June 13, 2016
The Federal Reserve Board on Friday June 3, 2016 approved an advance notice of proposed rulemaking (ANPR) inviting comment on conceptual frameworks for capital standards that could apply to systemically important insurance companies and to insurance companies that own a bank or thrift. The standards would differ for each group.
The Board’s ANPR presents one approach–called the consolidated approach–that would apply to systemically important insurance companies, and a second approach–called the building block approach–for less complex insurance companies that also own a bank or thrift. The Board is publishing an ANPR to provide ample opportunity for interested parties to comment on the appropriate structure of capital standards to promote financial stability, and to protect depository institutions owned by insurance companies.
“The frameworks we are considering would address all the risks across an insurance company’s regulated and unregulated subsidiaries,” Federal Reserve Chair Janet L. Yellen said. “I believe this proposal is an important step toward capital standards that are both appropriate for our supervised insurance firms and that enhance the resiliency and stability of our financial system.”
For systemically important insurance companies, the consolidated approach would categorize an entire insurance firm’s assets and insurance liabilities into risk segments, apply appropriate risk factors to each segment at the consolidated level, and then set a minimum ratio of required capital. The Board currently supervises two systemically important insurance companies, American International Group, Inc. and Prudential Financial, Inc.
For insurance companies that own a bank or a thrift, the building block approach would aggregate existing capital requirements across a firm’s different legal entities to arrive at a combined, group-level capital requirement, subject to adjustments to reflect the Board’s supervisory objectives. The Board currently supervises 12 insurance companies that own a bank or thrift.
Both the building block approach and the consolidated approach recognize the distinct differences between insurance companies and banks, and would use insurance-focused risk weights and formulas that reflect the appropriate nature of insurance liabilities.
“The dual approach proposed today is another example of our efforts to tailor capital regulation to the different risks posed by financial intermediaries of varying types and complexity,” Governor Daniel K. Tarullo said.
Also on Friday, the Board approved a proposed rule to apply enhanced prudential standards to systemically important insurance companies designated by the Financial Stability Oversight Council. As required under the Dodd-Frank Act, these standards would apply consistent liquidity, corporate governance, and risk-management standards to the firms. These firms would also be required to employ both a chief risk officer and chief actuary to help ensure that firm-wide risks are properly managed. The enhanced prudential standards would only apply to systemically important insurance companies, reflecting the heightened risk these firms pose to financial stability.
Comments on both the ANPR and proposed rule are due by August 2, 2016.