International Insurance Capital Standards: Collaboration among U.S. Stakeholders Has Improved but Could Be Enhanced
Published: 2015-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Large, internationally active insurance companies accounted for 28 percent of the aggregate insurance premiums underwritten in the United States in 2014. IAIS is developing international group-level capital standards for these insurers. Although these standards are not yet complete and U.S. regulators have not yet determined how they might be implemented, some regulators and insurers have expressed concerns. GAO was asked to review the potential effects of the standards, the need for them, and U.S. involvement in their development.
This report examines (1) the status of the development and implementation of the international standards; (2) what is known about their potential effects; (3) views on the need for the standards; and (4) the extent to which U.S. regulators are collaborating in developing a U.S. position on the standards. To address these questions, GAO reviewed IAIS and U.S. agency documentation and relevant literature; assessed the extent of collaboration compared to leading practices; and interviewed regulators, IAIS officials, insurers, academics, and other stakeholders that would be affected by or have commented on the standards.
section_title: What GAO Found
paragraphs: International capital standards establishing the amounts of capital that large, internationally active insurers could be required to maintain are in the early stages of development, and much about them remains uncertain. For example, the International Association of Insurance Supervisors (IAIS) has not finalized the methodologies that will be used to determine the required capital levels. Further, implementing the standards at the group level in the United States could be challenging since states, the primary regulators, focus on individual insurance entities rather than on group-level entities or holding companies. At this time, it is unclear which U.S. regulator would implement and enforce the standards or how they would compare with current U.S. capital standards.
With so many unknowns, some stakeholders agreed that it was too early to determine the effects of the proposed standards. However, some stakeholders said that any effects could be minimal, since U.S. insurers generally hold high levels of capital. Other stakeholders said that potential positive effects could include the promotion of comparable standards across jurisdictions and the removal of incentives for companies to select locations based on regulatory differences. Some stakeholders also mentioned potential negative effects, including higher costs for insurers required to hold additional capital that could create incentives to stop offering some products or to raise prices.
Stakeholders expressed mixed views on the need for international capital standards to address systemic risk. Many stakeholders said that traditional insurance activities were not likely to pose systemic risk, which has been described as a key reason for pursuing the standards. But other stakeholders said that nontraditional noninsurance activities, such as credit default swaps and guaranteed investment contracts, could increase insurers' interconnectedness with other financial market participants and cause systemic effects should an insurer fail. These types of activities contributed to financial problems for the American International Group, Inc. during the 2007-2009 financial crisis. IAIS officials and others said that international capital standards could help address risks from these activities. But some state regulators and industry representatives noted that current U.S. risk-based capital standards and other regulatory tools adequately protected U.S. policyholders and that regulators were coordinating to address potential group-wide risks.
The U.S. members of IAIS—including the Federal Insurance Office (FIO), the Federal Reserve, and the National Association of Insurance Commissioners (NAIC)— have improved coordination among themselves as a group but could do more to incorporate leading practices for collaboration. GAO found that the collaborative efforts members had made were consistent with some leading practices, such as establishing shared goals. But U.S. IAIS members have not followed other leading practices, such as ensuring that leadership will be sustained in the long term and publicly reporting on their collaborative efforts. The members said that their efforts were still in the early stages. Adopting these practices would allow U.S. IAIS members to better advocate for standards that reflect the interests of U.S. insurance regulators, industry, and consumers.
section_title: What GAO Recommends
paragraphs: To enhance and sustain U.S. involvement in the development process, FIO, in consultation with the Federal Reserve and NAIC, should take steps to sustain leadership over the long term and publicly report on their collaborative efforts.FIO concurred with the recommendation, stating that it would build on existing collaboration efforts.

section_title: Letter
paragraphs: As of December 2014, large, internationally active insurance companies  accounted for 28 percent of the over $1 trillion in aggregate insurance  premiums underwritten in the United States. In response to financial  stresses faced by some insurers during the 2007-2009 financial crisis,  U.S. regulators and international bodies have taken steps to enhance  supervision of certain insurers such as internationally active large  insurance companies that could be considered systemically risky,  including the introduction of new insurance capital standards. For  example, the Dodd-Frank Wall Street Reform and Consumer Protection  Act (Dodd-Frank Act) gave the Financial Stability Oversight Council  (FSOC) authority to designate nonbank financial companies for enhanced  prudential standards and supervision by the Board of Governors of the  Federal Reserve System (Federal Reserve). In addition, the Financial  Stability Board (FSB), the international body that coordinates the work of  national financial authorities and international standard-setting bodies in  the interest of global financial stability, has designated three U.S.  companies as global systemically important insurers (G-SII). The  International Association of Insurance Supervisors (IAIS), the  international standard-setting body responsible for the insurance sector,  is in the process of developing international capital standards for these  insurers, as well as another capital standard for all internationally active  insurance groups (IAIG). While it is not yet certain whether or how the  United States would implement these standards, U.S. regulators have  been involved in their development.
You asked us to review the development and potential effects of these  international capital standards for U.S. insurers. This report examines (1)  the status of the development and implementation of the international  standards, (2) what is known about the potential effects of applying  international capital standards to U.S. insurers, (3) views on the need for  an international group-level capital standard for insurance companies,  and (4) the extent to which U.S. regulators are collaborating with each  other, and considering the views of industry and other stakeholders, in  developing a U.S. position on international capital standards.
To address all of these objectives, we reviewed IAIS documentation,  attended relevant meetings and conferences, and interviewed insurance  industry stakeholders. Specifically, we interviewed federal agencies—the  Federal Insurance Office (FIO), the Federal Reserve, and FSOC, as well  as the National Association of Insurance Commissioners (NAIC) and  several former and current state insurance regulators that will likely  supervise IAIGs. We also interviewed representatives of IAIS, credit  rating agencies, the American Academy of Actuaries, and the National  Conference of Insurance Legislators. In addition, we interviewed  representatives of all three insurance groups that have been designated  as G-SIIs, as well as five companies that could be designated as IAIGs  based on IAIS criteria. We also interviewed two large, internationally  active U.S.-based insurers that would not likely meet the IAIS criteria for  being IAIGs; one large, domestic-only U.S.-based insurer that has  participated in the U.S. collaborative efforts; and two insurance industry  associations that represent U.S. life and property and casualty (P/C)  insurers. Additionally, to obtain non-U.S. views on the development of  international capital standards, we interviewed two regulators and three  insurance industry associations from countries that had primary  regulatory responsibility for at least one G-SII or potential IAIG domiciled  in the country, or had implemented or were in the process of  implementing group-wide insurance capital standards. We also reviewed  relevant documentation related to the international standards, including  consultation drafts of the standards, stakeholder comments on the draft  standards, and IAIS documentation such as on financial stability and  identifying G-SIIs. Finally, we attended the 2014 IAIS annual meeting, an  IAIS stakeholder meeting, and three NAIC meetings related to the  development of the standards.
To examine the need for and potential effects of the international capital  standards, we conducted a literature review and identified 38 studies,  including academic studies that discussed insurance, capital standards,  and systemic risk. We determined these studies were reliable for the  purpose of capturing viewpoints and information on the insurance industry  and the potential effect of enhanced capital standards. We also  interviewed two academics who have studied these issues. In addition,  we analyzed data from SNL Financial to determine the number of G-SIIs  and IAIGs that were offering variable annuities with guaranteed benefits  or guaranteed investment contracts. We determined the data to be  reliable for these purposes. To assess the extent to which U.S. regulators  are collaborating with each other and industry stakeholders in developing  a U.S. position on the standard, we reviewed our past reports that  establish criteria for effective collaboration. We also reviewed agency  documentation such as strategic plans and annual reports to better  understand the extent to which the agencies were meeting these criteria.  For additional information, see appendix I.
We conducted this performance audit from July 2014 to June 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Insurance Industry Overview
paragraphs: Insurers offer several lines, or types, of insurance to consumers and  others, including life, health, annuity, and P/C products. The U.S.  life/health and P/C industries reported approximately $583 billion and  $481 billion of aggregate net written premiums in 2013, respectively.  These insurers have two primary sources of revenue: premiums (from  selling insurance products) and investment income. Both life and P/C  insurers earn income from premiums they collect but, because of  differences in potential claims, their investment strategies generally differ.  For instance, life insurance companies typically have longer-term  liabilities than P/C insurers, so life insurance companies invest more  heavily in longer-term assets, such as high-grade corporate bonds with  30-year maturities. P/C insurers, however, tend to have shorter-term  liabilities and tend to invest in a mix of lower-risk, conservative  investments such as government and municipal bonds, higher-grade  corporate bonds, short-term securities, and cash.
The United States is the world’s largest insurance market by premium  volume. In 2014, the United States had a total of roughly $1.16 trillion in  premium volume. FSB has designated three U.S. insurance groups as G- SIIs and, according to our analysis, nine additional U.S.-based insurance  groups generally meet the criteria for becoming IAIGs. Table 1 shows the  relative sizes of these companies, based on total assets, compared with  other U.S. companies with insurance subsidiaries.
section_title: Insurance Regulation in the United States
paragraphs: Insurers in the United States are regulated primarily by state insurance  regulators, but FIO, the Federal Reserve, and FSOC also play roles.
State insurance regulators: State insurance regulators are  responsible for enforcing state insurance laws and regulations. State  regulators license agents, review insurance products and premium  rates, and examine insurers’ financial solvency and market conduct.  NAIC is the voluntary association of the heads of insurance  departments from the 50 states, the District of Columbia, and five U.S.  territories. While NAIC does not regulate insurers, according to NAIC  officials, it does provide services designed to make certain  interactions between insurers and regulators more efficient. According  to NAIC, these services include providing detailed insurance data to  help regulators analyze insurance sales and practices; maintaining a  range of databases useful to regulators; and coordinating regulatory  efforts by providing guidance, model laws and regulations, and  information-sharing tools. Generally, a model act or law is meant as a  guide for subsequent legislation by states. State legislatures may  adopt model acts in whole or in part, they may modify them to fit their  needs, or they may opt not to adopt them.
FIO: FIO was established by the Dodd-Frank Act. Although FIO is not  a regulator or supervisor, it has the statutory authority to represent the  United States at IAIS, as appropriate, and to coordinate federal efforts  and develop federal policy on prudential aspects of international  insurance matters. FIO also monitors certain 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.
FSOC: FSOC is authorized to determine that a nonbank financial  company shall be subject to Federal Reserve supervision and  enhanced prudential standards if FSOC determines that the  company’s material financial distress—or the nature, scope, size,  scale, concentration, interconnectedness, or mix of its activities— could pose a threat to U.S. financial stability. As of March 2015,  FSOC had designated American International Group, Inc. (AIG),  General Electric Capital Corporation, Inc., MetLife, Inc., and  Prudential Financial, Inc. for Federal Reserve supervision and  enhanced prudential standards.
The Federal Reserve: The Federal Reserve supervises holding  companies that may own insurance companies on a consolidated  basis if the holding companies are either savings and loan holding  companies or nonbank financial companies designated by FSOC for  Federal Reserve supervision and enhanced prudential standards.
Insurance supervision in the United States is generally at the legal entity  level, rather than the holding company or group level, in cases where a  company owns one or more insurance companies. That is, state  insurance regulators are authorized to supervise individual insurance  companies, but lack the legal authority to directly supervise a company  that might own an insurer, or to supervise a noninsurance affiliate or any  affiliate domiciled and operating outside of the state. However, NAIC  officials noted that states that have adopted NAIC’s Insurance Holding  Company System Regulatory Act can serve as the group-wide supervisor  for an insurance firm that includes noninsurance affiliates, obtain reports  and information directly from a noninsurer holding company or affiliate of  an insurer, and approve or reject intercompany transactions between the  holding company and insurers. State regulators also require insurance  companies to maintain specific levels of capital. NAIC’s Risk-Based  Capital for Insurers Model Act applies to life and P/C insurance  companies. Most U.S. insurance jurisdictions have adopted statutes,  regulations, or bulletins that are substantially similar to this model law,  according to NAIC, as enactment of this model law is required for a state  to be accredited by NAIC. Under this model law, state insurance  regulators determine the minimum amount of capital appropriate for a  reporting entity (i.e., insurers) to support their overall business operations,  taking into consideration their size and risk profile. The model law also  provides the thresholds for regulatory intervention when an insurer is  financially troubled. Risk-based capital standards aim to require a  company with a higher amount of risk to hold a higher amount of capital.  Generally, the risk-based capital formulas focus on risk related to (1)  assets held by an insurer, (2) insurance policies written by the insurer,  and (3) other factors affecting the insurer. A separate risk-based capital  formula exists for each of the primary insurance types that focus on the  material risks common to each type. For example, risk-based capital for  life insurers includes interest rate risk, because of the material risk of  losses from changes in interest rate levels on the long-term investments  that these insurers generally hold. In addition to capital requirements,  regulators use other tools to supervise insurers. For example, supervisory  colleges facilitate oversight of IAIGs. U.S. state insurance regulators  both participate in and convene supervisory colleges. State insurance  commissioners may participate in a supervisory college with other  regulators charged with supervision of such insurers or their affiliates,  including other state, federal, and international regulatory agencies.
Insurers operating in multiple jurisdictions may maintain multiple  accounting records in order to satisfy domestic regulatory reporting  requirements. U.S. insurers that issue publicly traded securities report  financial holdings information to the Securities and Exchange  Commission using U.S. Generally Accepted Accounting Principles  (GAAP). Additionally, U.S. insurers are required to report their financial  holdings on an individual legal entity basis to their state of domicile  regulators using Statutory Accounting Principles. Some jurisdictions in the  European Union may require insurers to report regulatory requirements  using International Financial Reporting Standards, or the valuation  system used in Europe’s insurance regulatory rules under Solvency II  following its implementation. Finally, some foreign jurisdictions may  require reporting with valuation standards in alignment with those  developed by the International Accounting standards Board.
section_title: International Bodies with Roles in the Development of International Standards or Insurance Regulation
paragraphs: In response to the 2007-2009 financial crisis, the Group of Twenty (G20)  forum—representing 19 countries (including the United States) and the  European Union—positioned itself as the main international forum for  reforming financial regulations. In 2008, the G20 leaders committed to  implementing a broad range of reforms designed to strengthen financial  markets and regulatory regimes. To implement their reforms, the G20  leaders generally have called on their national authorities—finance  ministries, central banks, and regulators—and international bodies,  including FSB and standard-setting bodies such as IAIS.
Established by the G20 in 2009, FSB is the international body that  coordinates the work of national financial authorities and international  standard-setting bodies in the interest of global financial stability.  According to FSB, it seeks to support the multilateral agenda for  strengthening financial systems and the stability of international financial  markets. Its mandate includes reviewing the policy development work of  the international standard-setting bodies that jurisdictions use to establish  rules or policies through, for example, legislation or regulation. FSB has  developed a framework intended to reduce the probably and impact of  failure of systemically important financial institutions (SIFI). In 2013 and  2014, FSB also worked with IAIS and national authorities to identify and  designate nine insurers as G-SIIs, which will be subject to a set of G-SII  policy measures developed by IAIS consistent with FSB’s general SIFI  framework. FSB member institutions include national finance ministries,  financial regulatory authorities, and central banks, as well as international  standard-setting bodies, such as IAIS. U.S. FSB members include the  Federal Reserve, the Securities and Exchange Commission, and  Department of the Treasury (Treasury)—which serve on the FSB’s  Steering Committee and Plenary, FSB’s decision-making body—and  other banking regulators (see fig. 1).
IAIS is the international standard-setting body responsible for developing  and assisting in the implementation of principles, standards, and other  supporting material for the supervision of the insurance sector.  Established in 1994, IAIS’s mission is to promote effective and globally  consistent supervision of the insurance industry in order to develop and  maintain fair, safe, and stable insurance markets, and to contribute to  global financial stability. It operates by consensus, and its members  include insurance supervisors and regulators from more than 200  jurisdictions in approximately 140 countries. According to NAIC, these  members account for 97 percent of the world’s insurance premiums. As  noted above, FIO has statutory authority to represent the United States at  IAIS. In addition, the Federal Reserve and NAIC are also members. IAIS  does not have regulatory power or legal authority over its members, but it  influences national and regional regulators by publishing supervisory  principles, offering training and support, and advancing the latest  developments in international regulation.
There are four key IAIS bodies involved in the development of  international capital standards—the General Meeting, the Executive  Committee, the Technical Committee, the Financial Stability Committee— and related subcommittees (see fig. 2).
The General Meeting: The General Meeting comprises all IAIS  members (of approximately 190, approximately 160 are voting  members) who elect members of the Executive Committee and can  adopt supervisory and supporting materials. To decide upon an issue,  the General Meeting requires either a simple or a two-thirds majority  of votes, depending on the issue. For example, with a simple majority  the General Meeting can elect members of the Executive Committee,  and with a two-thirds majority the General Meeting can vote to adopt  supervisory and supporting material not already adopted by the  Executive Committee.
The Executive Committee: The Executive Committee has 9 to 24  voting members elected by the General Meeting and up to 4  additional nonvoting members (the chairs of certain committees if they  are not already voting members). The Executive Committee is  responsible for ensuring that supervisory and supporting material to  be adopted by IAIS has been adequately vetted by IAIS members and  stakeholders; adopting supervisory and supporting material;  appointing all other committee chairs and vice chairs; and ensuring  that working structures fulfill the IAIS mission.
The Technical Committee: The Technical Committee develops  international principles, standards, guidance, and other documents  related to insurance supervision. Specifically, the Technical  Committee is responsible for setting standards in response to  developments in industry structures, financial markets, business  practices, and policyholders’ needs; completing, reviewing, and  updating the comprehensive set of high-level principles-based  supervisory and supporting material; and establishing the Common  Framework for the Supervision of Internationally Active Insurance  Groups (ComFrame), including the Insurance Capital Standard  (ICS). Relevant groups reporting to the Technical Committee include  the Accounting and Auditing Working Group, the Governance Working  Group, the Insurance Groups Working Group, the Resolution Working  Group, and the Field Testing Working Group.
The Financial Stability Committee: The Financial Stability  Committee works on issues related to financial stability, systemic risk,  and supervision and surveillance of industry-wide solvency  (macroprudential supervision and surveillance). Specifically, the  Financial Stability Committee is responsible for developing and  refining an assessment methodology to identify G-SIIs; performing an  annual assessment of the G-SII status of insurers and reinsurers;  developing, in cooperation with Technical Committee, policy  measures related to heightened prudential standards for G-SIIs;  providing guidance to supervisors and firms on other components of  the package of enhanced policy measures that apply to G-SIIs;  coordinating IAIS activities with FSB and the G20; preparing papers  on issues related to financial stability, systemic risk, and  macroprudential surveillance as they relate to insurance; and  developing tools to enhance macroprudential surveillance and  supervision. Relevant groups reporting to the Financial Stability  Committee include the G-SII Analysts Working Group, the G-SII  Policy Measures Task Force, and the Capital Development Working  Group.
section_title: International Capital Standards Are Not Yet Finalized, and U.S. Implementation Could Be Challenging
subsections: section_title: International Capital Standards Are in Early Stages of Development and Implementation
paragraphs: IAIS is developing three international capital standards for insurers. The  standards are the Basic Capital Requirements (BCR), the Higher Loss  Absorbency (HLA), and the ICS. The three capital standards serve  different purposes and are in different stages of development.  1.  BCR: The BCR is a straightforward, basic, risk-based capital  requirement that would apply only to G-SIIs and is intended to be  used as a globally comparable foundation for the calculation of the  HLA requirement. It has three basic components—an insurance  component, a banking component that applies the Basel III leverage  ratio to regulated banking entities, and a component for noninsurance  activities (financial and material nonfinancial)—that are currently not  subject to regulatory capital requirements. To set required capital  levels, it uses a factor-based approach that applies 15 risk factors to  defined segments of traditional life insurance, traditional nonlife  insurance, nontraditional insurance, noninsurance, and assets. All  holding companies, insurance legal entities, banking legal entities,  and any other companies in the group are included in the  consolidated capital requirement. In October 2014, IAIS issued and  the Financial Stability Board endorsed the finalized BCR. According to  IAIS, during 2014 it completed its first round of quantitative field  testing, which incorporated the BCR, and beginning in 2015 the BCR  was being reported on a confidential basis to group-wide supervisors  and shared with IAIS for purposes of additional refining. Once the  HLA is complete, the BCR will serve as a foundation for the HLA. The  development of the ICS will be informed by the work of the BCR, and  when finalized, it will replace the BCR in its role as the foundation for  the HLA.  2.  HLA: The HLA requirement is a capital add-on that would apply only  to G-SIIs to account for their nontraditional, noninsurance activity, as  well as other factors that led the Financial Stability Board to designate  them as G-SIIs. The sum of the BCR and HLA would form a  consolidated group-wide minimum capital requirement that would be  higher than the requirement for firms that are not G-SIIs. In  September 2014, IAIS issued a set of principles to guide the  development of the HLA. For example, one principle states that  outcomes should be comparable across jurisdictions. IAIS plans to  issue the first HLA consultation document for comment in mid-2015,  and plans for implementation to begin in 2019.  3.  ICS: The ICS is a risk-based, group-wide capital standard that is  intended to apply to all IAIGs and G-SIIs as part of IAIS’s ComFrame.  ComFrame is a set of proposed international supervisory  requirements focusing on the effective group-wide supervision of  IAIGs—as well as related international capital standards. According  to IAIS, the ICS is being developed to promote effective and globally  consistent supervision of the insurance industry, and should help  develop and maintain fair, safe, and stable insurance markets. In  March 2015, the IAIS announced that the ultimate goal of the ICS is a  common methodology that achieves comparable outcomes across  jurisdictions. Once finalized and agreed upon, the ICS would be the  minimum standard that IAIS members would be encouraged to  implement. According to IAIS, supervisory colleges would identify  IAIGs by applying ComFrame criteria. IAIS issued a set of ICS  principles in September 2014 and the first of three ICS consultation  documents in December 2014. As of April 2015, IAIS is incorporating  feedback received on the first consultation document and has said  that 2015 priorities include developing an example of a standard  method for determining the ICS, further considering approaches to  valuation, and defining qualifying capital resources. IAIS is scheduled  to conduct its second round of quantitative field testing from April  through August 2015, which will be the first time that IAIS will field test  the proposed ICS.
IAIS is staggering the implementation of the three capital standards, with  the full package scheduled for implementation beginning in 2019 (see  fig.3).
section_title: Several Key Aspects of the International Capital Standards Are Largely Unknown
paragraphs: Because the capital standards are still in the relatively early stages of  development and adoption, several important aspects of the design of the  standards are still unknown, as the following examples illustrate:
Quantity and quality of capital: Whether the ICS would require U.S.  insurers to hold or raise additional capital is largely unknown. Some  stakeholders believe that it would be unlikely that the ICS would be  higher than what U.S. insurers currently hold. They stated that to  maintain desired credit ratings, some U.S. insurers hold more capital  than the state risk-based capital standard requires. For example one  credit rating agency said that most insurers can sometimes hold  approximately 11 times more capital than regulatory requirements  mandate. However, it is unknown how the ICS capital requirements  would compare with the risk-based capital standard required by state  insurance regulators. IAIS has sought stakeholder feedback on the  appropriate approach for determining capital standards, which could  include a factor-based approach, stress testing approach, or modeling  approach. Additionally, it is not yet known whether insurers would be  able to include senior debt as qualifying capital, something insurers  can currently do in the United States. Some insurers have stated that  not being able to include senior debt as capital could potentially result  in insurers being considered undercapitalized, requiring them to raise  more capital though public offerings or private investment. Finally,  some insurers we spoke with raised concerns about group-level  capital requirements resulting in a need to hold duplicative capital. For  example, one insurer said that foreign jurisdictions would not likely  count capital being held elsewhere within a holding company. As a  result, insurance holding companies might then have to hold capital at  the local entity level, as they do now, and also at the group level for  the same risks.
Valuation approaches: IAIS has yet to determine which  methodologies ICS will use to assess the value of insurers’ assets  and liabilities. As of April 2015, IAIS was testing two valuation  approaches—a market-adjusted valuation approach where the values  of assets and liabilities are adjusted to current market rates, which is  not the approach used by most U.S. insurers, as well as a GAAP  approach with adjustments. A few U.S. stakeholders stated that using  a market-adjusted approach could potentially conflict with the way  U.S. GAAP values insurers’ assets and liabilities. According to one  insurance association, differences in valuation methods are so  substantial that one method may make an insurer appear financially  strong while another may make the same insurer appear financially  insolvent. Therefore, depending on the valuation methods used, U.S.  insurers could be required to raise and hold additional capital. One  credit rating agency also said that different countries measure capital  and solvency in different ways. This may make it difficult for IAIS to  develop a standard that would be accepted internationally.  Additionally, one insurance association noted that if the capital  standards valuation methodologies do not align with U.S. practices,  U.S.-based insurers may need to keep an additional set of regulatory  accounting records to demonstrate evidence that they are in  compliance with both sets of standards.
Risk assessment: Some details about how the ICS will assess risk  are still unknown. As previously stated, the BCR uses 15 factors  associated with insurance activity and assigns capital charges  according to their estimated risks. Some insurers said that the BCR is  not granular enough in its classification, or segmentation, of insurance  products and business activities. For example, one insurer noted that  some of its products that carry different risk characteristics fit into the  same category in the BCR, resulting in the possibility of either under-  or over-assessing risk charges. In commenting on the draft ICS, which  is intended to replace the BCR, some stakeholders said the  categories used in the draft ICS were adequate, but others expressed  concern about the categories potentially needing to become more  granular. Furthermore, one insurer stated that products can carry  different risks in different jurisdictions, exacerbating the difficultly of  correctly assessing risk with the international capital standards without  becoming excessively granular.
Other areas of uncertainty include questions of the appropriate time  horizon for the development and implementation of the standards and  tiering of capital resources, as well as other technical issues. Several  stakeholders said that given the significant uncertainties around the  design of the standards, IAIS is not allowing sufficient time to develop the  capital standards. Federal Reserve officials noted that IAIS aims to  identify and address questions and concerns about the standards through  its field testing process.
section_title: Implementation of International Capital Standards in the United States Could Pose Challenges
paragraphs: Questions also remain about how the standards would be implemented in  the United States, a process that could pose challenges. For example,  U.S.-based G-SIIs would be subject to the BCR and HLA. They have also  been designated by FSOC for enhanced supervision, meaning that they  would be subject to enhanced prudential standards from the Federal  Reserve as well. However, because neither the Federal Reserve’s capital  requirements for SIFIs nor the HLA had been finalized as of April 2015, it  is difficult to know what, if any, challenges the Federal Reserve might  face in concurrently implementing these two sets of standards. In  addition, one state commissioner noted that it is unclear which regulator  would have responsibility for implementing the ICS for the IAIGs.  Currently, state regulators supervise individual insurance entities  domiciled in their state, but all three of the proposed international capital  standards would establish group-level capital requirements. According to  NAIC, state regulators would still implement these requirements for  insurance groups not supervised by the Federal Reserve. However, a few  stakeholders stated that it is unclear who the group-wide regulator would  be for these insurers. Furthermore, some stakeholders remarked that  having group-level capital standards for U.S. insurers also raises  questions about fungibility—the extent to which capital could be moved  between entities. Insurers in the United States are not required to move  capital among regulated insurance entities, and some stakeholders noted  that the extent to which the international capital standards would require  group-wide capital to be fungible among legal entities is uncertain.  Making capital fungible would raise questions about where group capital  would reside (i.e., within the legal entities or in a holding company), and  when regulators could move it among entities or across jurisdictions from  financially strong entities to aid failing ones. Without a single regulator for  the holding company, questions remain about how such decisions would  be made.
Furthermore, there is some uncertainty about the legal mechanisms that  would be used to implement the standards in the United States. NAIC  officials said implementation of new capital standards in the United States  would likely require individual states to pass legislation that incorporates  the standards. They also noted that NAIC could encourage states to  adopt such legislation by developing a model law and including it in  NAIC’s accreditation requirements. However, one state regulator noted  getting all states to adopt and implement it might take time.  Representatives of state legislators said that they would work with  insurance regulators to determine which requirements were appropriate  for their states. Alternatively, NAIC noted the possibility of a federal  mandate through Congress to implement the standards. Despite the  uncertainties about how the standards would be implemented, several  stakeholders we spoke with said that the United States would likely  implement the standards once IAIS has completed them. Several  stakeholders noted the potential negative consequences of not  implementing the standards, such as having international market access  issues such as regulatory barriers to conducting business abroad. Two  stakeholders also noted the possibility of the United States receiving a  poor review from the International Monetary Fund’s Financial Sector  Assessment Program or political pressure that could have trade  implications between the United States and foreign jurisdictions.
section_title: Effect of International Group-Level Capital Standards Is Unknown
paragraphs: Because the international capital standards are still largely in the early  stages of development, it is difficult to determine their potential effects on  U.S. insurers. IAIS plans to engage in field testing before finalizing the  capital standards but has not yet completed any prospective quantitative  or cost-benefit analyses to understand the potential effects on insurers,  consumers, or the broader economy. Many stakeholders we spoke with  thought it was too early to discuss the likely effects of the standards, but  others identified possible effects, including improved comparability,  increased costs, and competitive disadvantages.
subsections: section_title: IAIS Intends Capital Standards to Improve Comparability but Some Stakeholders Expressed Concerns
paragraphs: IAIS has stated that having a common means to measure capital  adequacy on a group-wide consolidated basis could benefit both  regulators and insurers. A single international standard would allow  regulators to compare IAIGs across jurisdictions. It would also increase  mutual understanding among regulators who regulate at the holding  company level as well as regulators of nondomestic companies operating  in their country, and give them more confidence in cross-border analyses  of these companies. Similarly, Federal Reserve officials we spoke with  said that international capital standards would limit the possibility for  regulatory arbitrage, or “jurisdiction shopping,” where companies choose  where they are domiciled based on more favorable standards. One large,  internationally active company we spoke with also said that an  international capital standard that was comparable across jurisdictions  would help regulators address failing companies. International regulators  need to agree on a level of capital adequacy and to have comparable  means of measuring capital in order to move it across borders to help a  failing company. A common standard could make this process easier.
For insurers conducting business internationally, a single capital standard  could reduce the complexities of complying with many different standards.  However, some industry representatives we spoke with said that while a  single capital standard could be beneficial to companies that are  operating in multiple jurisdictions, they are skeptical that the IAIS  standards would create uniformity. Specifically, one insurer noted that  IAIS standards would likely not replace local standards, but instead be an  additional layer of standards. An industry stakeholder also noted that  while it is important for regulators to be able to assess risks faced by  IAIGs, it was unclear whether a single capital standard could result in true  comparability across national boundaries or different products. As an  example, the risk associated with auto insurance in a nonlitigious country  that has national health care, where policyholders are less likely to be  sued for medical damages, is different from the risk associated with auto  insurance in a litigious country that does not have national health care,  where policyholders are more likely to be sued for such costs. A U.S.  insurance industry group commented that applying the same capital  standard to companies from different regulatory environments with  different economic and political goals would not produce comparable  conclusions about capital or solvency. It noted, for example, that the U.S.  regulatory system was based on an economic and political model that  supported relatively easy entry into and exit from the market, with  policyholder protection as the primary goal. In contrast, it said that capital  standards being developed by the European Union may place more  emphasis on protecting creditors and investors. Some stakeholders have  suggested that IAIS should focus on comparability of outcomes rather  than developing a single capital formula. For example, several  stakeholders who commented on the draft ICS suggested a stress testing  approach that could help identify common risks and better ensure that all  IAIGs could survive certain prescribed stress scenarios without  prescribing a specific capital requirement.
section_title: Stakeholders Expressed Concern That Standards Could Result in Increased Costs and Competitive Disadvantages
paragraphs: In the face of limited empirical work conducted to date and the lack of  details on final capital requirements, there is considerable uncertainty  about the effect on insurance companies, the industry, consumers, and  the larger macro economy. However, if insurance companies were forced  to raise capital or hold more capital it could carry costs. Consistent with  this, several stakeholders we spoke with said that if the capital standards  required insurers to hold more capital, they could result in higher costs for  insurers, and therefore higher prices for consumers. In addition, requiring  insurers to hold more capital could be costly for all affected insurers but  could also disproportionately affect some types of insurers. For example,  two insurers we spoke with said that mutual insurance companies cannot  raise equity easily because they do not issue stock and are owned by  policyholders rather than shareholders and use senior debt as part of  their qualifying capital. If the ICS does not recognize such unique features  of mutual insurance companies, then mutual insurance companies could  be significantly disadvantaged in the marketplace with lower qualifying  capital as a result of the ICS. These companies would likely have to  increase capital by taking actions such as selling assets, increasing  retained earnings, and shifting their portfolio toward lower-risk assets.  Some insurers we spoke with also said that increased capital  requirements could result in opportunity costs. That is, having to hold  more capital could result in these resources not being invested to  generate higher financial returns, invest in product innovation, or expand  to other markets. Many stakeholders we spoke with also said that the  standards could result in increased compliance costs. In particular,  depending on the accounting method that is used, the standards could  result in insurers having to maintain an additional set of accounting  records for recordkeeping purposes.
Many insurers and state regulators we spoke with said that any increase  in costs for insurers could translate into higher prices and fewer product  offerings for consumers. Specifically, several insurers and state  regulators noted that if the IAIS standards imposed higher costs on IAIGs  through higher capital requirements or compliance costs, IAIGs would  have to raise product prices to offset these additional costs. As a result,  the companies would be less competitive with both large domestic  insurers and smaller insurers, neither of which would be affected by the  international capital standards. However, the extent to which costs might  be passed on to consumers would depend on the degree of competition.  NAIC suggests that U.S. markets are quite competitive, which may limit  the degree to which insurance companies can raise prices on insurance  products. A few stakeholders said that as an alternative or in addition to  raising prices, IAIGs may choose to discontinue some products. As an  example, some stakeholders said this would most likely affect longer-term  insurance products such as annuities. Because long-term liabilities could  be considered riskier than short-term liabilities, they can carry higher  capital charges. Consumers could have fewer product choices and the  markets for some products could become less competitive. One insurer  we spoke with stated that the uncertainty regarding the international  capital standards was already affecting its decisions on products offered  and pricing.
Further, two stakeholders told us that if insurers raise prices or  discontinue products in response to international capital standards, they  may also change the types of assets they hold to match with their  liabilities. Specifically, if the capital standards result in disincentives to  offer certain long-term products, insurers may no longer purchase the  same amount or type of long-term assets to match the liabilities of these  products. This, in turn could affect the markets for those long-term assets.  For example, insurers are significant investors in some long-term assets,  such as corporate and municipal bonds, and a reduction in insurers’  purchases of these bonds could potentially result in disruptions to these  markets.
Another important factor is how shareholders and other investors may  react to additional capital holdings and the possibility of lower return on  equity. Some stakeholders said that holding additional capital could  benefit insurers if investors viewed the more stringent regulations as a  sign of increased financial resilience and reliability. Credit rating agencies  we spoke to said that while being subject to the standards would not  necessarily increase insurers’ ratings, being subject to international  capital standards could be a positive signal to investors. However, some  stakeholders expressed concern that increased costs resulting from  higher capital requirements could reduce shareholder returns, making  insurers a less attractive investment opportunity. Companies can also  adjust to heightened capital requirements by shifting to lower risk assets;  shrinking the volume of business; merging with other insurance  companies to diversify business lines; or relying more on reinsurance.
section_title: Views Differ on the Need for the International Group- Level Standards
subsections: section_title: Stakeholders Disagreed on the Systemic Risk Posed by Insurance Activities
paragraphs: In its support for the development of an international capital standard for  insurers, the Financial Stability Board has cited supporting financial  stability as a reason the standards are needed. However, views differed  on whether and to what extent insurance companies pose a risk to  financial stability—and therefore whether the standards were actually  needed. According to many of the stakeholders we spoke with, traditional  insurance activities would likely not pose systemic risk or threaten  financial stability, but engaging in nontraditional, noninsurance activities  could create such risks. These views were supported by a number of the  studies we reviewed. For example, IAIS has noted that the bulk of  traditional insurance risks are idiosyncratic—that is, they tend not to be  correlated with each other or with the economic business cycle and  financial market developments, which decreases their likelihood of  contributing to systemic risk. However, IAIS also stated that substantial  nontraditional and noninsurance activities have the potential to make  insurers more prone to posing systemic risk, and may contribute to  making insurance groups systemically important. While there is no single  agreed-upon definition of nontraditional, noninsurance activities, some  research has described these activities as more bank-like in nature and  provided examples that included third-party asset management,  investment banking, and hedge fund and credit default swap activities.  Insurance activities can also have nontraditional features that may  increase their systemic risk. For example, if variable annuities contain  guaranteed returns, attempting to pay guaranteed amounts could result in  increased asset sales by an insurer and exacerbate already distressed  market conditions. One study we reviewed noted that capital infusions  were needed for several large insurers during the last financial crisis  because some insurers’ investment-oriented life insurance policies had  minimum guarantees and other contract features. We found that the  three U.S.-based G-SIIs all offered variable annuities with guaranteed  benefits and guaranteed investment contracts. Also, four of the seven  additional U.S-based companies that generally met the criteria for being  an IAIG offered variable annuities with guaranteed benefits, and two  offered guaranteed investment contracts.
Nontraditional, noninsurance activities may also increase the likelihood  that an insurance company will contribute to systemic risk because they  can increase the company’s interconnectedness with the broader  financial sector. Most of the insurance industry representatives we spoke  with, as well as some of the literature we reviewed, noted that insurers  generally did not have interconnections with broader financial markets  that would pose systemic risk. However some stakeholders said that  nontraditional, noninsurance activities could increase a company’s  interconnections. IAIS has stated that the systemic importance of such  activities increases as the activities expand the company’s  interconnectedness with noninsurance financial sectors. For example,  IAIS noted that through its credit default swaps, securities lending, and  other noninsurance activities, AIG was connected with many large  commercial banks, investment banks, and other financial institutions. As a  result, the U.S. government concluded that without assistance, AIG’s  failure could have caused cascading losses throughout the financial  system. We have also pointed out the impact of AIG’s activities in prior  work. Literature we reviewed also noted that increasing involvement of  insurance companies in nontraditional, noninsurance activities was also  increasing the interactions between insurance and banking, a  development that has implications for financial stability. For example, one  study concluded that in recent years, insurance companies had increased  their involvement in alternative risk transfer instruments, such as  insurance-linked securities, and that this activity had increased  interconnectedness between insurers and banks. Another study found  that interconnectedness between insurers and the financial system has  increased over time, largely because of life insurers and insurers  specializing in financial guarantees.
The extent of systemic risk posed by nontraditional, noninsurance  activities likely depends on how an insurance company is managing the  risks associated with the activities. For example, guaranteed investment  contracts may create a systemic problem if an insurer is unable to  manage liquidity demands created by higher than expected policyholder  withdrawals. This could happen if, for example, interest rates rise sharply  above what policyholders are receiving on their accounts, motivating  them to move their money to the higher yields. However, maximum  contribution and withdrawal rates, as well as penalties, can be written into  the contracts to mitigate this risk. In addition, insurers may engage in  hedging to mitigate this risk. They could, for example, enter into interest  rate derivatives contracts, whose values rise when interest rates rise. In  its most recent Financial Sector Assessment Program report on the U.S.  insurance sector, IMF noted that the insurance industry has made  improvements in the management of exposures created by guarantees,  including using certain hedging strategies. However, the report also noted  that the effectiveness of these strategies during times of market turmoil  remains uncertain.
In addition to nontraditional, noninsurance activities, some stakeholders  have noted that even traditional features of insurance products can lead  to systemic risk. For example, while some industry representatives we  spoke with said that insurance products were not subject to bank-like runs  that could lead to systemic failure, others have said that life insurers could  be subject to such runs. In its justification for designating one insurance  company for Federal Reserve supervision and enhanced prudential  standards, FSOC wrote that the company could experience significant  asset liquidations as the result of surrender and withdrawal requests, and  that such liquidations could cause significant disruption to key markets.  Dissenting views on FSOC’s designation of this company noted that there  are protections and disincentives that mitigate the risk of these runs on  insurance companies, such as the ability of an insurance company to  delay payment of early withdrawals and charge surrender fees, as well as  the ability of state insurance regulators to manage significant policyholder  surrender activity. FSOC wrote that although the company has the  contractual ability to defer payouts on withdrawable liabilities and thus to  reduce the need for asset liquidations, if this action were to be taken at a  time when the company was experiencing material financial distress, it  could spread concern about the company. Such concern could  exacerbate the company’s material financial distress and result in  negative effects for counterparties, policyholders, and the broader  industry. In addition, customers could become concerned about access to  funds at other insurance companies with similar assets or product  profiles, especially in the context of a period of overall stress in the  financial services industry and in a weak macroeconomic environment.
Other factors that could contribute to systemic risk include the size of the  company and the nature of its assets. Many experts and industry  representatives we spoke with said that insurers do not pose systemic  risk based on size alone, but some have said that size is an important  factor. For example, a study analyzing insurers’ contribution to systemic  risk during the economic crisis showed that insurers’ size, as measured  by total assets and net revenues, was a significant factor. The study  noted that failures of large insurers could lead to doubts about the health  of other insurers, potentially destabilizing the financial system. While  insurers are connected to other counterparties through their assets, a few  insurance industry representatives noted that their connections were not  sufficiently large to pose systemic risk. However, one study we reviewed  found that insurers’ assets were distributed across a wide range of  financial sectors, including corporate bonds, stocks, government bonds,  and commercial mortgages. The study asserts that the failure of an  insurance company and the subsequent unwinding of its assets could  trigger asset fire sales and pose a threat to the financial system.
IAIS has stated that it considers its capital standards to be essential for  supporting international financial stability. Specifically, the HLA is  designed to address notable risk posed by G-SII’s nontraditional,  noninsurance activity and interconnectedness. As previously noted, the  HLA is a capital add-on applied to the BCR, and while the standard is still  in the early stages of development, it is intended to be a capital charge  specifically for G-SIIs. In addition, according to IAIS, the ICS will reflect all  material risks of IAIGs, including noninsurance risks. While IAIS has not  yet specified how noninsurance risk will be accounted for in the ICS, the  first ICS consultation draft states that the capital treatment of  noninsurance financial activities will be expanded upon in future  consultation processes. Also, group-wide capital standards could be used  to help noninsurance affiliates of insurance groups in times of financial  distress by moving capital from insurance entities to the affiliates.  However as previously noted, uncertainties remain about when and how  capital could be moved from one entity to another and how such transfers  would be impacted by state insurance laws in the United States. IAIS has  also stated that the capital standards for G-SIIs would reduce the  probability and impact of any failure of these companies and thus reduce  the expected systemic impacts of disorderly failure. In addition, according  to IAIS these standards should be disincentives for other insurers to  become systemically important and therefore designated as G-SIIs.
While, according to IAIS the main objective of the ICS is policyholder  protection and financial stability, some industry representatives and state  regulators we spoke with said that the current U.S. regulatory system was  sufficient for its purpose—protecting policyholders—and that additional  international capital standards were not needed. Specifically, once state  insurance regulators determine an insurer is having solvency issues, they  work with the insurer to resolve the issue, and if necessary can appoint a  receiver and attempt to rehabilitate the company. If that fails, the state  guaranty funds, which pay for covered claims in the event of an insurance  company insolvency, help ensure that policyholders are protected. The  funds do not prevent an insurance company from failing, but according to  NAIC, they generally help policyholders to receive their claims quickly and  help to ensure the stability of the insurance market. Some stakeholders  have noted that this focus on protecting policyholders made the U.S.  regulatory approach different from other international systems that may  be more focused on preventing insurance company failures. These  stakeholders said this system is appropriate for the United States and  should not be changed by the introduction of international capital  standards. For example, in commenting on the ICS consultation draft,  officials from one internationally active insurance company noted that the  ICS should be focused on requiring that insurance companies have the  capital necessary to meet policyholder obligations and not on protecting  other creditors. One researcher we spoke with, however, has expressed  concern that state guaranty funds would not be sufficient to protect all  policyholders if a large insurance company were to fail. In addition, in its  most recent Financial Sector Assessment Program report, IMF noted that  the overall soundness of the U.S. insurance sector cannot be adequately  assessed without group-level capital requirements.
In addition, some insurance industry representatives and state regulators  we spoke with said that insurance companies generally fared well during  the last economic crisis, suggesting that the current regulatory structure  and current capital standards were sufficient for helping insurance  companies withstand downturns. Although insurance companies received  various sources of assistance during the recent financial crisis, including  direct capital support and liquidity support, IAIS has reported that, in  general, the insurance business model enabled the majority of insurers to  withstand the last financial crisis better than other financial institutions. In  our June 2013 report on this issue, we also found that the effects of the  financial crisis on insurers and policyholders were generally limited.  However, we found that some life insurers that offered variable annuities  with guaranteed living benefits, as well as financial and mortgage  guaranty insurers, were more affected by their exposures to the  distressed equity and mortgage markets. We and others have also  pointed to AIG as an example of an insurance group that suffered large  losses and threatened broader financial stability, but some state  regulators and industry representatives we spoke with noted that AIG’s  distress could not have been avoided even by having higher capital  requirements in place. They also noted that the supervisory colleges that  are now in place would have detected risky activities involving AIG’s  insurance companies.
section_title: Some Stakeholders Said That Tools Other Than Capital Requirements Also Help Reduce Risk
paragraphs: Many industry representatives and U.S. federal and state regulators we  spoke with discussed the importance of tools other than capital  requirements in monitoring and mitigating potential risk posed by  insurance companies. FIO, the Federal Reserve, and NAIC described  capital requirements as one of many tools available to regulators. Other  tools that both regulators and industry representatives cited included the  following:
Supervisory colleges: These joint meetings of all regulators involved  in supervising a company can include detailed discussions about a  company’s financial data, corporate governance, and enterprise risk  management functions. According to NAIC, supervisory colleges,  which generally started after the last financial crisis, are intended to  facilitate oversight of internationally active insurance companies at the  group level. Regulators and industry representatives we spoke with  said that while supervisory colleges were a newer practice, they had  shown promise in helping regulators detect and manage risk at the  group level. One state regulator that had hosted supervisory colleges  for two large insurance groups said the colleges were taken very  seriously and serve as an opportunity for open and candid  conversations about a company and its strategic objectives. Officials  from another state regulator said the colleges had enhanced  communications among international regulators and had proven to be  effective in identifying group-wide risks. In addition, he said that the  colleges had allowed regulators from various countries to better  understand each other’s practices and processes.
Own Risk and Solvency Assessments: An Own Risk and Solvency  Assessments is an internal process undertaken by an insurer or  insurance group to assess the adequacy of its risk management and  current and prospective solvency positions under normal and severe  stress scenarios. Large- and medium-size U.S. insurance groups  were required to begin regularly conducting Own Risk and Solvency  Assessments starting in 2015. One insurance company representative  said that Own Risk and Solvency Assessments had helped the  company maintain an awareness of all of the risks they have  undertaken. State insurance regulators we spoke with also told us that  Own Risk and Solvency Assessments would be an important  regulatory tool for them.
Enterprise Risk Management tools: Insurance companies engage  in enterprise risk management practices to obtain an enterprise-wide  view of their risks and help management engage in risk-based  decision making. Enterprise risk management generally has two  goals: (1) to identify, evaluate, and quantify risks, and (2) to ensure  that the organization actively implements risk treatment strategies and  manages appropriate risk levels. Examples of specific enterprise risk  management practices include identification and categorization of  risks, well-defined risk tolerances, risk mitigation with cost-benefit  analyses, and stress tests and other modeling approaches. FIO  representatives and some state regulators we spoke with said that  enterprise risk management practices were important to companies’  risk management.
Supervisory colleges, Own Risk and Solvency Assessments, and  enterprise risk management are practices that work together to reduce  risk. For example, enterprise risk management practices can be used to  conduct Own Risk and Solvency Assessments, and one insurer noted  that supervisory colleges can help ensure that a company’s enterprise  risk management practices are properly identifying and mitigating risks. In  its comments to IAIS on the ICS consultation draft, one insurance  company suggested that the ICS should be made compatible with other  regulatory tools such as Own Risk and Solvency Assessments and  supervisory colleges. The comments stated that a supervisory college  would likely voluntarily take action if a consolidated assessment of an  insurance group revealed solvency concerns. The comments also noted  that IAIS should develop standards and processes for supervisors to use  in conducting such an assessment and not simply create a prescriptive  formula for capital requirements.
section_title: Collaboration among U.S. IAIS Members Has Improved, but Opportunities to Enhance Collaboration Exist
paragraphs: U.S. IAIS members actively participated in the development of the new  international capital standards for insurers at IAIS and in related U.S.  collaborative efforts, which incorporated some leading practices for  collaboration but not others. They led and participated in key IAIS  committees and voted in the General Meeting. Collaboration among U.S.  IAIS members has improved, and U.S. IAIS members and industry  stakeholders were generally optimistic. We found that while the U.S.  collaborative efforts were consistent with certain leading practices that we  have identified, the U.S. IAIS members have opportunities to take  additional steps in line with leading practices to enhance and sustain  those efforts. U.S. industry stakeholder participation in the development  of international capital standards has evolved, and occurs through IAIS,  the U.S. collaborative efforts, and through individual agency efforts.
subsections: section_title: U.S. IAIS Members Participate in Key IAIS Committees and Vote in the IAIS General Meeting, and Other U.S. Stakeholders Have Limited Influence
paragraphs: As of March 2015, the U.S. IAIS members are NAIC, FIO, and the  Federal Reserve. NAIC was a founding member of IAIS in 1994. FIO  became a member in 2011, after the Dodd-Frank Act created the office  and gave it a range of authorities, including coordinating on international  insurance matters, and representing the United States in IAIS, as  appropriate. The Federal Reserve became a member in 2013, after  FSOC designated some insurers for enhanced supervision by the Federal  Reserve.
The U.S. IAIS members have played an active role in the development of  the international capital standards by participating in the IAIS General  Meeting, voting in the Executive Committee, leading and participating in  other relevant IAIS committees and subcommittees, and providing  comments on IAIS consultation drafts (see fig. 4), as illustrated by the  following:
General Meeting: The U.S. IAIS members have 17 of approximately  160 votes in the General Meeting. Through this mechanism, U.S. IAIS  members can help elect members of the Executive Committee, and  adopt supervisory material developed by IAIS that has not already  been adopted by the Executive Committee.
Executive Committee: As of March 2015, the U.S. IAIS members  had 3 of 24 votes in the Executive Committee: one NAIC member as  the co-vice chair, another NAIC member as a voting member, and  FIO. Through this mechanism, the U.S. IAIS members (1) help  ensure that any supervisory and supporting materials to be adopted  by IAIS have been subject to an adequate consultation process  among IAIS members and stakeholders, (2) adopt supervisory and  supporting material developed by IAIS unless such a decision is  deferred to the General Meeting, and (3) appoint Chairs and Vice  Chairs for other committees.
Other relevant committees: The U.S. IAIS members have  leadership roles on six relevant IAIS committees, subcommittees,  working groups, and task forces and membership in four additional  relevant groups. For example, one NAIC member is the vice chair of  the Financial Stability Committee and FIO is the chair of the Technical  Committee. Through these mechanisms, U.S. IAIS members can  contribute to reaching international consensus through discussions on  issues related to financial stability, systemic risk, and macroprudential  supervision and surveillance and development of international  principles, standards, guidance, and other documents related to  insurance supervision. These discussions generally are led by  committee chairs and influence the development of consultation  documents before the documents are made public.
Comments on IAIS consultation documents: In addition to  participating in discussions on issues related to international capital  standards through work in relevant committees, the NAIC provides  additional input to the development of the standards by submitting  comments on IAIS consultation documents. For example, the NAIC  has submitted comments on the BCR and ICS consultation  documents.
The U.S. IAIS members told us that their work through these mechanisms  contributed significantly to the development of the IAIS international  capital standards. U.S. IAIS members who chaired committees and  subcommittees had the authority to set timelines for reaching decisions  on issues and then decide when to bring up an issue for formal decision,  and U.S. IAIS members who were members of committees and  subcommittees also contributed to consensus building. According to the  U.S. IAIS members and several industry stakeholders, their efforts also  had a significant effect on specific topical areas. For example, they told us  that the U.S. IAIS members were largely responsible for developing the  international consensus that led IAIS to include a GAAP-adjusted  valuation approach in the ICS consultation document and 2015 field  testing. IAIS originally intended for the ICS to use the market-adjusted  valuation approach, which many U.S. stakeholders have said is  incompatible with U.S. accounting standards, but the U.S. IAIS members  said that they had made a successful coordinated effort for the ICS to  include the GAAP-adjusted valuation approach as a second approach.  FIO also said that setting the final scaling factor in the BCR formula,  which can increase or decrease the overall BCR results, was another  area where U.S.IAIS members had worked with international counterparts  to shape an appropriate consensus.
section_title: Collaborative Efforts among U.S. IAIS Members Have Improved, but Are Not in Line with Some Leading Practices
paragraphs: U.S. IAIS members and many industry stakeholders we interviewed  indicated that initially, after FIO and the Federal Reserve joined NAIC as  U.S. IAIS members, U.S. IAIS members did not collaborate effectively or  speak with a unified voice on international capital standards for insurers.  Given their different authorities, the U.S. IAIS members each had different  focuses and perspectives related to international capital standards. For  example, in 2015, the International Monetary Fund reported that state  insurance regulators and the Federal Reserve had different focuses and  potential conflicts between their mandates regarding group-wide  supervision. The International Monetary Fund found that the state  insurance regulators focused on policyholder protection, while the Federal  Reserve focused on depositor protection. Furthermore, FIO and the  Federal Reserve were new to IAIS and said that they did not have official  policies guiding their work in IAIS or in collaboration with other U.S. IAIS  members on international capital standards. U.S. IAIS members and  stakeholders pointed to areas of public disagreement between FIO and  NAIC on issues such as FIO’s potential role in supervisory colleges, the  general need for the ICS, and which insurance products would count as  nontraditional, noninsurance—a major factor in the formula used to  determine which insurers would be designated as G-SIIs. Also, one  industry association said that FIO and NAIC running against each other  for the chair of the IAIS Technical Committee in the fall of 2012 detracted  from the U.S.’s ability to speak with a united voice. Most insurers and an  industry association we interviewed indicated that the lack of a unified  U.S. view initially reduced U.S. influence in the IAIS, and some insurers  indicated that this was one factor that enabled foreign regulators to  strongly influence initial IAIS work on capital standards.
Early on, the U.S. IAIS members took some steps to coordinate their  positions on various substantive and procedural issues at IAIS through  information sharing. FIO officials said that, as authorized in the Dodd- Frank Act, FIO began to coordinate the U.S. IAIS members by organizing  regular phone calls among high-level U.S. officials to discuss key items  for IAIS meetings and among staff on technical issues. The Federal  Reserve and the NAIC also took steps that helped coordinate their work  with the other U.S. IAIS members. For example, Federal Reserve officials  told us that they continued sharing information with state regulators on  SIFIs that were also designated as G-SIIs with state regulators, and NAIC  officials said that FIO and the Federal Reserve responded to some NAIC  invitations to participate in NAIC meetings that addressed international  capital standards, such as NAIC conference calls leading up to IAIS  meetings, relevant parts of NAIC national meetings, and NAIC  ComFrame Development and Analysis Working Group calls. Additionally,  all three U.S. IAIS members said that their staff members had long been  in regular, informal communication regarding international capital  standards.
U.S. IAIS members strengthened their focus on collaboration as IAIS  activity related to international capital standards increased, and our  analysis of information they provided shows that their collaborative efforts  are in line with some but not all leading practices for implementing and  sustaining interagency collaborative efforts. In our September 2012 report  on interagency collaboration, we found that it is difficult to sustain  collaborative efforts on issues that touch upon the responsibilities of  multiple agencies and identified leading practices for implementing and  sustaining interagency collaborative efforts. Although collaborative  mechanisms differ in complexity and scope, they all benefit from certain  key features that agencies should consider when implementing and  sustaining these mechanisms, such as leadership, outcomes and  accountability, and participants, among other things. Appendix II contains  more information on the key features we have identified in past reports.
subsections: section_title: Leadership
paragraphs: The U.S. IAIS members have taken some steps that are in line with  leading practices related to leadership and collaborative efforts. But they  have not yet taken steps to help ensure that leadership will be sustained  over the long term, consistent with leading practices that we have  previously identified. Officials from FIO, the Federal Reserve, and NAIC  cited the following examples:
The members developed an informal leadership structure and  decision-making process for their collaborative efforts, with FIO  coordinating the efforts. They established an unofficial steering  committee of high-level officials from FIO and the Federal Reserve,  and three state insurance commissioners appointed by NAIC. The  steering committee provides general leadership and organizes  monthly teleconferences to discuss agenda items for upcoming IAIS  meetings and coordinates issues and strategies across work streams.  Members also established an informal decision-making process in  which they aim for consensus while accepting that they might not  always reach it. We have previously said that agreeing on roles and  responsibilities helps agencies organize joint and individual efforts,  and facilitates decision making.
The members identified and agreed on four key technical areas of the  ICS to work on—segmentation, valuation, capital requirements, and  capital resources—and created work streams around them. Although  the work streams do not have official chairs, leadership has been  shared among the U.S. IAIS members. FIO has taken the lead in the  segmentation work stream and the valuation work stream, with the  Federal Reserve leading technical work on a data template and  instructions. The Federal Reserve has taken the lead in the capital  requirements work stream, with FIO and NAIC leading work in specific  risk categories. Leadership of the capital resources work stream is  more evenly distributed among members, with FIO serving as the  overall coordinator. We have previously found that distributing  leadership responsibility for certain group activities among members  can help keep members engaged.
High-level staff from each member provided strong leadership to the  efforts by actively participating in regular meetings, often in person.  We have previously said that committed leadership at all levels of an  organization is needed to overcome the many barriers to working  across agency boundaries. In addition, we have previously found  that interagency groups benefit from involving high-level leaders who  could help recruit key participants and make policy-related decisions  requiring a high level of authority.
The U.S. IAIS members have not yet taken steps to help ensure that  leadership will be sustained over the long term. The tenure of high- level officials who participate in the U.S. collaborative efforts— especially the state insurance commissioners who are political  appointees—is not guaranteed through the scheduled start of  implementation of the ICS and ComFrame in 2019. Federal Reserve  and FIO officials said that personal commitment from high-level  officials contributed to the effort’s success to date, and said that a  change in leadership would be a setback for the effort. Federal  Reserve officials also said that there was a need to strategically  consider how to sustain the collaborative efforts, and said that they  were in the process of filling five related positions and were beginning  to consider succession planning. FIO officials said that they have not  yet considered succession planning, but they have been trying to  establish a precedent for collaboration. NAIC officials agreed that it  was important to sustain leadership in the collaborative efforts, noting  that they tried to select commissioners who were better able to make  long-term commitments for participation in the collaborative effort.  NAIC officials also said that because there was external pressure to  remain involved in IAIS and that interest in the process was not likely  to subside, signing a memorandum of understanding or similar  document would likely not significantly increase agency commitment.  As we have previously said, given the importance of leadership to any  collaborative effort, transitions and inconsistent leadership can  weaken its effectiveness. Consequently, it is important for  participating agencies to consider how leadership will be sustained  over the long term.
section_title: Outcomes and Accountability
paragraphs: The U.S. IAIS members have taken steps in line with leading practices  related to outcomes and accountability for collaborative efforts, but could  take additional steps to improve organizational accountability, such as  addressing the work done in U.S. collaborative efforts in agency annual  reports, as shown in the following examples:  To establish shared goals that resonate with all participants, the members  took steps, such as starting the collaborative effort with the most  directly affected participants and then broadening it to include other  stakeholders, as well as identifying shared interests early. The  members agreed to aim to establish consensus on each of the four  technical issues mentioned earlier, and then build on work in these  areas to establish a more unified U.S. view on the ICS. We have  previously identified that these approaches are effective ways to help  define outcomes that represent the collective interests of all  participants and gain support in achieving the objectives of the  collaboration. We have also identified that establishing such goals  provides agencies with a reason to continue participating in the  process.
The Federal Reserve and FIO, through Treasury, have goals in their  strategic plans that are compatible with those of the collaborative  efforts. For example, the Federal Reserve’s 2012-2015 Strategic  Framework has a strategic objective related to strengthening the  stability of the financial sector through the development of policies,  tools, and standards. Also, Treasury’s 2014-2017 Strategic Plan has  strategic objectives related to implementing financial regulatory reform  initiatives, addressing threats to financial stability, and advancing U.S.  interests through multilateral mechanisms. We have previously  identified that federal agencies can use their strategic plans to  reinforce accountability for the collaboration by aligning agency goals  and strategies with those of the collaborative efforts.
Federal Reserve and FIO annual reports have not yet addressed the  work done in U.S. collaborative efforts. While Federal Reserve and  FIO officials both mentioned IAIS in their most recent annual reports,  the annual reports do not discuss their agencies’ actions in IAIS or in  the collaborative efforts. NAIC’s most recent annual report discusses  NAIC’s actions in IAIS and mentions ongoing discussions with FIO  and the Federal Reserve regarding group capital. One high-level  FIO official said FIO would consider including discussions of progress  made in the collaborative efforts in future annual reports, but as of  2014, the reports have generally been focused on the status and  progress of broader efforts. Federal Reserve officials also said that  there could be an opportunity to report on the collaborative efforts in  future annual reports. NAIC officials said that details of collaborative  efforts were discussed in NAIC national meetings. We have previously  identified that reporting publicly on collaborative efforts can strengthen  participating agencies’ commitment to working collaboratively by  reinforcing accountability through public reporting of results so that  efforts can be tracked and monitored.
There are several reasons why the collaborative efforts do not include  some leading practices that we had identified as being key to  implementing and sustaining interagency collaborative efforts. Primarily,  U.S. IAIS members and industry stakeholders mentioned:  this is the first time that the federal agencies and state regulators had  worked together on international insurance matters in IAIS, and the  United States has never before had a supervisory standard for group  capital for insurers;
U.S. activity surrounding the capital standards was still in its early  stages and had increased only recently;
U.S. IAIS members are not statutorily required to collaborate with  each other, and are sorting through ideological challenges related to  the integration of federal authorities in U.S. insurance regulation; and  the responsibility for the implementation and enforcement of the  proposed standards would be split among many regulators.
While U.S. IAIS members and most U.S. insurers and insurance  associations we interviewed were optimistic about the recent collaborative  efforts, some industry stakeholders said that it was too soon to tell  whether the efforts would be effective. U.S. IAIS members and most  industry stakeholders we interviewed generally agreed that recent  collaborative efforts improved upon past coordination and helped create a  more unified U.S. view on the ICS, and also improved engagement with  U.S. industry stakeholders. Additionally, U.S. IAIS members and some  industry stakeholders said that the collaborative efforts had generated  new ideas, such as the GAAP-adjusted valuation approach, which NAIC  officials said met the needs of all U.S. parties. FIO also said that  collaboration had improved over time as the participants learned through  experience how to best coordinate and share analysis, information, and  views. However, some stakeholders said that the effectiveness of the  collaborative effort remained unproven because it had yet to achieve its  long-term goal of establishing a more unified U.S. view on the ICS, and  that it was unclear whether the U.S. IAIS members would be able to  agree on related issues, such as insurance group capital standards.  Another stakeholder noted that they would like the collaborative efforts to  increase interaction with U.S. G-SIIs because such interaction would  encourage greater transparency and generate specific, technical  feedback from G-SIIs that was necessary to develop and implement the  international capital standards.
Following additional leading practices related to leadership and outcomes  and accountability could help U.S. IAIS members enhance and sustain  their collaborative efforts. Although U.S. IAIS members have different  authorities and are not required to collaborate in IAIS, they have said that  establishing a more unified U.S. view on the ICS is important because  doing so would allow the U.S. IAIS members to better contribute to IAIS  discussions on capital standards. Because the U.S. IAIS members have  yet to meet this goal and will need to collaborate until at least 2019, the  scheduled date for IAIS to pass and ask countries to begin to implement  the ICS, it is important to ensure that collaborative efforts are effective  and can be sustained. Additional steps taken now to enhance and sustain  collaboration, while the development of international capital standards is  in the relatively early stages, could help U.S. IAIS members better  advocate for standards that reflect the interests of U.S. insurance  regulators, industry, and consumers over the long term.
section_title: U.S. Industry Stakeholder Participation in Development of International Capital Standards Has Evolved
paragraphs: U.S. industry stakeholders provided some direct input to IAIS on the  development of international capital standards. According to FIO, eight  insurance companies served as field testers for proposed standards.  Also, most of the insurers and insurance industry associations we  interviewed submitted comments on consultation documents to IAIS, and  two had also submitted relevant research for IAIS consideration. While  IAIS received comments representing a diversity of views, some noted  that IAIS did not always incorporate the comments they submitted via  these mechanisms. Additionally, although attendance at IAIS committee  meetings was often open only to IAIS members, under earlier IAIS policy  many industry stakeholders held observer status, which allowed them to  pay annual membership fees in order to participate in select IAIS  meetings but not to vote. For example, we observed that IAIS meetings  preceding the 2014 IAIS annual conference included a session where five  sets of observers gave presentations on the proposed structure and  nature of the ICS, and a dialogue between observers and members of the  IAIS Technical and Financial Stability Committees subsequently occurred.
However, IAIS recently changed its policies for stakeholder consultation  and meeting attendance. IAIS issued related consultation documents,  solicited stakeholder comments, and voted to pass and implement the  policies between July 2014 and January 2015. The new stakeholder  consultation policy eliminated observer status but established public  consultation sessions with stakeholders on the development of all  supervisory and supporting material, public sessions with the Executive  Committee, public dialogues and/or hearings, and timely public  information on IAIS activities. IAIS has taken steps that demonstrate how  it may implement the new stakeholder consultation policy. For example,  beginning in February 2015, IAIS started a series of six meetings to  discuss ComFrame and capital standard development. We observed that  the first meeting offered stakeholders the opportunity to provide  comments on the ICS consultation document and ask related questions to  members of the IAIS Capital Development and Field Testing Working  Groups, who said that feedback would be incorporated into the 2015  round of field testing. as appropriate. Under the new policy for meeting  attendance, committee or subcommittee chairs could invite guests to  closed meetings when there was a specifically identifiable need for input  in order to provide additional perspective or input into matters being  developed at the committee/subcommittee levels and help ensure that all  relevant substantive views are being considered.
While not enough time has passed to assess the effects of changes to  IAIS policies for stakeholder consultation and meeting attendance, IAIS,  U.S. IAIS members, and U.S. industry stakeholders we interviewed had  mixed views on the changes. IAIS said that these changes would make  the process of obtaining stakeholder input more effective, efficient,  consistent, transparent, and predictable. The Federal Reserve said that  the new policies would make the IAIS rulemaking process more  transparent and help IAIS be fully independent of the entities it regulates.  FIO said that the new policies would promote IAIS efficiency,  independence, and transparency. NAIC voted against the new policies,  and said that they would decrease IAIS transparency and make it more  difficult for IAIS to achieve optimum regulatory outcomes or reach broad  consensus on the standards. NAIC noted that those most affected by the  standards—the industry and consumers—would not be able to provide as  much input as before. U.S. industry stakeholders we interviewed  generally expressed negative opinions on the new policies. Specifically,  they were often concerned that the new policies could decrease the  transparency of the IAIS capital standard development process and that  by the time IAIS allowed them to provide input, it would be too late to  make a difference because the decisions would have effectively been  made. However, one G-SII said that the new policy for stakeholder  engagement was appropriate, reflected key alterations sought by both  U.S. industry stakeholders and U.S. IAIS members, and encouraged  significant interaction with regulatory standard setters.
U.S. industry stakeholders have also been involved in the U.S.  collaborative efforts, providing input that informs U.S. IAIS members’  efforts related to the development of international capital standards for  insurers in IAIS. For example, agency officials told us the following:
U.S. IAIS members worked with eight U.S. insurers who were IAIS  field testers. Specifically, they communicated with the field testers and  their primary regulators on their experience testing the proposed  international capital standards and reviewed the data the field testers  planned to submit to IAIS. Officials said that this effort helped them  verify that the data were of good quality and understand U.S. data  before holding related discussions with foreign regulators in IAIS  committees.
U.S. IAIS members have involved industry stakeholders with technical  expertise in the four work streams mentioned earlier, and incorporated  some of the industry stakeholder feedback in their work.
U.S. IAIS members held four meetings to discuss the results of field  testing and technical issues related to the ICS consultation draft with  IAIS field testers and other insurers in August 2014, October 2014,  January 2015, and February 2015. The last three meetings included  additional industry stakeholders, such as large domestic-only insurers  and insurers with foreign parent companies. Federal Reserve officials  said that they were reviewing comments and considering them as  they developed their own position on the ICS in areas such as field  testing specifications and potential changes in approach. Additionally,  according to Federal Reserve officials, the U.S. IAIS members are  planning to hold meetings on similar topics in the near future.
Although U.S. IAIS members disagreed on whether the FSOC  independent member with insurance expertise would be a relevant  participant in U.S. collaborative efforts, U.S. IAIS members agreed that  FIO had generally involved the right industry stakeholders. We have  previously identified that ensuring that the relevant participants have been  included in the collaborative effort, including organizations from the  private sector, is important.
In addition to providing direct input to IAIS and being involved in the U.S.  collaborative efforts, U.S. industry stakeholders have also discussed the  development of international capital standards with U.S. IAIS members  through other mechanisms, described in the following examples:
FIO discussed international capital standards with the Federal  Advisory Committee on Insurance (FACI), a committee that Treasury  created to provide advice and recommendations that assist FIO in  carrying out its statutory authority, and has members including a  range of industry representatives. For example, according to FACI  documents from September 2013 and August 2014, FIO provided  FACI with high-level explanations of objectives for international capital  standards and issues related to implementation, and responded to  questions from FACI members. In November 2014, FIO gave a  presentation to FACI that provided additional information on topics  including U.S.-specific activities related to the international capital  standards, such as field testing and collaborative efforts to develop a  unified U.S. view.
Federal Reserve officials told us that they had accepted numerous  requests for informal meetings with insurers on how international  policies could potentially affect them.
NAIC committees that address international capital standards for  insurers—such as the International Insurance Relations Committee  and ComFrame Development and Analysis Working Group—held  open meetings, through which industry stakeholders could learn about  NAIC’s work at IAIS and provide both conceptual and technical input.
For example, from 2013 through 2015, the NAIC groups held open  conference calls and meetings on issues such as IAIS observer and  stakeholder meetings; designation of G-SIIs and development of G-SII  policy measures; the role of capital in ComFrame; IAIS work related to  the development of the BCR, HLA, and ICS; and NAIC comments for  submission to IAIS on the BCR and ICS consultation documents.
section_title: Conclusions
paragraphs: IAIS is in the early stages of developing international capital standards for  insurers, and key decisions still need to be made. The development  process will continue until at least 2019 and could affect large,  internationally active U.S. insurers. Effective long-term collaboration  among U.S. interests in this process is essential to ensuring a reasonable  outcome for the U.S. insurance industry and its regulators. The  international standards are being developed in a large multilateral forum  in which many national regulators advocate for standards that will align  with their national interests. In this multilateral setting, the U.S. members  could better advance U.S. interests and concerns with a more unified  voice. Given that U.S. IAIS members have different authorities and areas  of focus, they may not be likely to reach similar positions without effective  coordination. Further, because the development process will span at least  4 more years, a unified U.S. presence with sustained leadership is  essential. Recently, the U.S. IAIS members have increased their focus on  collaborating with each other and with U.S. stakeholders, and are aiming  to establish a more unified U.S. view on the ICS. Engaging in leading  collaboration practices, such as sustaining long-term leadership and  developing better public reporting of its efforts, would help U.S. IAIS  members enhance their efforts and better advocate for the interests of  U.S. insurance regulators, industry, and consumers.
subsections: section_title: Recommendation
paragraphs: To enhance and sustain future U.S. participation in the development of  international capital standards for insurers, the Secretary of the Treasury  should direct the Director of FIO, in consultation with the Federal Reserve  and NAIC, to enhance future collaborative interagency efforts by following  additional leading practices for collaboration, such as taking steps to  sustain leadership over the long term and publicly reporting on their  efforts, for example in annual reports.
section_title: Agency Comments and Our Response
paragraphs: We provided a draft of this report to FIO, the Federal Reserve, FSOC, the  Office of the U.S. Trade Representative, and NAIC for review and  comment. FIO concurred with our recommendation, and its written  comments are reprinted in appendix III. The Federal Reserve, FSOC, the  U.S. Trade Representative, and NAIC provided us with technical  comments, which we incorporated as appropriate.
In concurring with our recommendation that FIO enhance future  collaborative efforts by following additional leading practices, FIO said  that the agency would build on its existing collaboration process by  following leading collaboration practices discussed in the report. Further,  FIO said that it would discuss U.S. IAIS members’ collaboration in FIO’s  annual report. Finally, it noted that the office would take steps to sustain  U.S. leadership at IAIS over the long term.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Director of the Federal  Insurance Office, the Chair of the Board of Governors of the Federal  Reserve System, the Secretary of the Treasury as the Chairperson of  FSOC, the U.S. Trade Representative, and the President of NAIC. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To examine the development and potential effects of these international  capital standards for U.S. insurers, we reviewed (1) the status of the  development and implementation of the international standards; (2) what  is known about the potential effects of applying international capital  standards to U.S. insurers; (3) industry and other stakeholder views on  the need for an international group-level capital standard for insurance  companies; and (4) the extent to which U.S. regulators are collaborating  with each other, and considering the views of industry and other  stakeholders, in developing a U.S. position on international capital  standards.
To address all of these objectives, we interviewed insurance industry  stakeholders, reviewed IAIS documentation, and attended relevant  meetings and conferences. Specifically, we interviewed federal  agencies—the Federal Insurance Office, the Board of Governors of the  Federal Reserve System, and the Financial Stability Oversight Council  (FSOC)—as well as the National Association of Insurance  Commissioners (NAIC) and several former and current state insurance  regulators that will likely supervise internationally active insurance groups  (IAIG). We spoke with the offices of the former insurance commissioner  from Connecticut, as well as the offices of the current insurance  commissioners from New Jersey, New York, Nebraska, and  Pennsylvania. Additionally, we spoke with the current insurance  commissioner from Missouri because he was a member of FSOC. We  also interviewed representatives of the International Association of  Insurance Supervisors (IAIS), credit rating agencies, the American  Academy of Actuaries, and the National Conference of Insurance  Legislators.
In addition, we interviewed representatives of all three U.S.-based  insurance groups that have been designated as global systemically  important insurers (G-SII). Using the IAIS criteria for identifying IAIGs and  SNL Financial data, which we determined to be reliable for these  purposes by reviewing related documentation and conducting electronic  testing of the data, we identified the U.S.-based companies that would  likely meet the criteria and interviewed three of these companies. We also  interviewed two non-U.S.-based companies that would likely be IAIGs;  two large, internationally active U.S.-based insurers that would not likely  meet the criteria for being IAIGs; as well as a large U.S.-based company  that is not internationally active but had participated in the U.S.  collaborative efforts. We selected companies to include both  property/casualty and life insurers, as well as those that were participating  as field testers for the international capital standards. We also interviewed  two insurance industry associations—the Property Casualty Insurers  Association of America and the American Council of Life Insurers.  Additionally, to obtain their views on the international capital standards,  we interviewed regulators from two other countries and insurance industry  associations from three other countries that had recently implemented  similar types of capital standards for insurers, had a large presence of  U.S.-based insurers, and had either a G-SII or potential IAIG domiciled in  the country. We also reviewed relevant documentation related to  standards, including consultation drafts of the standards, stakeholder  comments on the draft standards, and IAIS documentation, such as on  financial stability and identifying G-SIIs. Finally, we attended the 2014  IAIS annual meeting in Amsterdam, an IAIS stakeholder meeting in Los  Angeles, as well as three NAIC meetings related to the development of  the standards.
To examine the need for and potential effects of the international capital  standards, we conducted a literature review of 38 studies that reviewed  systemic risk or international capital standards, identified through online  databases such as ProQuest and EconLit. We created a standardized  template to capture information from each study. We used the studies as  testimonial evidence regarding differing viewpoints on the need for and  the potential effect of enhanced capital standards, and we reviewed their  methodologies to ensure that they were sufficiently reliable for these  purposes. We also interviewed two academics who have studied these  issues. In addition, we analyzed data from SNL Financial to determine the  number of G-SIIs and IAIGs that were offering variable annuities with  guaranteed benefits, and guaranteed investment contracts. We  determined the data to be reliable for these purposes by reviewing related  documentation and conducting electronic testing of the data. To assess  the extent to which U.S. regulators are collaborating with each other and  industry stakeholders in developing a U.S. position on the standard, we  reviewed past GAO reports that establish criteria for effective  collaboration. We also reviewed agency documentation, such as  strategic plans and annual reports, to better understand the extent to  which the agencies were meeting these criteria. We also spoke with  officials at the U.S. Trade Representative about its potential involvement  in the implementation of the standards. The officials clarified that the U.S.  Trade Representative would not be involved in the implementation of  international capital standards for insurers.
We conducted this performance audit from July 2014 to June 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Key Features and Issues to Consider When Implementing Collaborative Mechanisms
paragraphs: Given agencies’ long-standing challenges working across organizational  lines, in 2005 we identified the following practices that can help enhance  and sustain collaboration among federal agencies, including: define and articulate a common outcome; establish mutually reinforcing or joint strategies; identify and address needs by leveraging resources; agree on roles and responsibilities; establish compatible policies, procedures, and other means to operate develop mechanisms to monitor, evaluate, and report on results; reinforce agency accountability for collaborative efforts through  agency plans and reports; and  reinforce individual accountability for collaborative efforts through  performance management systems.
In 2012, we built on our past work and developed key issues for  Congress and others to consider when implementing interagency  mechanisms that the federal government uses to collaborate. These key  issues and features are listed in table 1, below.
section_title: Appendix III: Comments from the Federal Insurance Office
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Lawrance L. Evans, Jr., (202) 512-8678, evansl@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Patrick A. Ward (Assistant  Director), Winnie Tsen (Analyst-in-Charge), Jordan Anderson, Nancy  Barry, Bethany Benitez, Chloe Brown, Emily Chalmers, David Dornisch,  Janet Eakloff, Courtney LaFountain, Scott McNulty, Joseph Silvestri, Jena  Y. Sinkfeld, Sarah Veale, and Jack Wang made significant contributions  to this report.