Last Updated 10/19/2020
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 the Solvency Modernization Initiative (SMI) that continue to serve well today. 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 macroprudential measures are reflective of 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 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 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:
- 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.
- 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.
Status: The Financial Stability Task Force is continuing to make progress and develop solutions in the MPI focus areas.
- Liquidity Risk has been the primary focus of the MPI initiative. 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). 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, a draft of which was exposed for comment at the 2019 Fall National Meeting. Development of the comprehensive framework was put on hold due to COVID-19 and in its place quarterly liquidity data calls were conducted for the 1Q and 2Q of 2020. The data calls will help inform the development of the comprehensive framework which will resume in the 4thQ 2020.
- Capital Stress Testing: The 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 once it is finalized.
- Recovery & Resolution: The Task Force is working with the NAIC Receivership & Insolvency Task Force on 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.
Committees Active on This Topic
Macroprudential Initiative Collection
NAIC Research Library
Global Insurance Market Report
March 2020, IAIS
What Are Macroprudential Tools?
February 2020, Brookings Institute
Holistic Framework for Systemic Risk
November 2019, IAIS
A Quick Guide to Macroprudential Policies
May 2017, European Central Bank
Monitoring Interest Rate Risk, Lower Interest Rate Study Update
April 2016, Presentation to NAIC Financial Stability (EX) Task Force
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Sr. Financial Markets Advisor, Macroprudential Surveillance
Director, Financial Regulatory Policy & Data
Assistant Director, Financial Policy and Legislation