Last updated 10/25/2023
Issue: Macroprudential policies provide regulatory governance of the overall financial system. The financial crisis of 2007-2009 demonstrated that substantial consequences can arise for access to credit and financial services from insufficient capital, liquidity, and transparency in the financial sector. As a result of the financial crisis, regulators have increased their focus on the overall financial system. The primary aim of macroprudential policy is to ensure that financial disruptions such as those during the 2007-2009 crisis do not reoccur; that is, to preserve financial stability.
Macroprudential risk assessment is the analysis of systemic risks within the financial sector. Systemic risk is the risk of disruptions to financial services caused by impairments of all or parts of the financial system. Further, these impairments must have the potential to induce serious consequences for economic activity to be considered systemic. Macroprudential risk is distinct from microprudential risk, which is focused on financial risk faced by individual institutions and holding companies/groups.
In addition to examining aggregate financial risks in specific financial sectors, macroprudential risk assessments consider the interconnectedness of financial sectors. For example, a macroprudential assessment of the insurance industry would consider its connections with other financial industries, such as commercial banking.
Macroprudential efforts within the NAIC reflect state insurance regulators' commitment to protect policyholders by ensuring financial strength in the companies they regulate. Macroprudential measures also serve as a stabilizing force that contributes to financial stability in the insurance industry when financial markets are stressed.
Since the 2007-09 financial crisis, NAIC initiatives around macroprudential supervision have evolved substantially. The initial effort—the Solvency Modernization Initiative—transitioned into the largely finalized Macroprudential Initiative, which has established a number of mechanisms for ongoing monitoring of financial stability within the insurance sector. More recently, the NAIC has produced an inaugural Macroprudential Risk Assessment of the U.S. Insurance Industry, which will be further developed and refined over time. Additional efforts are being undertaken to better understand the role of private equity in the insurance industry: both as an owner of insurers and an investment vehicle for insurers.
Solvency Modernization Initiative (SMI)
Soon after 2007-2009 financial crisis, the NAIC implemented several reforms as part of a Solvency Modernization Initiative (SMI). The SMI, which commenced in June 2008, was a “critical self-examination of the United States’ insurance solvency regulation framework” and included a review of international efforts in insurance supervision, banking supervision, and international accounting standards. The SMI considered the use of similar actions in U.S. insurance regulation.
The SMI focused on capital requirements, governance and risk management, group supervision, statutory accounting and reporting, and reinsurance. An important consequence of the SMI was the introduction of the Own Risk and Solvency Assessment (ORSA), which requires insurance companies to issue their own assessment of their current and future risk through an internal risk self-assessment process. An ORSA allows regulators to form an enhanced view of an insurer's ability to withstand financial stress
Macroprudential Initiative (MPI)
The NAIC's Macroprudential Initiative (MPI) was a logical continuation of the SMI project intended to bolster the confidence of insurance consumers and investors and enhance the credibility of the state system of insurance regulation.
The NAIC's MPI commenced in April 2017 when new charges were assigned to the Financial Stability Task Force by the NAIC Executive Committee. The goal of MPI was to consider some new or improved tools to:
- better monitor and respond to the impact of external financial and economic risks on the insurance industry;
- better monitor and respond to risks emanating from or amplified by the insurance industry that (1) might be transmitted externally and (2) which may result in significant market impacts or financial, reputational, litigation or regulatory risks for the insurance industry; and
- increase public awareness of NAIC and state monitoring capabilities to assess macroprudential risks within the U.S. insurance industry and the implications of those risks of these trends.
The Financial Stability Task Force's MPI efforts were designed to identify potential enhancements in four key areas, including  liquidity risk,  capital stress testing,  recovery and resolution, and  counterparty exposure and concentration.
 Liquidity Risk. Liquidity risk is the risk of a need for large scale liquidation of assets due to demand for cash. Many life insurers, for example, have significant demands on cash arising from annuities and life insurance policy cash outs.
Liquidity Risk has been a primary focus of the NAIC’s MPI. The Liquidity Assessment Subgroup proposed many reporting changes which were adopted by the NAIC Plenary for inclusion in the 2019 data year statutory life annual statements (filed in 2020) (reporting template). These changes primarily increase the level of detail in product category reporting in the life annual statement, allowing regulators to better identify companies with material writings in product types that possess higher liquidity risk.
As was the intended goal, these efforts evolved into a formal Liquidity Stress Testing (LST) framework for large life insurers, which was finalized in 2021 (see also Final 2021 Liquidity Stress Testing Framework with Lead State Guidance). The NAIC, along with individual state Departments of Insurance, partook in liquidity stress testing of several large firms in 2021 and 2022. The LST is an ongoing regulatory requirement per revisions to the NAIC model Holding Company Act.
 Capital Stress Testing (CST). CST is a comprehensive examination of (large insurer) balance sheets to identify potential risks to capital adequacy. A CST incentivizes the insurer to critically evaluate its current capital position and the potential for its capital position to change under various contrived scenarios.
The Financial Stability Task Force is coordinating with the ongoing work of the NAIC Group Capital Calculation Working Group. The Task Force will overlay a capital stress testing framework on the Group Capital methodology. In May 2022, the Group Capital Calculation (E) Working Group adopted the 2022 GCC Instructions and Template which will be used by a number of states for year-end 2022 filings with the same states in the late Spring/early Summer of 2023.
- Evaluated current recovery and resolution laws, guidance, tools, to ensure they reflect best practices relevant for financial stability;
- Considered what information in recovery and resolution planning in other jurisdictions or groups may be systemically important and could be most valuable for state insurance regulators to consider requiring of large cross-border U.S. groups; and
- Evaluated whether there are any current misalignments between federal and state laws that could be an obstacle to achieving effective and orderly recovery and resolutions for U.S. insurance groups.
 Counterparty Exposure/Concentration. The Financial Stability Task Force exposed and finalized a list of current disclosures, public and confidential, to begin this work. Currently in progress, the Task Force aims to identify any gaps and propose ways to address those gaps.
Beyond the MPI: Macroprudential Risk Assessment
The NAIC currently is developing and implementing a macroprudential risk assessment for 2021. Staff from the Capital Markets Bureau, Financial Regulatory Services, and the Center for Insurance Policy & Research are working with regulators on this effort. Both internal and public-facing reports that document the process and expose the assessment are in progress. The inaugural risk assessment is due to be released near end-of-year 2022. Efforts will then begin to produce a 2022 macroprudential risk assessment with enhanced and improved features. The reports will be produced annually. The reports include a risk dashboard that provides an overall assessment in each category (such a macroeconomic environment, underwriting, liquidity, and capital adequacy) as well as a deeper dive into each category, which includes relevant data and charts.
Beyond the MPI: Private Equity
Private equity has been a much-increased presence in the U.S. insurance industry in recent years. The Financial Stability Task Force (FTSF) and Macroprudential Working Group (MWG), along with other committees, task forces, and working groups of the NAIC, are seeking to better understand the role that private equity plays in the insurance industry, both as an owner of insurers and as an investment vehicle for insurers. NAIC work is expanding in this domain, and in June 2022, the FSTF and MWG adopted 13 regulatory considerations applicable (but not exclusively) to private-equity-owned insurers.
Financial Stability Board, 2009, Report to G20 Finance Ministers and Governors – Guidance to Assess the Systemic Importance of Financial Institutions, Markets, and Instruments: Initial Considerations, October. As quoted in Martin Eling and David Pankoke, 2014, “Systemic Risk and the Insurance Industry: Principal Linkages and Dependencies,” in Jan Monkiewicz and Marian Malecki (eds.), Macroprudential Supervision in Insurance: Theoretical and Practical Aspects, Palgrave Macmillan, New York.
NAIC, Issues for Consideration in the Solvency Modernization Initiative, June 14, 2009; NAIC, Solvency Modernization Initiative: An NAIC Issues Brief, September 3, 2009; The international standards included the Basel II International Capital Framework for banks and its implementation in the U.S.; solvency work by the International Association of Insurance Supervisors (IAIS); solvency proposals in place or under development in other jurisdictions, including Australia, Canada, Switzerland, and the EU; and accounting standards being developed by the International Accounting Standards Board (IASB).
NAIC, Solvency Modernization Initiative: Update as of January 2011, January 31, 2011
NAIC Financial Stability (EX) Task Force, Macro Prudential Initiative (MPI): A Proposed Framework, April 6, 2017.
Committees Related to This Topic
Insurance Business Diversification and Systemic Risk, Journal of Insurance Regulation, 2022
Macroprudential Initiative Collection, NAIC Research Library
Reviewing Systemic Risk within the Insurance Industry, Society of Actuaries, 2017.
Discussion Paper on Systemic Risk and Macroprudential Policy in Insurance, European Insurance and Occupational Pensions Authority (EIOPA), 2019
Global Insurance Market Report (GIMAR) (2021), International Association of Insurance Supervisors (IAIS), 2022
Macroprudential Provisions, Measures, and Instruments for Insurance, European Systemic Risk Board (ESRB), 2018
U.S. and EU focus on regulatory cooperation (Jan. 15, 2018)