The Federal Reserve Board has given U.S. annuity issuers a boost by deciding to draw its insurance capital standards from U.S. regulators, rather than applying standards from overseas.
The board agreed last week to apply U.S.-style capital standards to federally insured banks that are "significantly engaged in insurance activities." The board has posted a draft of the final rule on its website.
The Fed adopted the "Building Block Approach," which is a strategy for using rules based on the current U.S. risk-based capital ratio system to determine how prepared an insurer is to meet its obligations. The Building Block Approach won out over the International Association of Insurance Supervisors' Insurance Capital Standard approach.
The board's decision will have a direct effect on only four "supervised insurance organizations," but it could end up having a direct or indirect influence on broader insurance capital standards rules.
What it means: By going with the Building Block Approach, the Fed addressed concerns around annuities.
The American Council of Life Insurers told the Fed in 2021 that the IAIS approach, which involves regular market-value adjustments of an insurer's assets and benefits liabilities, is "inherently punitive to long-term savings-oriented products with financial guarantees."
If U.S. regulators adopted the IAIS' Insurance Capital Standard, "the industry would be forced to shift to shorter-term products and investments, and we believe the overall insurance market would shrink," the ACLI warned.
The Fed and insurance: The Fed has been working on the new final rule since 2016.
It noted that it now supervises just four bank insurance organizations. The only life and annuity issuer that will be directly affected is Ameriprise.
