Federal Reserve Board finalizes a rule establishing capital requirements for insurers supervised by the Board

Following a corresponding consultation launched in October 2019 (please see EventID 4264 in this context for detailed information), the Board of Governors of the Federal Reserve System (FED) has announced its final rule with respect to the capital requirements for Depository Institution Holding Companies (DIHCs) significantly engaged in insurance activities. These institutions are currently exempt from capital requirements which is why new rules were consulted on.
#### Background
On October 24, 2019, the FED published in the Federal Register a proposed new regulatory framework to determine the capital requirements of DIHCs where
– the top-tier DIHC is an insurance underwriting company or
– the top-tier DIHC, together with its subsidiaries, holds 25% or more of its total consolidated assets in insurance underwriting subsidiaries (other than assets associated with insurance underwriting for credit risk related to bank lending).
The Board thereby proposed to apply a building block approach (BBA) to group together companies under a DIHC that are subject to the same capital framework and requirements and aggregate the various building blocks‘ capital and capital requirements as expressed in the BBA ratio (aggregated available capital to the aggregated required capital) to come up with an overall DIHC capital position. This position or ratio would have to be at least 2.5 and – considering the capital conservation buffer as well (2.35 or 235%) – the ratio would have to be 4.85. Furthermore, firms would have to annually report on their BBA via new Form FR Q-1 by March 15 and certain items submitted under Form FR Q-1 would be publicly disclosed by the FED. Finally, the FED sought view on whether or not certain line items in FR Q-1 should be audited.
#### Final Rule and adjustments based on feedback from respondents
In view of the responses received to the consultation, the final rule will NOT deviate from the draft one as far as the process to determine the capital and the capital requirements of DIHCs is concerned. Specifically, DHICs will have to take the following steps in their assessment of their BBA ratio:
– DHICs must create a list of all the companies within the insurance depository institution holding company’s organization.
– DHICs must categorize these companies into smaller groups called „building blocks“ based upon their capital framework.
– DHICs must calculate the amount of money available as capital and the capital requirements for the parent company of each building block, known as the „building block parent“ in accordance with the relevant capital framework for that block.
– DHICs must make necessary adjustments to the available capital and capital requirements within each building block as specified by the BBA. These adjustments aim to ensure that the representation of loss-absorbing resources and risks is consistent across the entire organization.
– If required, firms need to convert the adjusted available capital and capital requirement figures from the specific capital framework used by each building block parent to a common capital framework to facilitate comparison.
– DHICs must aggregate the translated (if so) and adjusted available capital and capital requirement figures for each building block parent, making deductions where appropriate to avoid double counting.
– DHICs must determine whether the combined ratio meets the minimum requirement set out by the FED, including the capital conservation buffer.
As far as the filing deadline is concerned, the FED has implemented a 14 day delay to the proposed filing deadline to stipulate that Form Q-1 will have to be submitted by March 31 of each year.
Furthermore, the FED has reduced the capital conservation buffer from 2.5 or 235% to 1.5 or 150%, requiring firms to have a BBA ratio of 4.0 rather than 4.85.
Also, the FED has limited the reporting requirement under Form FR Q-1 which will only require DHICs to report the assets and liabilities of companies included in the DHICs „whose parents represent more than 1% of the group’s assets“. Finally, the FED will refrain from publishing details of a firms assets and liabilities, but will disclose the overall BBA for individual DHICs.