The Federal Reserve Board (FRB) has begun a process that will lead to the imposition of new capital requirements on some large insurance companies. Pursuant to Section 171 of the Dodd-Frank Act, the FRB gained authority to impose leverage and risk-based capital standards on nonbank financial companies that are under the FRB’s jurisdiction. These include insurance companies that are owned by bank holding companies and those that are deemed to have systemic significance.
As a first step in this regulatory process, the FRB has started a quantitative impact survey (QIS) that will gather information about balance sheet and capital positions of insurance companies. The information will inform the development of the new capital standards.
The new capital requirements will likely follow the pattern of regulation historically used in the banking industry, and not that used by state insurance regulators. That could mean a less nuanced approach, based more on gross assets of different types, with fewer if any adjustments for actuarial factors and reinsurance.
The QIS presents an opportunity to educate the FRB about the way insurance companies analyze their own risks, and how their levels of capital should be viewed in relation to those risks. The QIS also presents an opportunity for the insurance companies to see what risks the FRB is most concerned about. Broadly speaking, these tend to be investment, operational and market risks.
The FRB is also focused on the existing processes for liquidation of insolvent insurance companies; transactions among affiliates (especially upstream dividends); governance; and liquidity. These are areas in which the historical regulatory practices of banking regulators have differed markedly from the practices of insurance regulators.