APCIA backs US-developed aggregation method for group capital assessment

IAIS seeking comments on a comparability assessment with ICS

APCIA backs US-developed aggregation method for group capital assessment

Insurance News

By Bethan Moorcraft

The International Association of Insurance Supervisors (IAIS) is seeking comments on criteria for assessing whether the US-developed aggregation method (AM) for group capital assessment is comparable to their insurance capital standard (ICS).

The comparability assessment was officially released for consultation at the 2022 IAIS Global Seminar, held in Dubrovnik, Croatia on June 16-17, 2022. It is open for comment until August 15, 2022. If deemed comparable, the AM will be considered an outcome equivalent approach for implementation of the ICS as a prescribed capital requirement.

“The AM for group capital assessment is doing the same thing as the ICS, but from a different standpoint,” said Steve Broadie, VP of financial policy at the American Property Casualty Insurance Association (APCIA), which is strongly in favor of the AM for US insurers. “The ICS is a consolidated group level capital requirement, whereas the AM aggregates the capital requirements of all the legal entities within the group – regardless of where they’re based around the world – in coming up with an overall group capital assessment.”

With the AM, regulators have the ability to see where capital is within the group because they can access an inventory that shows the capital requirements and capital resources of the different legal entities. Essentially, insurance supervisors have tools to pinpoint where and when financial problems may arise. This is not possible with the ICS method, which is consolidated at the group level, meaning regulators cannot see where capital is located within the group.

“That’s one area in which we think the AM is superior to the ICS approach,” Broadie told Insurance Business. “Another significant difference between the two is that the ICS is based on fair valuing assets and liabilities - it’s similar to the approach taken by Solvency II in the EU – whereas the AM takes the legal entities as it finds them. In the US, we use generally accepted accounting principles (GAAP) for public reporting, and statutory accounting adopted by the National Association of Insurance Commissioners (NAIC) for regulatory reporting – and those are both based on a different accounting method to what’s used in Europe for Solvency II.”

A recent study released prior to the IAIS Global Seminar by the Federal Reserve Board’s Insurance Policy Advisory Committee found that, “as currently constructed, the ICS would not be appropriate as a capital rule for US-based internationally active [life] insurance groups”. As for P&C insurers, the APCIA believes the “application of the ICS to US insurers would require use of a different regulatory accounting system at great cost solely to implement the ICS”.

Both the NAIC and the Federal Reserve Board have indicated that the ICS will not be adopted in the US. The AM for group capital assessment is now with various state legislatures, and while it will take time for full execution, the APCIA “strongly supports adoption and implementation at the state level”. 

Regarding the consultation on the comparability assessment, Broadie reiterated: “The ICS and the AM assess group capital from different perspectives. European supervisors have argued for a much more quantitative approach in terms of assessing comparability with the AM, but we [the APCIA] would like to see a combination of quantitative analysis as well as consideration of qualitative regulatory factors.”

The APCIA is the primary national trade association for home, auto, and business insurers, which promotes and protects the viability of private competition for the benefit of consumers and insurers. Its members represent all sizes, structures, and regions—protecting families, communities, and businesses in the US and across the globe.

“We are now beginning the process of looking at the proposed criteria with our members,” said Broadie. “We have a short timeframe to do that because the comment deadline is August 15. We want our members to give us their opinions on the specifics for them, as well as the overall [group capital assessment] approach.”

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