State regulators also require insurance  companies to maintain specific levels of capital. However, a few  stakeholders stated that it is unclear who the group-wide regulator would  be for these insurers. Insurers in the United States are not required to move  capital among regulated insurance entities, and some stakeholders noted  that the extent to which the international capital standards would require  group-wide capital to be fungible among legal entities is uncertain. Furthermore, there is some uncertainty about the legal mechanisms that  would be used to implement the standards in the United States. In addition, requiring  insurers to hold more capital could be costly for all affected insurers but  could also disproportionately affect some types of insurers. Views Differ on the Need for the International Group- Level Standards

		Stakeholders Disagreed on the Systemic Risk Posed by Insurance Activities

In its support for the development of an international capital standard for  insurers, the Financial Stability Board has cited supporting financial  stability as a reason the standards are needed. However some stakeholders said that  nontraditional, noninsurance activities could increase a company’s  interconnections. Many experts and industry  representatives we spoke with said that insurers do not pose systemic  risk based on size alone, but some have said that size is an important  factor. But they  have not yet taken steps to help ensure that leadership will be sustained  over the long term, consistent with leading practices that we have  previously identified. Primarily,  U.S. IAIS members and industry stakeholders mentioned:  this is the first time that the federal agencies and state regulators had  worked together on international insurance matters in IAIS, and the  United States has never before had a supervisory standard for group  capital for insurers;
U.S. activity surrounding the capital standards was still in its early  stages and had increased only recently;
U.S. IAIS members are not statutorily required to collaborate with  each other, and are sorting through ideological challenges related to  the integration of federal authorities in U.S. insurance regulation; and  the responsibility for the implementation and enforcement of the  proposed standards would be split among many regulators. However, some stakeholders said that the effectiveness of the  collaborative effort remained unproven because it had yet to achieve its  long-term goal of establishing a more unified U.S. view on the ICS, and  that it was unclear whether the U.S. IAIS members would be able to  agree on related issues, such as insurance group capital standards. Although U.S. IAIS members have different  authorities and are not required to collaborate in IAIS, they have said that  establishing a more unified U.S. view on the ICS is important because  doing so would allow the U.S. IAIS members to better contribute to IAIS  discussions on capital standards. Additional steps taken now to enhance and sustain  collaboration, while the development of international capital standards is  in the relatively early stages, could help U.S. IAIS members better  advocate for standards that reflect the interests of U.S. insurance  regulators, industry, and consumers over the long term. Recommendation

To enhance and sustain future U.S. participation in the development of  international capital standards for insurers, the Secretary of the Treasury  should direct the Director of FIO, in consultation with the Federal Reserve  and NAIC, to enhance future collaborative interagency efforts by following  additional leading practices for collaboration, such as taking steps to  sustain leadership over the long term and publicly reporting on their  efforts, for example in annual reports. In concurring with our recommendation that FIO enhance future  collaborative efforts by following additional leading practices, FIO said  that the agency would build on its existing collaboration process by  following leading collaboration practices discussed in the report. Appendix I: Objectives, Scope, and Methodology

To examine the development and potential effects of these international  capital standards for U.S. insurers, we reviewed (1) the status of the  development and implementation of the international standards; (2) what  is known about the potential effects of applying international capital  standards to U.S. insurers; (3) industry and other stakeholder views on  the need for an international group-level capital standard for insurance  companies; and (4) the extent to which U.S. regulators are collaborating  with each other, and considering the views of industry and other  stakeholders, in developing a U.S. position on international capital  standards. Specifically, we interviewed federal  agencies—the Federal Insurance Office, the Board of Governors of the  Federal Reserve System, and the Financial Stability Oversight Council  (FSOC)—as well as the National Association of Insurance  Commissioners (NAIC) and several former and current state insurance  regulators that will likely supervise internationally active insurance groups  (IAIG).
Why GAO Did This Study

Large, internationally active insurance companies accounted for 28 percent of the aggregate insurance premiums underwritten in the United States in 2014. IAIS is developing international group-level capital standards for these insurers. Although these standards are not yet complete and U.S. regulators have not yet determined how they might be implemented, some regulators and insurers have expressed concerns. GAO was asked to review the potential effects of the standards, the need for them, and U.S. involvement in their development.
This report examines (1) the status of the development and implementation of the international standards; (2) what is known about their potential effects; (3) views on the need for the standards; and (4) the extent to which U.S. regulators are collaborating in developing a U.S. position on the standards. To address these questions, GAO reviewed IAIS and U.S. agency documentation and relevant literature; assessed the extent of collaboration compared to leading practices; and interviewed regulators, IAIS officials, insurers, academics, and other stakeholders that would be affected by or have commented on the standards.

What GAO Found

International capital standards establishing the amounts of capital that large, internationally active insurers could be required to maintain are in the early stages of development, and much about them remains uncertain. For example, the International Association of Insurance Supervisors (IAIS) has not finalized the methodologies that will be used to determine the required capital levels. Further, implementing the standards at the group level in the United States could be challenging since states, the primary regulators, focus on individual insurance entities rather than on group-level entities or holding companies. At this time, it is unclear which U.S. regulator would implement and enforce the standards or how they would compare with current U.S. capital standards.
With so many unknowns, some stakeholders agreed that it was too early to determine the effects of the proposed standards. However, some stakeholders said that any effects could be minimal, since U.S. insurers generally hold high levels of capital. Other stakeholders said that potential positive effects could include the promotion of comparable standards across jurisdictions and the removal of incentives for companies to select locations based on regulatory differences. Some stakeholders also mentioned potential negative effects, including higher costs for insurers required to hold additional capital that could create incentives to stop offering some products or to raise prices.
Stakeholders expressed mixed views on the need for international capital standards to address systemic risk. Many stakeholders said that traditional insurance activities were not likely to pose systemic risk, which has been described as a key reason for pursuing the standards. But other stakeholders said that nontraditional noninsurance activities, such as credit default swaps and guaranteed investment contracts, could increase insurers' interconnectedness with other financial market participants and cause systemic effects should an insurer fail. These types of activities contributed to financial problems for the American International Group, Inc. during the 2007-2009 financial crisis. IAIS officials and others said that international capital standards could help address risks from these activities. But some state regulators and industry representatives noted that current U.S. risk-based capital standards and other regulatory tools adequately protected U.S. policyholders and that regulators were coordinating to address potential group-wide risks.
The U.S. members of IAIS—including the Federal Insurance Office (FIO), the Federal Reserve, and the National Association of Insurance Commissioners (NAIC)— have improved coordination among themselves as a group but could do more to incorporate leading practices for collaboration. GAO found that the collaborative efforts members had made were consistent with some leading practices, such as establishing shared goals. But U.S. IAIS members have not followed other leading practices, such as ensuring that leadership will be sustained in the long term and publicly reporting on their collaborative efforts. The members said that their efforts were still in the early stages. Adopting these practices would allow U.S. IAIS members to better advocate for standards that reflect the interests of U.S. insurance regulators, industry, and consumers.

What GAO Recommends

To enhance and sustain U.S. involvement in the development process, FIO, in consultation with the Federal Reserve and NAIC, should take steps to sustain leadership over the long term and publicly report on their collaborative efforts.FIO concurred with the recommendation, stating that it would build on existing collaboration efforts.