Last Updated 3/06/2019
Issue: Macroprudential monitoring involves analyzing how the insurance sector is impacted by, reacts to, and contributes to financial, economic and other common risk exposures. Understanding these relationships is critical to maintaining strong and competitive insurance markets. Post financial crisis the NAIC implemented several reforms as part of our Solvency Modernization Initiative (SMI) that continue to serve us well today in achieving our regulatory responsibilities. In the ensuing years since the crisis, insurers have had to contend with sustained low interest rates, changing demographics and rapid advancements in communication and technology. They have responded by offering new products, adjusting investment strategies, making structural changes and expanding into new global markets. There are new market players, new distribution channels, and a complex web of interconnections between financial market players.
What has not changed since the financial crisis is the intense scrutiny on the insurance sector in terms of understanding how insurers react to financial stress, and how that reaction can impact, via various risk transmission channels, policyholders, other insurers and financial market participants, and the broader public.
The proposed new work on macroprudential measures is reflective of the state insurance regulators' commitment to ensure that the companies they regulate remain financially strong for purposes of policyholder protection. Macroprudential measures should also serve as a stabilizing force to contribute to financial stability, including in stressed financial markets. The NAIC's Macroprudential Initiative (MPI) is a logical continuation of the SMI project and should bolster the confidence of insurance consumers and investors, and further 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 is to consider some new or improved tools that we can use to:
- Better monitor and respond to the impact of external financial and economic risks on the firms we supervise;
- Better monitor and respond to risks emanating from or amplified by the firms we supervise that might be transmitted externally, and which may result in significant market impacts or financial, reputational, litigation or regulatory risks for the firm; and
- Increase public awareness of NAIC/state monitoring capabilities regarding macroprudential trends within the US insurance sector and their implications.
The Financial Stability Task Force's MPI efforts focus on identifying potential enhancements in four key areas, including:
- Capital Stress Testing: To assess the value of capital stress testing for macroprudential surveillance.
- Recovery & Resolution: To consider what aspects of, or type of information from, insurers' recovery and resolution planning processes would be useful to regulators and insurers prior to receivership proceedings.
- Counterparty Exposure/Concentration: To consider the need for additional tools and/or data for assessing counterparty concentrations, including at the group level. Consideration will be given to interconnections that arise from both on and off-balance sheet items.
- Liquidity Risk: To further develop the U.S. regulatory framework's program on liquidity risks, with a focus on life insurers due to the long-term cash buildup involved in many life insurance contracts and their potential for large scale liquidation of assets.
Status: The Financial Stability Task Force is continuing to make progress and develop solutions in the MPI focus areas.
- Capital Stress Testing: The Task Force will coordinate with the ongoing work of the NAIC Group Capital Calculation Working Group.
- Recovery & Resolution: The Task Force has asked the experts on the NAIC Receivership & Insolvency Task Force to identify potential enhancements in three areas:
- Evaluate current recovery and resolution laws, guidance, tools, to ensure they reflect best practices relevant for financial stability;
- Consider what information in recovery and resolution planning applicable in other jurisdictions or to groups that may be systemically important could be most valuable for state insurance regulators to consider requiring of large cross-border U.S. groups; and
- Evaluate 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. The Receivership & Insolvency Task Force continues to research and develop answers and recommendations to the Task Force's requests.
- Counterparty Exposure/Concentration: The Task Force exposed and finalized a list of current disclosures, public and confidential, to begin this work. Now, the Task Force aims to identify any gaps and propose ways to address those gaps.
- Liquidity Risk: A Liquidity Assessment Subgroup was created in mid-year 2017 to address the more extensive work involved with this item.
The Task Force sponsored many reporting changes proposed by the Subgroup. These reporting changes were adopted by the NAIC Plenary for inclusion in the 2019 data year statutory life annual statements (filed in 2020). These changes primarily increase the level of detail in product category reporting in the life annual statement, allowing regulators to more readily identify companies with material writings in product types that may possess higher liquidity risk.
The Subgroup is currently working to construct a liquidity risk stress testing framework for large life insurers. The results of this work will benefit solvency regulators overseeing these companies. However, the work is primarily meant to inform the Task Force regarding what material impact, if any, the life insurance industry would have on the broader financial markets in the event of certain stresses. The scope criteria to identify which life insurers should be subject to the liquidity stress test was adopted. Additionally, this criterion will be reviewed and modified as needed on an ongoing basis. The work is now focused on the construction of the liquidity stress test, using a cash flows approach, and the associated regulatory stress scenarios.
Committees Active on This Topic
Monitoring Interest Rate Risk, Lower Interest Rate Study Update
April 2016, Presentation to NAIC Financial Stability (EX) Task Force
IAIS Releases 2015 Global Insurance Market Report
March 2016, CIPR Newsletter
Macroprudential Surveillance in the Insurance Sector, A Challenge Brought to the Fore by the Financial Crisis
December 2012, IAIS Newsletter
The Emerging Role of Macroprudential Surveillance in Insurance Supervision
October 2011, CIPR Newsletter
Systemic Risk and the U.S. Insurance Sector
February 2010, Mary A. Weiss, Ph.D., CIPR Distinguished Scholar
The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation
September 2009, Scott E. Harrington, Ph.D. (Posted with permission from the National Association of Mutual Insurance Companies)
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International Insurance Technical Policy Advisor
Director, Financial Regulatory Policy & Data
Assistant Director, Financial Policy and Legislation