Dodd-Frank Reform and International Insurance Standards Coordination

Handshake In Front Of Flat World Map

Daren L. Moreira , John S. Pruitt , Cynthia R. Shoss , Maureen E. Adolf , Justin K. Kitchens | June 08, 2018 |

Handshake In Front Of Flat World Map

On May 24, 2018, President Donald Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act. While news headlines have focused on relaxation of various rules for banks contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Act includes an important provision designed to encourage federal coordination with US state insurance regulators when federal agencies represent the United States before international insurance standard-setting organizations such as the International Association of Insurance Supervisors (IAIS).

Specifically, the Act requires the US secretary of Treasury, the Board of Governors of the Federal Reserve System (FRB), and the director of the Federal Insurance Office (FIO) to "achieve consensus positions" with state insurance regulators through the National Association of Insurance Commissioners (NAIC) when taking positions on insurance proposals by a global insurance regulatory or supervisory forum. PL 115-174 § 211(a)(2).

The Act also requires the same federal agencies to "support increasing transparency" at any global insurance or international standard-setting regulatory or supervisory forum in which they participate, including supporting and advocating for greater public observer access to working groups and committee meetings of the IAIS. PL 115-174 § 211(a)(1).

The signing statement issued by President Trump in connection with the Act called specific attention to the provision described above, stating that "[t]hese directives contravene my exclusive constitutional authority to determine the time, scope, and objectives of international negotiations."

Signing statements are sometimes used to indicate the executive branch's view of a law passed by Congress and may indicate how federal agencies are expected to implement the law's provisions.

This appears to be the purpose of the signing statement issued in connection with the Act, which noted that the administration intends to give "careful and respectful consideration" to the preferences expressed by Congress, including consultation with state officials as appropriate, but will implement the international insurance provision of the Act "in a manner consistent with [the president's] constitutional authority to conduct foreign relations." 

As background, the IAIS has been working to finalize a risk-based global insurance capital standard (ICS) that would apply to all internationally active insurance groups (unlike already finalized capital requirements applicable only to global systemically important insurers). US state insurance regulators have for some time been critical of the ICS development as not respecting key elements of the US solvency regime such as legal entity as opposed to group supervision.

Furthermore, the IAIS discontinued "observer" status effective January 1, 2015, whereby industry representatives were previously permitted to attend IAIS meetings and participate in the official IAIS consultation process. In November 2017, the IAIS announced that it had agreed to implement ICS in 2 phases—a 5-year "monitoring period" expected to begin in 2020 during which ICS will be confidentially reported to group-wide supervisors but will not be used as a basis for supervisory action, followed by full implementation of ICS as a prescribed capital requirement targeted for 2025.

Importantly for the United States, the IAIS announcement recognized that the NAIC is in the process of developing an entity-level risk-based capital aggregation approach to group capital calculation. The IAIS has agreed to collect data concerning the development and application of an aggregation method for group capital. At the end of the ICS monitoring period, the IAIS will assess whether the aggregation method provides comparable outcomes to the ICS, and if so, it will be considered an outcome-equivalent approach for implementation of ICS as a prescribed capital requirement.

The NAIC Group Capital Calculation (E) Working Group has set a goal of field-testing a beta version of its calculation by the end of 2018. Prior to the adoption of the international insurance capital standards provisions of the Act, there was some concern among state insurance regulators that federal agencies might use their authority under Dodd-Frank to preempt state efforts to define a group capital standard that relies on the established state solvency framework. The next meeting of the Working Group will be held on June 20, 2018, during the NAIC Insurance Summit in Kansas City. 

In furtherance of the requirements described above, the Act establishes a new committee within the FRB and requires the completion of three separate reports, one of which is to be conducted annually. The new Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues at the FRB is to be composed of members representing a diverse set of perspectives from the various sectors of the US insurance industry. Additionally, the following reports are to be submitted to Congress.

  • An annual report and testimony needs to be submitted until 2024 by the US secretary of Treasury and the FRB on their efforts with the NAIC at global insurance regulatory or supervisory forums.
  • A joint study and report by the US secretary of Treasury, the FRB, and the FIO director concerning the impact on US consumers and markets, which is to be conducted in consultation with the NAIC, must be completed before any of the federal agencies support or consent to the adoption of any final international insurance capital standard. The report is to be open for a 60-day public comment period upon being submitted to Congress.
  • A report and testimony by the US secretary of Treasury and the FRB on their efforts to increase transparency at the meetings of the IAIS must be sent within 180 days of the Act.

Daren L. Moreira , John S. Pruitt , Cynthia R. Shoss , Maureen E. Adolf , Justin K. Kitchens | June 08, 2018