February 13, RE: Consultation Regarding Risk-based Global Insurance Capital Standards

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1 February 13, 2015 To Whom It May Concern International Association of Insurance Supervisors c/o Bank for International Settlements CH-4002 Basel Switzerland RE: Consultation Regarding Risk-based Global Insurance Capital Standards The U.S. Chamber of Commerce ( Chamber )established the Global Risk and Governance Initiative ( GRGI ) to promote modern and appropriate international structures for capital formation, risk management and corporate governance needed by businesses to fully function in a 21st century global economy, as well as its Center for Global Regulatory Cooperation which has had a particular focus on increasingly the interoperability of insurance regulation between the United States and the European Union. 1 The Chamber appreciates the opportunity to comment on the Consultation Document, Risk-based Global Insurance Capital Standards ( proposed ICS ), issued by the International Association of Insurance Supervisors ( IAIS ) on December 17, The Chamber has a number of concerns regarding the rushed process surrounding the development of an ICS. Further, the ICS has the potential to conflict with other Financial Stability Board ( FSB ) mandated projects increasing insurance regulatory capital levels without producing additional safety and soundness. The Chamber is concerned that the proposed ICS will adversely impact the traditional role of insurance as investors, ultimately harming capital formation. With a number of 1 The Chamber is the world s large business federation, represents the interest of more than three million businesses and organization of every size, sector, and region. Our members include insurance companies that operate only in the United States, as well as internationally active insurance groups ( IAIGs ) headquartered both in and outside of he U.S. Perhaps more importantly, we have non-financial companies that rely both on insurance products as well as the larger role insurance plays as an investor in globally interconnected economy. 1

2 regulatory initiatives having an impact on insurance and non-financial businesses already underway, we believe that the FSB, in conjunction with the IAIS, should undertake a cumulative impact analysis to understand the consequences of a diverse range of financial regulatory reforms before moving to complete work on an ICS. Discussion The Chamber supports the goal of ensuring global financial stability through the use of capital standards. However, we remain concerned over the timetable IAIS has established for the development of an ICS. The core mandate from the FSB to IAIS was to develop a capital standard for Global Systemically Important Insurers (G- SIIs). IAIS initially indicated that it would accomplish this through the development of a basic capital requirement ( BCR ) coupled with the adoption of a higher loss absorbency ( HLA ) standard. Having done a consultation on the BCR last year, the development of an HLA is required to address FSB s priority concern with regard to evaluating G-SIIs. However, IAIS has now shifted its focus to the development of an ICS with the intent that such a capital standard could somehow be used to evaluate Internationally Active Insurance Groups ( IAIGs ). IAIGs should not be a priority concern. These insurance companies have no direct connection with the financial crisis; as a result there should not be an artificially imposed timetable for contemplating the development of an ICS in the context of IAIGs. Back in August 2014 in comments to the IAIS as part of its BCR consultation, the Chamber indicated that it supports the development of insurance standards to build trust between regulators and help promote greater comparability and interoperability for regulators and companies across regulatory regimes. However, the Chamber also firmly stated the IAIS efforts should not lead to a prescriptive approach which results in complete harmonization of regulatory frameworks. Given that IAIS is not a regulator, but is instead made-up of national regulators which are accountable at the national level, it has no authority to draft binding regulation. IAIS has recognized this and has stated that any ICS needs to accommodate the role of national policy makers and insurance supervisors to apply discretion to make certain that the standards do not conflict or layer upon national regimes, create competitive market imbalances or negatively impact the provision of socially important insurance products and services. With IAIS now indicating that the ICS is intended to eventually replace the BCR, the core mandate from FSB to IAIS regarding G-SIIs is temporarily 2

3 accomplished by the development of a BCR and a HLA standard. The need to develop an ICS for IAIGs presents no pressing priority. An ICS for IAIGs will only be useful for comparability and interoperability between regulatory regimes if once it is developed it is actually widely used in some productive manner. Therefore, it is important that IAIS take its time, continue to consult with stakeholders, but most importantly develop a better understanding of how any ICS for IAIGs will ultimately be used, if at all, in jurisdictions around the world. The IAIS should not seek to complete work on the development of an ICS, without a clearer picture of the ultimate role an ICS will play for IAIGs once the standard is drafted. As insurers are significant providers of capital to the global financial system, the Chamber is concerned that an ICS for IAIGs may dislocate the balance necessary to promote and ensure capital formation by non-financial businesses, thereby harming economic growth and job creation. In particular, the Chamber believes that the IAIS should more closely examine the compounding effect and interactions that various global and domestic financial regulatory initiatives underway will have upon capital formation needs before considering the ICS as a tool for IAIGs. While we recognize and support regulations that bring stability to the financial system, that system must continue to serve its unique mission of facilitating the investment needed to grow our economy and create jobs. It is not clear to the Chamber, given all the other initiatives, that an ICS for IAIGs would do anything to enhance financial stability and may in fact do the opposite by hindering the capital formation process. The individual impacts of the proposed ICS and the cumulative impact of other regulatory reform initiatives upon the financial system and global economy should be studied to understand the aggregate impact and consequences of the changes before any proposals are finalized and implemented. Doing so will provide regulators with a better sense of the impacts that the proposed ICS will have upon Main Street businesses and whether a course change is needed to avoid adverse unintended consequences. Main Street businesses use a diverse and complex system to meet their cash needs and provide resources for long-term growth. These needs are met through the debt markets, equity markets, short-term financing and liquidity providers such as investment banks, commercial banks, insurance companies, private equity firms and many others. This system works if markets are open, appropriately regulated to ensure an even playing field, and if markets provide useful information to allow participants to make decisions on how to best deploy and acquire capital. The 3

4 insurance sector has played a crucial role in that space, and we would caution the IAIS not to adopt principles and standards that may distort capital flows. Businesses use the corporate bond markets to raise capital. While not as liquid as equity markets, the bond markets provide a stable form of financing, benefiting businesses and investors alike. As insurers are significant investors in the bond markets, the implementation of capital standards on a broad basis that includes both G-SIIs and IAIGs, could reduce the capital available for investment if an ICS is put in place. Given that the proposed ICS is the latest in a series of financial regulatory initiatives that could ultimately impair the flow of capital available to businesses, a comprehensive review by IAIS should be undertaken to understand the cumulative impact on non-financial businesses and the capital markets of the implementation of the ICS along with a number of other regulatory initiatives that are being imposed on other financial institutions including, the Leverage Ratio and Liquidity Coverage Ratio rules, capital surcharges for G-SIFIs that will force large internationally active banks to withdraw additional capital from productive capital formation streams, the Volcker rule and the proposed Vickers and Liikanen Rules that are expected to impact the ability of non-financial businesses to enter the debt and equity markets by raising costs and creating barriers of entry to the capital markets, and money market fund reforms that harm the ability of non-financial businesses to access the short-term commercial paper markets and manage cash. The combination of all of these initiatives could lead to an underperforming financial sector, create barriers to capital formation and have unintended ramifications throughout the rest of the economy. The inability of businesses to be able to engage in normal capital formation activities, efficient cash management and effective risk management will raise costs and create inefficiencies adversely impacting economic growth. Therefore, we believe it is important for the FSB in conjunction with the IAIS to undertake a comprehensive impact analysis to better understand how all of these initiatives will interact and work together and ultimately impact the insurance sector as well as the capital markets. While we share the intent of achieving rationale financial stability, we also believe that it is incumbent on the IAIS and FSB to understand the potential consequences that may undermine this goal. 4

5 Conclusion In conclusion, the Chamber continues to be concerned that the IAIS desire to develop an ICS is being done as a rushed exercise. IAIS should be focused on the core of the FSB mandate to address G-SIIs and beyond that should take time to more deeply appreciate how an ICS will be used for IAIGs, while also seeking to understand the compounding effect multiple capital market initiatives have on the unique and valuable role insurance plays in protecting policyholders and being a source of financial capital. Thank you again for the opportunity to comment upon the proposed ICS and we are happy to discuss these issues and concerns in greater detail at your convenience. 5