Proposed Fed Rule Shows Encouraging Signs for Consumers’ Long-Term Needs

The Federal Reserve Board (Fed) published last Friday its long-awaited capital rules proposal for bank or thrift holding companies with significant insurance operations. The rules are intended to ensure that these groups remain stable

Life insurers are still parsing the details of the 158-page proposal. But three pages tucked in the front are very clear – and very important for American consumers. The Fed’s proposed “Building Block Approach” uses the National Association of Insurance Commissioners’ (NAIC) risk-based capital (RBC) regulations as the foundation for new consolidated capital rules for Fed-supervised insurance groups.

The Fed rejected a different approach being used by the International Association of Insurance Supervisors (IAIS) to develop a “standard” Insurance Capital Standard (ICS) that is used globally. The Fed’s refusal is significant. The standard ICS, also known as the ICS “market-adjusted valuation” approach, penalizes long-duration products, like life insurance and annuities, that millions of Americans rely on for financial and retirement security.

The eventual application of the “standard” ICS, is expected to disincentivize firms from offering long-term products. This will hurt the ability of consumers to meet their long-term financial planning needs.

And if fewer insurers offer long-term products, then fewer insurers will seek to match their long-term liabilities with long-term asset investments. These long-term investments provide capital for important infrastructure projects around the world. Additionally, market-based capital measures for life insurers can send false signals of insolvency in times of economic stress, which can worsen economic downturns.

The Fed’s message to global regulators is that the U.S. insurance market, and its consumers, deserve a consolidated capital measure that uses a strong, time-tested financial, accounting and solvency standard, like the NAIC RBC framework.

The jury may still be out on whether the American Council of Life Insurers (ACLI) agrees with every part of the Fed’s proposal. But ACLI supports the development of public policy that makes it easier and less expensive for American families to build their own financial safety nets. We believe that using an existing capital framework designed with U.S. consumers in mind is a good way to start