Regulatory capital requirements for insurance holding companies

The Federal Reserve proposed a new capital framework for holding companies engaged in insurance activities.

Key points

  • The FRB has proposed an aggregation approach for calculating the enterprise-wide capital requirements of depository institution holding companies that are significantly engaged in insurance activities. The approach relies on existing legal entity capital requirements.
  • The proposed rule includes a minimum risk-based capital requirement, a capital buffer, limitations on capital distributions and discretionary bonus payments for insufficient capital holdings, and a separate minimum capital requirement under the federal banking capital rules.
  • The BBA capital requirements are expressed in terms of the NAIC risk-based capital frameworks and the approach is intended to be generally consistent with those frameworks already in place.
  • The proposed approach is different from the ICS being evaluated and tested by the IAIS as a global insurance standard; the FRB considers the two approaches to be outcome equivalent.

The Federal Reserve Board (FRB) proposed a risk-based capital framework, termed the Building Block Approach (BBA), which would apply to depository institution holding companies that are significantly engaged in insurance activities (Insurance HCs). Under the BBA, Insurance HCs would aggregate existing legal entity capital requirements, such as those prescribed by state insurance regulators and the federal banking agencies, to calculate a consolidated enterprise-wide capital requirement. The proposed framework would impose a minimum risk-based capital requirement and also a capital buffer, which would limit an Insurance HC’s capital distributions and discretionary bonus payments if it does not hold sufficient capital relative to enterprise-wide risk, including risk from insurance activities.

Note: As drafted, the proposed rule applies to depository institution holding companies though presently the FRB’s portfolio of Insurance HCs is comprised of only savings and loan holding companies (SLHCs). The FRB states the proposed BBA framework is designed to be appropriate for bank HCs that are significantly engaged in insurance activities though it is not proposing to apply the rule to bank HCs.

Key features of the proposed rule follow.

Enterprise-wide capital requirement calculated using the BBA framework 


  • Insurance HCs, and all owned or controlled subsidiaries of those Insurance HCs, would be subject to the BBA if:
    1. The top tier HC is an insurance underwriting company
    2. The top tier HC, with its subsidiaries, holds 25 percent 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)
    3. The firm is otherwise subject to the BBA as determined by the FRB.


  • The BBA is an aggregation-based approach designed to capture risk, including all material risks, at the level of the entire enterprise or group. The BBA constructs “building blocks” – or groupings of entities in the supervised firm – that are regulated by the same capital framework. Capital requirements would be calculated for each building block using the applicable capital framework.
    • In general, insurance operations would be subject to the regulatory capital framework promulgated by the National Association of Insurance Commissioners (NAIC); a property and casualty (P&C) insurer would be subject to the NAIC P&C capital framework and a life insurer would be subject to the NAIC life insurance capital framework.
    • Material insurance companies that lack a U.S. regulatory capital framework, such as some captive insurance companies, would be subject to the NAIC risk-based capital framework, as appropriate (i.e., P&C or life following restatement of their financial information in accordance with SAP). Material non-insurance companies would generally be subject to the federal banking capital rules. (Materiality criteria are outlined in the proposed rule.)
    • Insured depository institutions would be subject to the capital framework of their primary federal banking regulator (FRB, OCC, and FDIC).
    • Insurance HCs predominantly engaged in title insurance would be subject to the FRB’s banking capital rule (note: FRB states there is one such entity).


  • Following adjustments, as outlined in the rule, the available capital and capital requirements for each building block would be combined using a bottom-up approach to arrive at the enterprise-level available capital and capital requirement. In some cases, “scaling” will be required to translate a company’s capital position under one capital framework to its equivalent capital position in another framework. The FRB scaling approach is outlined in a whitepaper released concurrently with the proposed rule.
  • The FRB has also proposed an approach to incorporate the capital requirements where the building block is an overseas entity. This takes into account the regulatory intervention level of local regulators and removes the requirements to calculate the capital requirements under multiple regimes.


  • The ratio of the building block available capital to the building block capital requirements is the calculated BBA Ratio.
  • A minimum BBA Ratio of 250 percent would be required. (The 250 percent was determined by translating the minimum total capital requirement of eight percent of risk-weighted assets under the FRB’s banking capital rule to its equivalent under the NAIC risk-based capital framework.)
  • In addition, Insurance HCs would be required to hold a capital conservation buffer (separate from the capital conservation buffer in the FRB’s banking capital rule) in an amount greater than 235 percent (therefore, a total requirement of more than 485 percent) to avoid limitations on capital distributions and discretionary bonus payments to executive officers.

Reporting and disclosures

  • BBA Ratios would be reported annually on a new Form FR Q-1.

Separate enterprise-wide capital requirement calculated under Section 171 of Dodd-Frank

In addition to requirements under the BBA, the proposed rule would apply a separate minimum risk-based capital requirement to Insurance HCs pursuant to Section 171 of the Dodd-Frank Act. Section 171, as amended, permits HCs to exclude certain state and foreign regulated insurance operations and exempt top-tier insurance underwriting companies from the capital calculation (section 171 compliance calculation).

The proposed rule would amend the definition of “covered savings and loan holding company” under the FRB’s banking capital rule to include an Insurance HC that is an SLHC (not currently covered by the FRB’s banking capital rule). However:

  • A grandfathered unitary SLHC that derives 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis from activities that are not financial in nature would be excluded from the section 171 compliance calculation.
  • A top tier Insurance HC that is engaged in insurance underwriting and regulated by a state insurance regulator or certain foreign insurance regulators would not be required to comply with the requirements, though the first mid-tier HC would be required to meet the section 171 compliance calculation.
  • The minimum leverage capital requirement would not apply to Insurance HCs as part of the section 171 compliance calculation or the BBA framework.
  • Insurance HCs would not be subject to stress testing requirements.

Quantitative Impact Study

As part of the BBA rulemaking process, the FRB will also conduct a quantitative impact study. Data collected will be used to inform the FRB’s advocacy of positions with regard to international insurance standard setting that may be deemed comparable to the Insurance Capital Standard (ICS) being evaluated and tested by the International Association of Insurance Supervisors (IAIS). The FRB expects the study data will also inform assistance in NAIC’s development of the Group Capital Calculation (GCC).

KPMG perspective

The FRB acknowledges that it intends to advocate for international recognition of the BBA framework as an “outcome equivalent” approach to the ICS. The FRB has expressed concern that the market-adjusted valuation approach used in the ICS may not be optimal for the buy-and-hold long duration approach applied in the U.S. insurance market.

Although the proposed rule would apply only to Insurance HCs supervised by the FRB, which is a small subset of the insurance entities in the United States, the NAIC and Federal Insurance Office (FIO) also support the BBA and the aggregation approach. In testimony before Congress, the NAIC stated that it “will not be implementing the current ICS in the U.S.  States are moving forward with the Group Capital Calculation and the Fed is moving forward with the Building Block Approach, both of which are compatible with the Aggregation Method. We believe this is the best path forward for U.S. policyholders and market participants, while remaining consistent with the underlying purpose of the ICS.”

The IAIS is scheduled to adopt an updated, though not final, version of the ICS (ICS 2.0) in November 2019 followed by a five-year monitoring period between 2020 and 2024. During this time the ICS would be used for confidential reporting but not supervision; IAIS has agreed to continue to collect information and field test the aggregation method. At the end of the monitoring period IAIS expects to assess whether an aggregation method for group capital, such as the BBA, provides comparable outcomes to the ICS.

Equivalence would be of benefit to those entities with multinational operations that might otherwise be subject to the ICS. Notably, the risk-based capital regime on which the BBA is based, already has equivalency under Solvency II and this could possibly smooth the process to gaining outcome-equivalency with ICS.