Quarles: Capital framework proposal for insurance thrift holding companies near

A proposed capital rule for insurance thrift holding companies is expected to be released in the “not-too-distant future,” the Federal Reserve’s top supervision official told an insurance industry group meeting Wednesday in Naples, Fla.

Federal Reserve Board Vice Chairman for Supervision Randal Quarles discussed a capital framework in the works for insurance thrift holding companies Jan. 9.

Randal Quarles, the Federal Reserve Board’s vice chairman for supervision, updated the American Council of Life Insurers Executive Roundtable on what’s coming next following the Fed’s June 2016 advance notice of proposed rulemaking (ANPR). The ANPR set out two frameworks for capital standards, both unlike those in place for bank holding companies. Quarles said this “Building Block Approach” (BBA) builds upon the regulatory capital rules of subsidiaries’ functional regulators (state or foreign insurance regulators for insurance subsidiaries and federal banking regulators for insured depository institutions) to provide a consolidated capital requirement.

Quarles, offering a “high level” preview Wednesday, said the proposed rule will consider all material risks within the enterprise by aggregating the capital positions of companies under an insurance holding company, after making some adjustments and scaling them to a common capital regime. “To streamline implementation burden while reflecting all material risks, I think it would make sense to use the NAIC’s [National Association of Insurance Commissioners] insurance capital framework as the common capital regime,” he said.

In brief, he explained that the proposal constructs “building blocks,” or groupings of entities in the supervised firm, that are covered by the same capital regime, and the building blocks are then used to calculate combined, enterprise-level capital resources and requirements. Once the enterprise’s entities are grouped into building blocks, and capital resources and requirements are computed for each building block, the enterprise’s capital position is produced by generally adding up the capital positions of each building block. After the holding company’s aggregate capital position is calculated, he said, the BBA would impose a minimum requirement consistent with the Fed’s focus on safety and soundness.

“Our goal with the BBA is to capture all material risk of each supervised organization, leverage existing legal-entity standards, and minimize burden,” he said.

Quarles also said the Fed plans to conduct a quantitative impact study of the BBA as part of the rulemaking process.

Fed Vice Chairman for Supervision Randal K. Quarles Speech Jan. 9, 2019, at the American Council of Life Insurers Executive Roundtable, Naples, Florida: Insurance Supervision and International Engagement

June 2016 ANPR