The Federal Reserve Board on Friday invited public comment on a proposal to establish capital requirements for certain insurance companies supervised by the Board. The proposal builds on existing state-based insurance standards, while also establishing minimum capital requirements that are specific to the business of insurance.
Under the proposed framework, known as the Building Block Approach (BBA), holding companies significantly engaged in insurance activities would be required to aggregate their state-based capital requirements into a consolidated requirement. The proposal would establish both minimum requirements and a buffer on top of the minimum.
The BBA accounts for risks that are specific to the business of insurance and is different from the calculations used for bank capital requirements. However, the minimum standard under the BBA would be comparable to one of the key measures of banks’ health, the minimum total capital ratio, which is set at 8 percent for banks.
“The Building Block Approach looks to the well-known insurance capital standards from state regulators to establish minimum requirements,” Vice Chair for Supervision Randal K. Quarles said. “Banks and insurance companies can face materially different risks and this proposal takes that into account.”
The proposal builds on comments received on a conceptual proposal from June 2016 that described the BBA. The Board supervises depository institution holding companies, including those significantly engaged in insurance actaivities, and the Board currently oversees eight firms. Their insurance activities include life, title, and property and casualty, and the firms range in size from less than $10 billion in total assets to more than $250 billion.
As part of the proposal, the Board will conduct a quantitative impact study of the BBA to better inform the framework. The Board also published a white paper that explains the methodology the Board proposes to use to adjust for the differences between different state-based insurance capital requirements and bank capital requirements.