Liberty Mutual Insurance Issues Public Comment on Treasury Department Notice

WASHINGTON, Jan. 22 -- Edmund C. Kenealy, executive vice president, deputy general counsel and chief public affairs officer of Liberty Mutual Insurance, Boston, Massachusetts, has issued a public comment on the Department of the Treasury notice entitled "Federal Insurance Office Study on the Insurance Capital Standard". The comment was written on Jan. 14, 2021, and posted on Jan. 21, 2021:

* * *

In response to the request for information by the Federal Insurance Office, published in the Federal Register on October 9, 2020, concerning the potential effects of the insurance capital standard ("ICS") on U.S. insurance markets, U.S. consumers, and U.S. insurers, Liberty Mutual Insurance Group respectively states as follows:

1. If the ICS were adopted in the United States, how would this affect the insurance market in the United States, including consumers and insurers? How would the adoption of the ICS affect the competitiveness of U.S.-domiciled IAIGs, foreign insurance groups with significant operations in the United States, and U.S. insurers that have current or planned operations abroad?

FIO states it issued this notice to "help inform FIO's future work on the ICS and related matters at the IAIS."

Liberty Mutual believes certain aspects of this objective are obsolete, because it no longer is necessary or appropriate for FIO to consider issues related to "if the ICS were adopted in the United States." That question has been thoroughly considered by U.S. insurance regulators, who have determined the ICS is unfit for U.S. insurance markets.

Accordingly, "FIO's future work" on this issue should be focused on ensuring that the Aggregation Method ("AM") and the U.S. Group Capital Calculation ("GCC") are determined to be "comparable," as a group capital assessment standard, to the ICS under principles, criteria and processes to be established by the IAIS. FIO's future efforts should also ensure that the ICS is not implemented in other parts of the world in a manner that adversely impacts U.S. insurers or insurance consumers.

2. Please provide information on whether the ICS could create regulatory capital arbitrage opportunities or have procyclical effects, leading to increased volatility in U.S. insurance markets.

Because the ICS as currently (and mostly likely ultimately) designed utilizes a "market-adjusted valuation" (MAV) methodology, the ICS is susceptible to market volatility injecting instability into the valuation of assets, particularly those backing longer term liabilities. The U.S. FASB chose not to adopt a similar accounting standard, the IASB's IFRS17, when it continued to support U.S. GAAP. This was another significant reason underlying the rejection by U.S. regulators (including the Federal Reserve Board in its "Building Blocks Approach") of the ICS as unfit for U.S. markets.

3. How should the FIO Study consider the potential effects of implementing the AM in U.S. insurance markets as compared to implementing the ICS? In addition, should the FIO Study consider the potential impact upon U.S. insurance markets if credit rating agencies were to accept the ICS as a global standard?

Unfortunately, as the IAIS developed the ICS, the IAIS moved away from the principles-based, outcome-oriented, flexible approach to insurance supervision which the IAIS promotes in so many other contexts. Instead, the ICS imposes a rigid, one-size fits all approach to calculate a prescribed, consolidated amount of group capital using techniques and based on provisions very much like Europe's relatively new Solvency II, and which, in some cases are untried. The AM and the GCC, on the other hand, rely upon longstanding and proven financial condition standards in the U.S. Therefore, they are more predictable and less prone to unintended consequences and negative impacts.

The ICS - which is untested and has yet to be implemented - is designed as a supervisory tool and is inappropriate for use by credit agencies as a standard for assessing an insurer's financial condition. Insurers have strenuously and repeatedly urged the IAIS to apply a "warning label" to the ICS. Additionally, neither the ICS nor the AM results for a specific insurer should be made public. Thus, there should be no potential impact on credit ratings and from rating agencies in either case.

4. What information should be considered in evaluating the impact of ICS implementation on the various business lines and the cost and availability of different product types in the U.S. insurance market?

As noted above, we are concerned that this question presumes that there is a set of circumstances under which the ICS would be adopted in the U.S. A notion that has been rejected by relevant regulators. As would be expected, however, if the ICS were ever adopted in the U.S., insurance company managers would have to manage their businesses in a manner that accounts for the potential consequences of an ICS-based regulatory regime, which would have an impact both on affordability and availability of certain insurance products upon which U.S. consumers have come to rely for their personal and financial security. FIO should consider how the capital requirements in the ICS will drive insurance product offerings, particularly with respect to new products and emerging markets, globally and indirectly in the U.S.

5. If the ICS were implemented in foreign jurisdictions where U.S. insurers operate, what effects could the ICS have on the ability of U.S. insurers to compete with local insurers and other international insurers in these overseas markets? How should FIO evaluate issues related to global competitiveness of U.S. insurers and potential adoption of the ICS by foreign jurisdictions?

Our response to Question 1 forms a critical part of our response here. The ICS is a group capital regime only. The importance of an AM comparability determination is that it will obviate any concern regarding application of the ICS to all or part of a U.S.-headquartered IAIG based on the presence of a member or operations of that IAIG in a jurisdiction adopting the ICS. The inappropriate application of another jurisdiction's group capital regime, whether based on the ICS or not, can cause negative impacts on a U.S. insurer's ability to compete in those and other markets. It is important that all jurisdictions recognize and accept the U.S. approach to group supervision, including the GCC. Frankly, just the cost of developing and maintaining accounting and other systems necessary to comply with the ICS for merely a portion (or subgroup) of its business would adversely impact the ability of a U.S. insurer to do business internationally and impose structural costs that could adversely impact its U.S. operations as well.

6. Please provide your views on the following issues, as relevant to the FIO Study.

a. Data for FIO Study

We are not aware of any existing, credible data with respect to what is only a potential ICS-based system, not yet fully developed or implemented and still within the IAIS Monitoring Period.

b. Market Effects from MAV

See our response to Question 2. Also, the MAV (and accompanying MOCE provisions) is untried. The resource-intensive and expensive efforts required to implement it are unreasonable. Those provisions have no place in a credible and effective global group capital standard and should have been abandoned. According to the Center for Capital Markets Competitiveness ("CCMC"), the ICS, of which the MAV is perhaps the most crucial element, could decrease insurance product availability and hamper investments by insurers.

c. Capital Requirement.

The complicated and granular nature of risk factors and charges the IAIS has embedded in its capital requirements calculation will result in a rigid and prescribed forecast of consolidated group capital needs. These measures are untried and, in many cases, arbitrary. Thus, they are potentially misleading and damaging to accurate and effective regulatory oversight and market stability.

d. Available Capital.

The ICS will increase the amount of required capital for insurers and raise the aggregate cost of capital to the industry. The manner with which the ICS will treat various forms of U.S. subordinated and senior debt arbitrarily reduces the availability of such forms of capital with no pragmatic justification for doing so. If capital is available to pay policyholders, as is true with subordinated and senior debt, it should be fully considered without the tiering or limitations the ICS needlessly imposes. The reports by the CCMC support this position.

e. Jurisdictional Flexibility.

The authority of local jurisdictions must be preserved. The current ICS does not currently accommodate different approaches to the assessment of group capital adequacy.

The IAIS's stated goal of "comparability," which has the vague potential to address this issue also remains uncertain. Comparability should seek consistent and effective outcomes among the various capital assessment tools that are in use, or under development, in several jurisdictions, such as the aggregation approach of the AM/GCC. In other words, if an alternative sophisticated regime, such as the GCC, enables a jurisdiction's supervisor to assess adequately the capital needs and capital resources of an IAIG with respect to policyholder protection , then the IAIS should recognize the use of that alternative regime within the ambit of the larger ICS global capital standards project and not insist jurisdictions mirror the ICS.

If a local capital assessment regime satisfies certain basic standards regarding rigor and sophistication, then seeking consistent supervisory outcomes, regardless of the specific methodology used, would allow the IAIS to preserve the authority of local jurisdictions to evaluate group capital in a way that makes the most sense for their markets and financial conditions. The ICS should not prescribe an approach that pre-empts local authority - and use of the ICS as a prescribed target exacerbates this risk considerably.

7. Please provide any views regarding the following additional issues, as they relate to the FIO Study.

a. What data and input from market participants should be taken into consideration?

b. Describe any data or data services that independent third parties could provide for purposes of the FIO Study.

c. For the purposes of the FIO Study, would a "point in time" analysis be appropriate or would another time frame be more relevant for determining the implications?

Liberty Mutual has no comments with respect to this item.

8. How should the FIO Study inform FIO's engagement on the IAIS economic impact assessment of the ICS?

Especially given the paucity of cost data, FIO should call upon the IAIS to place a higher priority on assessing the potential costs and other impacts of the ICS. This economic impact analysis should be done very early on in the Monitoring Period. It should attempt to measure the extent to which the ICS will lead to higher insurance premiums, the contraction of insurance market capacity, reduced investment in insurers, and adversely impact insurers' own capital management and investments. As the analyses by the CCMC noted previously find, these factors all could adversely affect, rather than enhance, global financial stability.

9. How has the COVID-19 pandemic informed your views on the issues discussed in this Notice?

The COVID-19 pandemic has reaffirmed the insurance industry's resilience to global economic downturns, just as was the case during the financial crisis of 2008. Limited evidence existed that an insurance group capital standard was necessary when the IAIS commenced work on an ICS. The pandemic has shown that to continue to be the case. A report released on November 10, 2020 by the Insurance Information Institute includes information that confirms the industry's capital has not been materially affected by the pandemic. Perhaps a worthwhile aspect of the study would be to assess whether application of certain components of the ICS during the pandemic would serve as a catalyst for conduct that contributes to financial instability rather than support global financial stability.

10. Please provide any other comments on the issues discussed in this Notice.

As indicated at the outset, Liberty Mutual strongly recommends that FIO refocus its interest in the ICS away from measuring the hypothetical consequence of its adoption in the U.S., because the ICS is not going to be adopted here. Instead, FIO should explore how to influence the IAIS to revise the ICS and other jurisdictions not to adopt it in a manner that adversely affects U.S. insurers.

Very truly yours,

Edmund C. Kenealy

* * *

The notice can be viewed at: https://beta.regulations.gov/document/TREAS-DO-2020-0019-0001

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, [email protected], Springfield, Virginia; 703/304-1897; https://targetednews.com