.

338 The definition also includes premiums and other consideration paid with respect to certain reinsurance payments 

as well as certain payments for the purchase of depreciable property. The BEAT only applies if a taxpayer’s base 

erosion payments exceed three percent of all deductible payments. This percentage is reduced to two percent for 

certain banks and registered securities dealers.

339 Rubin, “Companies Hope to Beat a New Tax Called the BEAT.” 

340 Jason Woleben and Anup Parasuraman, “US Tax Reform May Prompt Life Underwriters to Alter Reinsurance 

Strategy,” S&P Global Market Intelligence, February, 13, 2018, 

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=43401204. 

341 Woleben and Parasuraman, “US Tax Reform May Prompt Life Underwriters to Alter Reinsurance Strategy.”
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FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY

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use less foreign affiliated reinsurance and incurring higher costs as a result.342 Insurers will 

likely weigh the cost of retaining more risk, including the impact on their capital positions, 

against the cost of the new BEAT tax with respect to offshore reinsurance transactions.

Second, the reduced corporate federal income tax rate will impact insurers’ RBC ratios, 

stemming from RBC factor adjustments and changes in the values of gross deferred tax assets 

and liabilities.343 The NAIC developed its RBC model as a tool for state regulators to identify 

weakly capitalized insurers by measuring capital adequacy relative to risk exposure. The impact 

of the recent tax reform measures will be particularly noticeable for life insurers whose RBC 

ratios are determined post- tax.344 Because RBC requirements are calculated on an after-tax 

basis for life insurers, a decrease in the corporate federal tax rate would involve an increase to

post-tax RBC factors.

345 However, the interaction of the new corporate federal tax rate with 

several of the factors in the RBC formula, including those related to bonds, real estate, and 

mortality risk, is expected to lower RBC ratios at year-end 2018 for life insurers largely due to 

the adjustments made to pre-tax RBC factors, which do not fully incorporate the new 21 percent 

corporate federal income tax rate.346 The lower expected RBC ratios, however, would not be 

indicative of a change in solvency position for most life insurers (i.e., the risk profile of an 

insurer at pre- and post- tax reform would remain unchanged). While the NAIC has 

implemented the changes to RBC to become effective for 2018 year-end reporting, it continues 

to assess the appropriateness of those revisions and to review other considerations. 

Third, from the perspective of insurance products, the new tax legislation may affect the use of 

life insurance as an estate protection vehicle. In particular, the Tax Cuts and Jobs Act 

temporarily raises the gift and estate tax exemption amount through 2025. In April 2018, the 

U.S. Internal Revenue Service (IRS) announced that the exemption amount for 2018 would be 

$11.2 million per person, rising from $5.6 million in 2017.347 Adjusted for inflation, the gift and 

estate tax exemption is revised each year by the IRS. The increased exemption amount may 

 

342 See, e.g., Ezequiel Minaya and Nina Trentmann, “A Tax Change Threatens to Hit Insurers When Most 

Vulnerable”, The Wall Street Journal, August 21, 2018. https://www.wsj.com/articles/a-tax-change-threatens-tohit-insurers-when-most-vulnerable-1534843801. 

343 The lower corporate federal income tax rate of 21 percent will reduce gross deferred tax assets (DTAs) and gross 

deferred tax liabilities (DTLs). DTAs and DTLs are measured using the tax rate expected to apply when the 

DTA/DTL is expected to be realized, reducing future federal income tax. Carryback provisions have also been 

affected by the new tax legislation. The ability to carry back net operating losses (NOLs) for life entities has been 

eliminated; non-life entities can continue to carry back NOLs two years.

344 While the RBC requirements are calculated on a post-tax basis for life insurers, they are calculated on a pre-tax 

basis for property and casualty insurers.

345 When a firm reports a loss, a lower corporate tax rate results in a larger post-tax net loss. Thus, post-tax RBC 

factors need to be adjusted upward.

346 Tim Zawacki, “Tax Reform to Weigh on Upcoming Annual US Statutory Insurance Statements,” S&P Global

Market Intelligence, February 28, 2018, 

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=43580704. 

347 IRS, “Inflation Adjustments Under Recently Enacted Tax Law,” IR-2018-94, April 13, 2018. 

https://www.irs.gov/newsroom/inflation-adjustments-under-recently-enacted-tax-law. 
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FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY

107 

reduce the need for some individuals to own life insurance as part of an estate plan and, as a 

result, they may consider surrendering their policies or selling them on the secondary market. 

On the other hand, because the exemption increase is only temporary, many taxpayers may 

decide to keep their policies in effect.

Finally, the lower corporate federal income tax rate tends to make investing in municipal bonds 

less attractive. Of the nearly $4 trillion in municipal bonds outstanding, U.S. chartered banks 

held over 14 percent or $554.4 billion; property-casualty insurance companies owned close to 9

percent or $327 billion; and life insurers held in excess of 5 percent or $193.8 billion as of the 

end of the first quarter 2018.348 Insurers and other market players may to some extent pull back 

from the municipal bond market in the near term in favor of alternative taxable investments.

349 

Although interest rate increases are expected to take a firmer hold this year and the full impact of 

the new tax legislation will evolve over time, the financial outlook for the insurance industry in 

the near term remains sound, barring the occurrence(s) of any substantial natural or other 

catastrophes. Both the L&H and P&C insurance sectors reported stable surplus positions as of 

June 30, 2018, despite a weakening in profitability for the L&H sector in the first six months of 

the year relative to the comparable period in 2017. The P&C sector showed a considerable boost 

in earnings for the first half of 2018, largely attributable to an aggregate underwriting gain of 

more than twice the level for the same period a year ago. Finally, leverage ratios and liquidity 

indicators held steady for the first six months of 2018, on track to mirror those observed in 2017. 

Still other factors touching upon the broader economy – such as the implications of a rising U.S. 

dollar on global trade and expectations of a potential end to quantitative easing by the European 

Central Bank – may also influence insurer behavior in 2018. 

 

348 Federal Reserve, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated 

Macroeconomic Accounts First Quarter 2018 (June 7, 2018), Tables L.100 through L.132. 

https://www.federalreserve.gov/releases/z1/20180607/z1.pdf. 

349 However, the Tax Cuts and Jobs Act also increased the proration percentage for P&C companies and changed the 

proration formula for life companies. These changes are calculated to increase the percentage of state and municipal 

bond interest that is taxable to insurance companies. These changes, combined with the reduction in the corporate 

tax rate, can be expected to increase tax-exempt bond interest rates, which should mitigate the reduction in demand.