Proposal would set capital requirements for insurance firms supervised by the Fed

A proposal to establish capital requirements for certain insurance companies supervised by the Federal Reserve – referred to as the “Building Block Approach (BBA)” – was issued by the central bank Friday, with the caveat that it is insurance-industry related and is mostly different from capital calculations used for banks.

The Fed said its proposal – issued for a 60-day comment period – builds on existing state-based insurance standards while also establishing minimum capital requirements that are specific to the business of insurance. Referring to this as a framework, the Fed said the BBA would require holding companies significantly engaged in insurance activities to aggregate their state-based capital requirements into a consolidated requirement. The proposal would establish both minimum requirements and a buffer on top of the minimum.

Although the Fed specifically pointed out that the BBA is specific to the insurance industry, and is distinctive from bank capital requirements, the minimum standard under the BBA would be comparable to banks’ minimum total capital ratio, which is set at 8%, the Fed said, calling that “one of the key measures of banks’ health.”

“The Building Block Approach looks to the well-known insurance capital standards from state regulators to establish minimum requirements,” Vice Chair for Supervision Randal K. Quarles stated in a release. “Banks and insurance companies can face materially different risks and this proposal takes that into account.”

According to the Fed – which supervises eight depository institution holding companies that are significantly engaged in a wide variety of insurance activities, and which range in size from $10 billion to more than $250 billion in total assets – the proposal stems from a 2016 “conceptual proposal” that described the BBA.

The Fed said it plans, as part of the proposal, to conduct a quantitative impact study of the BBA to better inform the framework.

The proposal was accompanied with a white paper that the Fed said explains the methodology it proposes to use to adjust for the differences between different state-based insurance capital requirements and bank capital requirements.

Federal Reserve Board invites public comment on proposal to establish capital requirements for certain insurance companies supervised by the Board

Comparing Capital Requirements in Different Regulatory Frameworks (PDF)