Enhanced Prudential Standards for Systemically Important Insurance Companies, 38610-38631 [2016-14005]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 81, Number 114 (Tuesday, June 14, 2016)]
[Proposed Rules]
[Pages 38610-38631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14005]


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FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Docket No. R-1540; Regulation YY]
RIN 7100 AE 54


Enhanced Prudential Standards for Systemically Important 
Insurance Companies

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Request for public comment on the application of enhanced 
prudential standards to certain nonbank financial companies.

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SUMMARY: Pursuant to section 165 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, the Board of Governors of the Federal 
Reserve System is inviting public comment on the proposed application 
of enhanced prudential standards to certain nonbank financial companies 
that the Financial Stability Oversight Council has determined should be 
supervised by the Board. The Board is proposing corporate governance, 
risk-management, and liquidity risk-management standards that are 
tailored to the business models, capital structures, risk profiles, and 
systemic footprints of the nonbank financial companies with significant 
insurance activities.

DATES: Comments must be submitted by August 17, 2016.

ADDRESSES: You may submit comments, identified by Docket No. R-1540, 
RIN 7100 AE 54, by any of the following methods:
    Agency Web site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    Federal eRulemaking Portal: https://www.regulations.gov. Follow the 
instructions for submitting comments.
    Email: regs.comments@federalreserve.gov. Include docket R-1540, RIN 
7100 AE 54 in the subject line of the message.
    FAX: (202) 452-3819 or (202) 452-3102.
    Mail: Robert deV. Frierson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site are 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 3515, 1801 K Street NW., (between 18th and 19th 
Streets), Washington, DC 20551 between 9:00 a.m. and 5:00 p.m. on 
weekdays.

FOR FURTHER INFORMATION CONTACT: Thomas Sullivan, Associate Director, 
(202) 475-7656, Linda Duzick, Manager, (202) 728-5881, Noah Cuttler, 
Senior Financial Analyst, (202) 912-4678, or Matt Walker, Senior 
Analyst & Insurance Team Project Manager, (202) 872-4971, Division of 
Banking Supervision and Regulation; or Laurie Schaffer, Associate 
General Counsel, (202) 452-2272, Tate Wilson, Counsel, (202) 452-3696, 
or Steve Bowne, Senior Attorney, (202) 452-3900, Legal Division.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    Section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) directs the Board of Governors of the 
Federal Reserve System (Board) to establish enhanced prudential 
standards for nonbank financial companies that the Financial Stability 
Oversight Council (Council) has determined should be supervised by the 
Board and bank holding companies with total consolidated assets equal 
to or greater than $50 billion in order to prevent or mitigate risks to 
U.S. financial stability that could arise from the material financial 
distress or failure, or ongoing activities, of these companies.\1\ The 
enhanced prudential standards must include risk-based capital 
requirements and leverage limits, liquidity requirements, certain risk-
management requirements, resolution-planning requirements, single-
counterparty credit limits, and stress-test requirements. Section 165 
also permits the Board to establish

[[Page 38611]]

additional enhanced prudential standards, including a contingent 
capital requirement, an enhanced public disclosure requirement, a 
short-term debt limit, and any other prudential standards that the 
Board determines are appropriate.
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    \1\ 12 U.S.C. 5365.
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    In prescribing enhanced prudential standards, section 165(a)(2) of 
the Dodd-Frank Act permits the Board to tailor the enhanced prudential 
standards among companies on an individual basis, taking into 
consideration their ``capital structure, riskiness, complexity, 
financial activities (including the financial activities of their 
subsidiaries), size, and any other risk-related factors that the Board 
. . . deems appropriate.'' \2\ In addition, under section 165(b)(3) of 
the Dodd-Frank Act, the Board is required to take into account 
differences among bank holding companies covered by section 165 of the 
Dodd-Frank Act and nonbank financial companies supervised by the Board, 
based on statutory considerations.\3\
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    \2\ 12 U.S.C. 5365(a)(2).
    \3\ See 12 U.S.C. 5365(b)(3).
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    The factors the Board must consider include: (1) The factors 
described in sections 113(a) and (b) of the Dodd-Frank Act (12 U.S.C. 
5313(a) and (b)); (2) whether the companies own an insured depository 
institution; (3) nonfinancial activities and affiliations of the 
companies; and (4) any other risk-related factors that the Board 
determines appropriate.\4\ The Board must, as appropriate, adapt the 
required standards in light of any predominant line of business of 
nonbank financial companies, including activities for which particular 
standards may not be appropriate.\5\ Section 165(b)(3) of the Dodd-
Frank Act also requires the Board, to the extent possible, to ensure 
that small changes in the factors listed in sections 113(a) and 113(b) 
of the Dodd-Frank Act would not result in sharp, discontinuous changes 
in the enhanced prudential standards established by the Board under 
section 165(b)(1) of the Dodd-Frank Act.\6\ The statute also directs 
the Board to take into account any recommendations made by the Council 
pursuant to its authority under section 115 of the Dodd-Frank Act.\7\
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    \4\ 12 U.S.C. 5365(b)(3)(A).
    \5\ 12 U.S.C. 5365(b)(3)(D).
    \6\ 12 U.S.C. 5365(b)(3)(B).
    \7\ 12 U.S.C. 5365(b)(3)(C).
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    For bank holding companies with total consolidated assets equal to 
or greater than $50 billion and certain foreign banking organizations, 
the Board has issued an integrated set of enhanced prudential standards 
through a series of rulemakings, including the Board's capital plan 
rule,\8\ stress-testing rules,\9\ resolution plan rule,\10\ and the 
Board's enhanced prudential standards rule under Regulation YY.\11\ As 
part of the integrated enhanced prudential standards applicable to the 
largest, most complex bank holding companies, the Board also adopted 
enhanced liquidity requirements through the liquidity coverage ratio 
rule and adopted enhanced leverage capital requirements through a 
supplementary leverage ratio. Further, the Board issued risk-based 
capital charges and an enhanced supplementary leverage ratio for the 
most systemic bank holding companies.\12\ In addition, through a final 
order the Board established enhanced prudential standards for General 
Electric Capital Corporation, a nonbank financial company designated by 
the Council for supervision by the Board.\13\ In the preamble 
accompanying the final enhanced prudential standards regulation for 
bank holding companies, the Board stated its intent to assess 
thoroughly the business model, capital structure, and risk profile of 
each company in considering the application of enhanced prudential 
standards to nonbank financial companies designated by the Council, 
consistent with the Dodd-Frank Act.\14\
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    \8\ 12 CFR 225.8.
    \9\ See 12 CFR part 252.
    \10\ 12 CFR part 243.
    \11\ See 79 FR 17420 (March 27, 2014).
    \12\ 12 CFR 217.11(c).
    \13\ 80 FR 142 (July 24, 2015).
    \14\ See 79 FR 17240, 17245 (March 27, 2014).
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    The Board invites public comment on the application of corporate 
governance and risk-management and liquidity risk-management standards 
to certain insurance-focused nonbank financial companies that the 
Council determined should be subject to Board supervision.\15\ 
Specifically, the enhanced prudential standards would apply to any 
nonbank financial company that meets two requirements: (1) The Council 
has determined pursuant to section 113 of the Dodd-Frank Act that the 
company should be supervised by the Board and subjected to enhanced 
prudential standards, and (2) the company has 40 percent or more of its 
total consolidated assets related to insurance activities as of the end 
of either of the two most recently completed fiscal years (systemically 
important insurance companies) or otherwise has been made subject to 
these requirements by the Board. As of the date of publication of this 
document in the Federal Register, American International Group, Inc. 
(AIG), and Prudential Financial, Inc. (Prudential), would be required 
to comply with the proposed enhanced prudential standards, if adopted 
as proposed.\16\
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    \15\ The Board intends to consider enhanced risk-based capital 
and leverage requirements, liquidity requirements, single-
counterparty credit limits, a debt-to-equity limit, and stress 
testing requirements at a later date. In addition, the Board has 
issued a resolution plan rule that by its terms applies to all 
nonbank financial companies supervised by the Board.
    \16\ As noted above, General Electric Capital Corporation is 
already subject by Board order to certain enhanced prudential 
standards.
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    The corporate governance and risk-management standard would build 
on the core provisions of the Board's SR letter 12-17, Consolidated 
Supervision Framework for Large Financial Institutions.\17\ The 
proposed liquidity risk-management requirements would help mitigate 
liquidity risks at systemically important insurance companies. The 
proposal would tailor these standards to account for the differences in 
business models, capital structure, risk profiles, existing supervisory 
framework, and systemic footprints between bank holding companies and 
systemically important insurance companies.
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    \17\ Supervision and Regulation Letter 12-17/Consumer Affairs 
Letter 12-14 (December 17, 2012), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm.
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    The Board believes that it is appropriate to seek public comment on 
the application of the proposed standards in order to provide 
transparency regarding the regulation and supervision of systemically 
important insurance companies. The public comment process will provide 
systemically important insurance companies supervised by the Board and 
interested members of the public with the opportunity to comment and 
will help guide the Board in future application of enhanced prudential 
standards to other nonbank financial companies.
    Question 1: The Board invites comment on all aspects of the 
proposed rule, including in particular the aspects noted in more 
detailed questions at the end of each section.
    Question 2: The Board invites comment on the 40 percent threshold 
contained in the proposed definition of systemically important 
insurance company. Would an alternative measure be more appropriate? 
Why or why not?

II. Corporate Governance and Risk-Management Standard

A. Background

    During the preceding decades and the recent financial crisis in 
particular, a number of insurers that experienced material financial 
distress had

[[Page 38612]]

significant deficiencies in key areas of corporate governance and risk 
management.\18\ Effective enterprise-wide risk management by large, 
interconnected financial companies promotes financial stability by 
reducing the likelihood of a large, interconnected financial company's 
material distress or failure. An enterprise-wide approach to risk 
management would allow systemically important insurance companies to 
appropriately identify, measure, monitor, and control risk throughout 
their entire organizations, including risks that may arise from 
intragroup transactions, unregulated entities, or centralized material 
operations that would not be subject to review at the legal entity 
level.
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    \18\ See Standard and Poor's Ratings Services, ``What May Cause 
Insurance Companies to Fail and How this Influences Our Criteria'' 
(June 2013), at 11-13; see also U.S. House of Representatives, 
``Failed Promises: Insurance Company Insolvencies'' (1990); 
Financial Crisis Inquiry Commission, ``Final Report of the National 
Commission on the Causes of the Financial and Economic Crisis in the 
United States'' (January 2011), pg. 352, available at https://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.
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    Accordingly, the Board is proposing to apply to systemically 
important insurance companies an enhanced corporate governance and 
risk-management standard that would build on the core provisions of SR 
12-17, the Board's consolidated supervision framework for large 
financial institutions.\19\ These standards would be applied, however, 
in a manner that is tailored to account for the business model, capital 
structure, risk profile, and activities of financial firms that are 
largely engaged in insurance (rather than banking) activities. 
Specifically, the proposal creates responsibilities for a systemically 
important insurance company's risk committee, chief risk officer, and 
chief actuary.
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    \19\ SR 12-17 sets forth a framework for the consolidated 
supervision of large financial institutions, and has two primary 
objectives: (1) Enhancing resiliency of a firm to lower the 
probability of its failure or inability to serve as a financial 
intermediary, and (2) reducing the impact on the financial system 
and the broader economy in the event of a firm's failure or material 
weakness.
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B. Risk Committee and Risk-Management Framework

    Consistent with section 165(h)(1) of the Dodd-Frank Act, the 
proposed rule would require a systemically important insurance company 
to maintain a risk committee that approves and periodically reviews the 
risk-management policies of the company's global operations and 
oversees the operation of the company's global risk-management 
framework.\20\ A large, interconnected financial institution's risk 
committee, acting in its oversight role, should fully understand the 
institution's corporate governance and risk-management framework and 
have a general understanding of its risk-management practices.
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    \20\ 12 U.S.C. 5365(h)(1).
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    The proposal would also require that the risk committee oversee the 
systemically important insurance company's enterprise-wide risk-
management framework, and that this framework be commensurate with the 
systemically important insurance company's structure, risk profile, 
complexity, activities, and size. An enterprise-wide risk-management 
framework facilitates management of and creates accountability for 
risks that reside in different geographic areas and lines of business. 
The risk-management framework would be required to include policies and 
procedures for establishing risk-management governance and procedures 
and risk-control infrastructure for the company's global operations. To 
implement and monitor compliance with these policies and procedures, 
the proposal would require the company to have processes and systems 
that (1) have mechanisms to identify and report risks and risk-
management deficiencies, including emerging risks, and ensure effective 
and timely implementation of actions to address such risks and 
deficiencies; (2) establish managerial and employee responsibility for 
risk management; (3) ensure the independence of the risk-management 
function; and (4) integrate risk-management and associated controls 
with management goals and its compensation structure for its global 
operations.
    A systemically important insurance company's risk-management 
framework would be strengthened by having an appropriate level of 
stature within its overall corporate governance framework. Accordingly, 
the proposal would provide that a systemically important insurance 
company's risk committee be an independent committee of the company's 
board of directors and have, as its sole and exclusive function, 
responsibility for the risk-management policies of the company's global 
operations and oversight of the operation of the company's global risk-
management framework. The risk committee would be required to report 
directly to the systemically important insurance company's board of 
directors and would receive and review regular reports on not less than 
a quarterly basis from the company's chief risk officer. In addition, 
the risk committee would be required to meet at least quarterly, fully 
document and maintain records of its proceedings, and have a formal, 
written charter that is approved by the systemically important 
insurance company's board of directors.
    Consistent with section 165(h)(3)(C) of the Dodd-Frank Act, the 
proposal would require that the risk committee include at least one 
member with experience in identifying, assessing, and managing risk 
exposures of large, complex financial firms.\21\ For this purpose, a 
financial firm would include an insurance company, a securities broker-
dealer, or a bank. The individual's experience in risk management would 
be expected to be commensurate with the company's structure, risk 
profile, complexity, activities, and size, and the company would be 
expected to demonstrate that the individual's experience is relevant to 
the particular risks facing the company. While the proposal would 
require that only one member of the risk committee have experience in 
identifying, assessing, and managing risk exposures of large, complex 
firms, all risk committee members should have a general understanding 
of risk-management principles and practices relevant to the company.
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    \21\ See 12 U.S.C. 5365(h)(3)(C).
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    Consistent with section 165(h)(3)(B) of the Dodd-Frank Act, the 
proposed rule also would include certain requirements to ensure that 
the chair of the risk committee has sufficient independence from the 
systemically important insurance company.\22\ The proposal would 
require that the chair of the risk committee (1) not be an officer or 
employee of the company nor have been one during the previous three 
years; (2) not be a member of the immediate family of a person who is, 
or has been within the last three years, an executive officer of the 
company; \23\ and (3) meet the requirements for an independent director 
under Item 407 of the Securities and Exchange Commission's (SEC) 
Regulation S-K, or must qualify as an independent director under the 
listing standards of a national securities exchange, as demonstrated to 
the satisfaction of the Board, if the company does not have an 
outstanding class of securities traded on a national securities 
exchange.
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    \22\ See 12 U.S.C. 5365(h)(3)(B).
    \23\ For purposes of this requirement, ``immediate family'' 
would be defined pursuant to the Board's Regulation Y, 12 CFR 
225.41(b)(3), and ``executive officer'' would be defined pursuant to 
the Board's Regulation O, 12 CFR 215.2(e)(1).
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    The Board views the active involvement of independent directors as 
vital to robust oversight of risk management and encourages companies

[[Page 38613]]

generally to include additional independent directors as members of 
their risk committees. However, the Board notes that not all members of 
the risk committee would be required to be independent, and involvement 
of directors affiliated with the company on the risk committee could 
complement the involvement of independent directors.
    Question 3: Are there additional qualifications and experience that 
the Board should require of a member or members of the risk committee 
of a systemically important insurance company?
    Question 4: The Board invites comment on whether the structure of 
the risk committee and the duties proposed to be assigned to the risk 
committee are appropriate.

C. Chief Risk Officer and Chief Actuary

    Most large, interconnected financial institutions, including large 
insurance companies, designate a chief risk officer to facilitate an 
enterprise-wide approach to the identification and management of all 
risks within an organization, regardless of where they are originated 
or housed. The chief risk officer supplements the work of legal entity, 
risk level (e.g., credit or operational risk), and line of business 
risk-management activities by identifying, measuring, and monitoring 
risks that may exist intentionally or unintentionally. The proposed 
rule would require each systemically important insurance company to 
have a chief risk officer and describes the minimum responsibilities of 
the chief risk officer. Under the proposal, the chief risk officer's 
function would extend to all risks facing the systemically important 
insurance company, including risks from non-insurance activities and 
insurance activities, such as risks arising out of unanticipated 
increases in reserves.
    The proposal provides that the chief risk officer would be 
responsible for overseeing (1) the establishment of risk limits on an 
enterprise-wide basis and monitoring compliance with such limits; (2) 
the implementation of and ongoing compliance with the policies and 
procedures establishing risk-management governance and the development 
and implementation of the processes and systems related to the global 
risk-management framework; and (3) management of risks and risk 
controls within the parameters of the company's risk control framework, 
and monitoring and testing of such risk controls. The chief risk 
officer also would be responsible for reporting risk-management 
deficiencies and emerging risks to the risk committee.
    The proposal would require the chief risk officer to have 
experience in identifying, assessing, and managing risk exposures of 
large, complex financial firms. The minimum qualifications for a chief 
risk officer would be similar to the risk-management experience 
requirement that at least one member of the company's risk committee 
must meet. The proposal was designed with the expectation that a 
systemically important insurance company would be able to demonstrate 
that its chief risk officer's experience is relevant to the particular 
risks facing the company and is commensurate with the company's 
structure, risk profile, complexity, activities, and size.
    The proposed standard would also require systemically important 
insurance companies to have a chief actuary to ensure an enterprise-
wide view of reserve adequacy across legal entities, lines of business, 
and geographic boundaries. Inadequate reserving is a common cause of 
insurer insolvencies.\24\ Insurance companies have complex balance 
sheets that depend heavily on estimates concerning the amount and 
timing of payments. Actuaries at insurance companies serve a critical 
role by developing these estimates and providing other technical 
insights on risk and financial performance. The estimates and the 
related processes, methodologies, and documentation can vary across 
jurisdictions and lines of businesses. The systemically important 
insurance companies have numerous insurance company subsidiaries and 
lines of businesses with their own actuarial functions. The 
organization may not have, however, an actuarial role or roles with the 
appropriate amount of stature and independence from the lines of 
business and legal entities.
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    \24\ See Standard and Poor's Ratings Services, ``What May Cause 
Insurance Companies to Fail and How this Influences Our Criteria'' 
(June 2013), pg. 8-10; see also U.S. House of Representatives, 
``Failed Promises: Insurance Company Insolvencies'' (1990).
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    The chief actuary would be responsible for advising the chief 
executive officer and other members of senior management and the 
board's audit committee on the level of reserves. Under the proposed 
rule, the chief actuary would also have oversight responsibilities over 
(1) implementation of measures that assess the sufficiency of reserves; 
(2) review of the appropriateness of actuarial models, data, and 
assumptions used in reserving; and (3) implementation of and compliance 
with appropriate policies and procedures relating to actuarial work in 
reserving. The chief actuary would be required to ensure that the 
company's actuarial units perform in accordance with an articulated set 
of standards that govern process, methodologies, data, and 
documentation; comply with applicable jurisdictional regulations; and 
adhere to the relevant codes of actuarial conduct and practice 
standards. The proposed rule would permit the chief actuary to have 
additional responsibilities, including overseeing ratemaking for 
insurance products.
    If a systemically important insurance company has significant 
amounts of life insurance and property and casualty insurance business, 
the proposal would allow systemically important insurance companies to 
have co-chief actuaries--one responsible for the company's life 
business and one responsible for the company's property and casualty 
business. Within the United States, the two different businesses have 
historically had separate professional organizations and 
correspondingly different professional examination requirements to 
obtain actuarial credentials. The actuarial techniques used in these 
two businesses starkly differ. While a single position with an 
enterprise-wide view of reserve adequacy is desirable, the Board 
recognizes that the need for chief actuaries to have the expertise 
necessary to carry out their duties. Thus, the proposed rule would 
permit, but not require, a systemically important insurance company to 
appoint a chief actuary with enterprise-wide responsibility for the 
life insurance activities and a separate chief actuary with enterprise-
wide responsibility for the property and casualty insurance activities.
    Under the proposed rule, the chief actuary would be expected to 
have experience that is relevant to the functions performed and 
commensurate with the company's structure, risk profile, complexity, 
activities, and size. This background should allow the chief actuary to 
discuss reserve adequacy with executive management and to communicate 
on actual practices and techniques with the underwriting, claims, 
legal, treasury, and other departments.
    Under the proposed rule, the chief risk officer and chief actuary 
would be required to maintain a level of independence. In addition to 
other lines of reporting, the chief risk officer and chief actuary 
would be required to report directly to their board's risk committee 
and audit committee,

[[Page 38614]]

respectively. Requiring the chief risk officer and chief actuary to 
report directly to board committees provides stature and independence 
from the lines of businesses and legal entities, which facilitates 
unbiased insurance risk assessment and estimation of insurance 
reserves. Furthermore, the proposal would not allow the chief risk 
officer and chief actuary roles to be performed by the same person 
because the positions serve distinct and separate independent oversight 
functions within the company. This separation would allow the risk 
group to review and challenge the actuarial assumptions used to prepare 
financial statements and provide an extra line of defense against 
improper reserving.
    In addition, the proposal would require a systemically important 
insurance company to ensure that the compensation and other incentives 
provided to the chief risk officer and chief actuary are consistent 
with their functions of providing objective assessments of a company's 
risks and actuarial estimates. This requirement would supplement 
existing Board guidance on incentive compensation, which provides, 
among other things, that compensation for employees in risk-management 
and control functions should avoid conflicts of interest and that 
incentive compensation received by these employees should not be based 
substantially on the financial performance of the business units that 
they review.\25\ In addition, the proposed requirement would allow 
systemically important insurance companies wide discretion to adopt 
compensation structures for chief risk officers and chief actuaries, 
whether through a compensation committee or otherwise, as long as the 
structure of their compensation allows them to objectively assess risk 
and does not create improper incentives to take inappropriate risks.
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    \25\ See Guidance on Sound Incentive Compensation Policies, 75 
FR 36395 (June 25, 2010).
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    Question 5: Are the responsibilities and requirements for the chief 
risk officer and the chief actuary of a systemically important 
insurance company appropriate? What additional responsibilities and 
requirements should the Board consider imposing?
    Question 6: Should the Board require a single, enterprise-wide 
chief actuary instead of allowing the position to be split between life 
and property and casualty operations? Why or why not?

III. Liquidity Risk-Management Standard

A. Background

    The activities and liabilities of systemically important insurance 
companies generate liquidity risk. The financial crisis that began in 
2007 demonstrated that liquidity can evaporate quickly and cause severe 
stress in the financial markets. In some cases, financial companies had 
difficulty in meeting their obligations as they became due because 
sources of funding became severely restricted. The financial crisis and 
past insurance failures also demonstrate that even solvent insurers may 
experience material financial distress, including failure, if they do 
not manage their liquidity in a prudent manner.\26\ Although many of a 
systemically important insurance company's liabilities are long-term or 
contingent upon the occurrence of a future event, such as the death of 
the insured or destruction of insured property, certain insurance 
contracts are subject to surrender or withdrawal with little or no 
penalty and on short notice and may create significant unanticipated 
demands for liquidity. Additionally, some activities and liabilities 
such as securities lending, issuance of some forms of funding 
agreements, collateral calls on derivatives used for hedging, and other 
sources can create liquidity needs during stress. For systemically 
important insurance companies, the negative effects of their material 
financial distress from a liquidity shortage could be transmitted to 
the broader economy through the sale of financial assets in a manner 
that could disrupt the functioning of key markets or cause significant 
losses or funding problems at other firms with similar holdings.
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    \26\ See U.S. Govt. Accountability Office, GAO-13-583, 
``Insurance Markets: Impacts of and Regulatory Response to the 2007-
2009 Financial Crisis,'' June 2013, at 10-16, 46-48, available at 
https://gao.gov/assets/660/655612.pdf. See also Standard and Poor's 
Ratings Services, ``What May Cause Insurance Companies to Fail and 
How this Influences Our Criteria'' (June 2013).
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    The proposal would require that a systemically important insurance 
company implement a number of provisions to manage its liquidity risk. 
For purposes of the proposed rule, liquidity is defined as a 
systemically important insurance company's capacity to meet efficiently 
its expected and unexpected cash flows and collateral needs at a 
reasonable cost without adversely affecting the daily operations or the 
financial condition of the systemically important insurance company. 
Under the proposed rule, liquidity risk means the risk that a 
systemically important insurance company's financial condition or 
safety and soundness will be adversely affected by its actual or 
perceived inability to meet its cash and collateral obligations.
    The proposed rule would require a systemically important insurance 
company to meet key internal control requirements with respect to 
liquidity risk management, to generate comprehensive cash-flow 
projections, to establish and monitor its liquidity risk tolerance, and 
to maintain a contingency funding plan to manage liquidity stress 
events when normal sources of funding may not be available. The 
proposed rule also would introduce liquidity stress-testing 
requirements for a systemically important insurance company and would 
require the company to maintain liquid assets sufficient to meet net 
cash outflows for 90 days over the range of liquidity stress scenarios 
used in the internal stress testing.

B. Internal Control Requirements

    To reduce the risk of failure triggered by a liquidity event, the 
proposed rule would require a systemically important insurance 
company's board of directors, risk committee, and senior management to 
fulfill key corporate governance and internal control functions with 
respect to liquidity risk management. The proposed rule would also 
require a systemically important insurance company to institute an 
independent review function to provide an objective assessment of the 
company's liquidity risk-management framework.
1. Board of Directors and Risk Committee Responsibilities
    The proposed rule would require a systemically important insurance 
company's board of directors to approve at least annually the company's 
liquidity risk tolerance. This liquidity risk tolerance should set 
forth the acceptable level of liquidity risk that a systemically 
important insurance company may assume in connection with its operating 
strategies and should take into account the company's capital 
structure, risk profile, complexity, activities, and size. Typically, 
more liquid, shorter-duration assets provide lower expected returns 
than similar assets with longer durations. Risk tolerances should be 
articulated in a way that all levels of management can clearly 
understand and apply these tolerances to all aspects of liquidity risk 
management throughout the organization. In addition, the proposal

[[Page 38615]]

would require the board of directors to (1) review liquidity risk 
practices and performance at least semi-annually to determine whether 
the systemically important insurance company is operating in accordance 
with its established liquidity risk tolerance, and (2) approve and 
periodically review the liquidity risk-management strategies, policies, 
and procedures established by senior management.
    The proposal would also require the risk committee or a designated 
subcommittee of the risk committee to review and approve the 
systemically important insurance company's contingency funding plan at 
least annually and whenever the company materially revises the plan. As 
discussed below, the contingency funding plan is the systemically 
important insurance company's compilation of policies, procedures, and 
action plans for managing liquidity stress events. In fulfilling this 
proposed requirement, the risk committee or designated subcommittee 
would report the results of its review to a systemically important 
insurance company's board of directors.
2. Senior Management Responsibilities
    To ensure that a systemically important insurance company properly 
implements its liquidity risk-management framework within the 
tolerances established by the company's board of directors, the Board 
is proposing to require senior management of a systemically important 
insurance company to be responsible for several key liquidity risk-
management functions.
    First, the proposed rule would require senior management to 
establish and implement strategies, policies, and procedures designed 
to manage effectively the systemically important insurance company's 
liquidity risk. In addition, the proposal would require that senior 
management oversee the development and implementation of liquidity risk 
measurement and reporting systems and determine at least quarterly 
whether the systemically important insurance company is operating in 
accordance with such policies and procedures and is in compliance with 
the liquidity risk-management, stress-testing, and buffer requirements.
    Second, the proposal would require senior management to report at 
least quarterly to the board of directors or the risk committee on the 
systemically important insurance company's liquidity risk profile and 
liquidity risk tolerance. More frequent reporting would be warranted if 
material changes in the company's liquidity profile or market 
conditions occur.
    Third, before a systemically important insurance company offers a 
new product or initiates a new activity that could potentially have a 
significant effect on the systemically important insurance company's 
liquidity risk profile, senior management would be required to evaluate 
the liquidity costs, benefits, and risks of the product or activity and 
approve it. As part of the evaluation, senior management would be 
required to determine whether the liquidity risk associated with the 
new product or activity (under both current and stressed conditions) is 
within the company's established liquidity risk tolerance. In addition, 
senior management would be required to review at least annually 
significant business activities and products to determine whether any 
of these activities or products creates or has created any 
unanticipated liquidity risk and whether the liquidity risk of each 
activity or product is within the company's established liquidity risk 
tolerance. An example of a significant business activity might include 
a company's securities lending operations or a particular line of 
business such as the issuance of funding agreements. This review should 
be done on a granular enough basis to allow for consideration of 
material differences in liquidity risk that might occur across 
jurisdictions or product features, such as a market value adjustment 
feature in an insurance contract.\27\
---------------------------------------------------------------------------

    \27\ Market value adjustment features tie the surrender value of 
an insurance contract to changes in market conditions.
---------------------------------------------------------------------------

    Fourth, senior management would be required to review the cash-flow 
projections (as described below) at least quarterly to ensure that the 
liquidity risk of the systemically important insurance company is 
within the established liquidity risk tolerance.
    Fifth, senior management would be required to establish liquidity 
risk limits and review the company's compliance with those limits at 
least quarterly. As described in Sec.  252.164(g) of the proposed rule, 
systemically important insurance companies would be required to 
establish limits on (1) concentrations in sources of funding by 
instrument type, single counterparty, counterparty type, secured and 
unsecured funding, and as applicable, other forms of liquidity risk; 
(2) potential sources of liquidity risk arising from insurance 
liabilities; (3) the amount of non-insurance liabilities that mature 
within various time horizons; and (4) off-balance sheet exposures and 
other exposures that could create funding needs during liquidity stress 
events. In addition, the proposal would require the size of each limit 
to be consistent with the company's established liquidity risk 
tolerance and reflect the company's capital structure, risk profile, 
complexity, activities, and size.
    Sixth, senior management would be required to (1) approve the 
liquidity stress testing practices, methodologies, and assumptions as 
set out in Sec.  252.165(a) of the proposed rule at least quarterly and 
whenever the systemically important insurance company materially 
revises such practices, methodologies, or assumptions; (2) review at 
least quarterly both the liquidity stress-testing results produced 
under Sec.  252.165(a) of the proposed rule and the liquidity buffer 
provided in Sec.  252.165(b) of the proposed rule; and (3) review 
periodically the independent review of the liquidity stress tests under 
Sec.  252.165(d) of the proposed rule.
    The proposal would allow a systemically important insurance company 
to assign these senior management responsibilities to its chief risk 
officer, who would be considered a member of the senior management of 
the systemically important insurance company.
    Question 7: The Board invites comment on whether there are 
additional liquidity risk-management responsibilities that the rule 
should require of senior management.
3. Independent Review
    An independent review function is a critical element of a financial 
institution's liquidity risk-management program because it can identify 
weaknesses in liquidity risk management that would be overlooked by the 
management functions that execute funding. Accordingly, the Board is 
proposing to require a systemically important insurance company to 
maintain an independent review function that meets frequently (but no 
less than annually) to review and evaluate the adequacy and 
effectiveness of the company's liquidity risk-management processes, 
including its liquidity stress-test processes and assumptions. Under 
the proposal, this review function would be required to be independent 
of management functions that execute funding (e.g., the treasury 
function), but it would not be required to be independent of the 
liquidity risk-management function. In addition, the proposal would 
require the independent review function to assess whether the company's 
liquidity risk-management framework complies with applicable laws, 
regulations, supervisory guidance,

[[Page 38616]]

and sound business practices, and report for corrective action any 
material liquidity risk-management issues to the board of directors or 
the risk committee.
    An appropriate internal review conducted by the independent review 
function under the proposed rule should address all relevant elements 
of the liquidity risk-management framework, including adherence to the 
established policies and procedures and the adequacy of liquidity risk 
identification, measurement, and reporting processes. Personnel 
conducting these reviews should seek to understand, test, and evaluate 
the liquidity risk-management processes, document their review, and 
recommend solutions for any identified weaknesses.

C. Cash Flow Projections

    Comprehensive projections of cash flows from a firm's various 
operations are a critical tool to help the institution manage its 
liquidity risk. The proposal would require that the company produce 
comprehensive enterprise-wide cash-flow projections that project cash 
flows arising from assets, liabilities, and off-balance sheet exposures 
over short and long-term time horizons, including time horizons longer 
than one year. Longer time horizons are particularly important for 
insurance companies, which generally have liabilities that extend far 
into the future. In addition, tracking cash-flow mismatches can help a 
systemically important insurance company identify potential liquidity 
issues and facilitate asset liability management, particularly as it 
relates to reinvestment risk from interest rate changes. The proposal 
would require that the systemically important insurance company update 
short-term cash-flow projections daily and update longer-term cash-flow 
projections at least monthly. These updates would not always require 
revisiting actuarial estimates; however, the updates would need to roll 
the cash flows forward and revise assumptions as needed based on new 
data and changing market conditions.
    To ensure that the cash flow projections would sufficiently analyze 
liquidity risk exposure to contingent events, the proposed rule would 
require that a systemically important insurance company establish a 
methodology for making projections that include all material liquidity 
exposures and sources, including cash flows arising from (1) 
anticipated claim and annuity payments; (2) policyholder options 
including surrenders, withdrawals, and policy loans; (3) collateral 
requirements on derivatives and other obligations; (4) intercompany 
transactions; (5) premiums on new and renewal business; (6) expenses; 
(7) maturities and renewals of funding instruments, including through 
the operation of any provisions that could accelerate the maturity; and 
(8) investment income and proceeds from assets sales. The proposal 
would require that the methodology (1) include reasonable assumptions 
regarding the future behavior of assets, liabilities, and off-balance 
sheet exposures, (2) identify and quantify discrete and cumulative cash 
flow mismatches over various time periods, and (3) include sufficient 
detail to reflect the capital structure, risk profile, complexity, 
currency exposure, activities, and size of the systemically important 
insurance company, and any applicable legal and regulatory 
requirements. The proposal provides that analyses may be categorized by 
business line, currency, or legal entity.
    Given the critical importance that the methodology and underlying 
assumptions play in liquidity risk management, a systemically important 
insurance company would be required to adequately document its 
methodology and assumptions used in making its cash flow projections.
    Question 8: The Board invites comment on whether the above 
requirements are appropriate for managing cash flows at systemically 
important insurance companies. Should any aspects of this cash-flow 
projection requirement be modified to better address the risk of 
systemically important insurance companies?
    Question 9: Should the Board consider a different level of 
frequency for requiring systemically important insurance companies to 
update their cash flow projections? If so, what frequency would be 
appropriate and why?

D. Contingency Funding Plan

    Under the proposed rule, a systemically important insurance company 
would be required to establish and maintain a contingency funding plan 
for responding to a liquidity crisis, identify alternate liquidity 
sources that the company can access during liquidity stress events, and 
describe steps that should be taken to ensure that the company's 
sources of liquidity are sufficient to fund its normal operating 
requirements under stress events. These provisions require the firm to 
develop and put in place plans designed to ensure that the firm will 
have adequate sources of liquidity to meet its obligations during the 
normal course of business. The proposal does not itself set a minimum 
liquidity requirement that would apply to all firms.
    The proposal would require the contingency funding plan to include 
a quantitative assessment, an event management process, and monitoring 
requirements. The proposal would also require the plan to be 
commensurate with a systemically important insurance company's capital 
structure, risk profile, complexity, activities, size, and established 
liquidity risk tolerance.
    Under the proposed rule, a systemically important insurance company 
would perform a quantitative assessment to identify liquidity stress 
events that could have a significant effect on the company's liquidity, 
assess the level and nature of such effect, and assess available 
funding sources during identified liquidity events. Such an assessment 
should delineate the various levels of stress severity that could occur 
during a stress event and identify the various stages for each type of 
event, spanning from the event's inception until its resolution. The 
types of events would include temporary, intermediate, and long-term 
disruptions. Under the proposal, possible stress events may include 
deterioration in asset quality, a spike in interest rates, an insurance 
catastrophe such as a pandemic that results in a large number of 
claims, an equity market decline, multiple ratings downgrades, a 
widening of credit default swap spreads, operating losses, negative 
press coverage, or other events that call into question a systemically 
important insurance company's liquidity. The stress events should be 
forecast in a comprehensive way across legal entities to identify gaps 
on an enterprise-wide basis. In addition, the proposal would require a 
systemically important insurance company to incorporate information 
generated by liquidity stress testing.
    The proposed rule would provide that a systemically important 
insurance company include in its contingency funding plan procedures 
for monitoring emerging liquidity stress events and identifying early 
warning indicators that are tailored to the company's capital 
structure, risk profile, complexity, activities, and size. Early 
warning indicators should include negative publicity concerning an 
asset class owned by the company, potential deterioration of the 
company's financial condition, a rating downgrade, and/or a widening of 
the company's debt or credit default swap spreads. In addition, a 
systemically important insurance company's contingency funding plan 
would be required to at least incorporate collateral and legal entity 
liquidity risk monitoring.
    As part of the quantitative assessment, a systemically important 
insurance

[[Page 38617]]

company would be required to include in its contingency funding plan 
both an assessment of available funding sources and needs and an 
identification of alternative funding sources that may be used during 
the identified liquidity stress events. To determine available and 
alternative funding sources, a systemically important insurance company 
would be expected under the proposal to analyze the potential erosion 
of available funding at various stages and severity levels of each 
stress event and identify potential cash flow mismatches that may 
occur. This analysis would include all material on- and off-balance 
sheet cash flows and their related effects, and would be based on a 
realistic assessment of both the behavior of policyholders and other 
counterparties and of a systemically important insurance company's cash 
inflows, outflows, and funds that would be available (after considering 
restrictions on the transferability of funds within the group) at 
different time intervals during the identified liquidity stress event. 
In addition, a systemically important insurance company should work 
proactively to have in place any administrative procedures and 
agreements necessary to access any alternative funding source.
    The proposed rule would also require a systemically important 
insurance company's contingency funding plan to identify the 
circumstances in which the company would implement an action plan to 
respond to liquidity shortfalls for identified liquidity stress events. 
The action plan would clearly describe the strategies that a 
systemically important insurance company would use during such an 
event, including (1) the methods that the company would use to access 
alternative funding sources, (2) the identification of a management 
team to execute the action plan, (3) the process, responsibilities, and 
triggers for invoking the contingency funding plan, and (4) the 
decision-making process during the identified liquidity stress events 
and the process for executing the action plan's contingency measures. 
In addition, the proposal sets out reporting and communication 
requirements to facilitate a systemically important insurance company's 
implementation of its action plan during an identified liquidity stress 
event.
    The proposal would require that a systemically important insurance 
company periodically test (1) the components of its contingency funding 
plan to assess its reliability during liquidity stress events, (2) the 
operational elements of the contingency funding plan, and (3) the 
methods the company would use to access alternative funding sources to 
determine whether those sources would be available when needed. The 
tests required by the proposal would focus on the operational aspects 
of the contingency funding plan. This can often be done via ``table-
top'' or ``war-room'' type exercises. In some cases, the testing would 
also require actual liquidation of assets in the buffer periodically as 
part of the exercise. This can be critical in demonstrating treasury 
control over the assets and an ability to convert the assets into cash. 
With proper planning, this can be done in a way that does not send a 
distress signal to the marketplace.
    Market circumstances and the composition of a systemically 
important insurance company's business and product mix change over 
time. These types of changes could affect the effectiveness of a 
systemically important insurance company's contingency funding plan. To 
ensure that the contingency funding plan remains useful and 
instructive, the proposal would require a systemically important 
insurance company to update its contingency funding plan at least 
annually, and more frequently when changes to market and idiosyncratic 
conditions warrant.
    Question 10: The Board invites comment on whether the above 
requirements for a contingency funding plan are appropriate for 
systemically important insurance companies. What alternative approaches 
to the contingency funding requirements outlined above should the Board 
consider?
    Question 11: Should the proposed rule allow systemically important 
insurance companies to plan for any delay or stay of payments to 
policyholders or other counterparties within their contingency funding 
plans? Why or why not?
    Question 12: What specific information should a systemically 
important insurance company be required to include in its action plan 
to describe the strategies that the company would use to respond to 
liquidity shortfalls for identified liquidity stress events?

E. Collateral, Legal Entity, and Intraday Liquidity Risk Monitoring

    The proposal would require a systemically important insurance 
company to establish and maintain procedures for monitoring collateral, 
legal entity, and intraday liquidity risk. Robust monitoring of 
collateral availability, legal entity level liquidity, and intraday 
liquidity risk triggers contribute to effective and appropriate 
management of potential or evolving liquidity stress events.
    Under the proposal, the systemically important insurance company 
would be required to establish and maintain procedures to monitor 
assets that have been, or are available to be, pledged as collateral in 
connection with transactions to which it or its affiliates are 
counterparties. The policies and procedures would include the frequency 
in which a systemically important insurance company calculates its 
collateral positions, requirements for a company to monitor the levels 
of unencumbered assets (as discussed in section III.F.2, below) 
available to be pledged and shifts in a company's funding patterns, and 
requirements for a company to track operational and timing requirements 
associated with accessing collateral at its physical location.
    A systemically important insurance company would also be required 
under the proposal to establish and maintain policies and procedures 
for monitoring and controlling liquidity risk exposures and funding 
needs within and across significant legal entities, currencies, and 
business lines, taking into account legal and regulatory restrictions 
on the transfer of liquidity among legal entities.
    The proposal would require a systemically important insurance 
company to maintain policies and procedures for monitoring the intraday 
liquidity risk exposure of the company, as applicable to its business, 
including obligations that must be settled at a specific time within 
the day or where intraday events could affect a systemically important 
insurance company's liquidity positions in a material and adverse 
manner. For instance, the company should have procedures in place to 
monitor the risk that an intraday movement in equity prices or the 
price of hedge instruments could materially affect the company's 
liquidity position. If applicable, these procedures would be required 
to address, among other things, how the systemically important 
insurance company will prioritize payments and derivative transactions 
to settle critical obligations and effectively hedge its risks.
    Question 13: The Board invites comments on whether there are 
specific activities that, if carried out by a systemically important 
insurance company, should result in a requirement that the company 
engage in intraday liquidity monitoring?

[[Page 38618]]

F. Liquidity Stress-Testing and Buffer Requirements

    To reduce the risk of a systemically important insurance company's 
failure due to adverse liquidity conditions, the proposal would require 
a systemically important insurance company to conduct rigorous and 
regular stress testing and scenario analysis that incorporate 
comprehensive information about its funding position under both normal 
circumstances, when regular sources of liquidity are readily available, 
and adverse conditions, when liquidity sources may be limited or 
severely constrained. The purpose of the proposed rule's liquidity 
stress testing and buffer requirements would be to ensure that the 
holding company (or another entity within the consolidated organization 
that is not subject to transfer restrictions) has the ability to 
transfer liquid assets to a legal entity within the consolidated 
organization that has a liquidity need so that a liquidity crisis can 
be avoided.
1. Liquidity Stress-Testing Requirement
    Under the proposed rule, a systemically important insurance company 
would be required to conduct liquidity stress tests that, at a minimum, 
involve macroeconomic, sector-wide, and idiosyncratic events (for 
example, including natural and man-made catastrophes) affecting the 
firm's cash flows, liquidity position, profitability, and solvency. The 
liquidity stress tests should span the different types of liquidity 
events that a systemically important insurance company could face. This 
includes both a fast-moving scenario in which an event triggers many 
withdrawal requests and collateral calls as well as a more sustained 
scenario where the systemically important insurance company's liquidity 
deteriorates slowly over the course of a year or longer. In conducting 
its liquidity stress tests, a systemically important insurance company 
would be required under the proposal to take into account its current 
liquidity condition, risks, exposures, strategies, and activities, as 
well as its balance sheet exposures, off-balance sheet exposures, size, 
risk profile, complexity, business lines, organizational structure, and 
other characteristics that affect its liquidity risk profile. The 
proposal would require a systemically important insurance company to 
conduct its liquidity stress tests monthly, or more frequently as 
required by the Board.
    In conducting its liquidity stress tests, a systemically important 
insurance company would be required to address the potential direct 
adverse effect of associated market disruptions on the company and 
incorporate the potential actions of counterparties, policyholders, and 
other market participants experiencing liquidity stresses that could 
adversely affect the company.
    As explained above, for purposes of the proposed rule, liquidity 
risk would encompass risks relating to collateral posting requirements. 
By virtue of their hedging and non-insurance operations, insurers can 
have large and directional derivative positions with associated 
collateral requirements. A systemically important insurance company 
would be required by the proposal to account for such hedges in its 
liquidity stress testing to ensure that it would have sufficient 
sources of assets available for posting.
    Effective liquidity stress testing should be conducted over a 
variety of different time horizons to capture rapidly developing events 
and other conditions and outcomes that may materialize in the near or 
long term. While some types of stresses can emerge quickly for 
systemically important insurance companies, such as collateral calls on 
derivatives positions, many insurance stresses take more time to 
develop and provide a slower draw on cash and funds relative to the 
stresses that affect other financial institutions. For instance, while 
a natural catastrophe might cause a large number of claims seeking 
reimbursement for property damage, these claims will typically be paid 
over a several year period as the properties are rebuilt and many 
claims are litigated. To ensure that a systemically important insurance 
company's stress testing captures such events, conditions, and 
outcomes, the proposed rule would require that a systemically important 
insurance company's liquidity stress scenarios use a minimum of four 
time horizons: 7 days, 30 days, 90 days, and one year. The proposal 
would also require systemically important insurance companies to 
include any other planning horizons that are relevant to its liquidity 
risk profile.
    Under the proposal, a systemically important insurance company 
would be required to incorporate certain assumptions designed to ensure 
that its liquidity stress tests provide relevant information to support 
the establishment of the liquidity buffer. For stress tests less than 
the 90-day period used to set the liquidity buffer, cash-flow sources 
could not include any sales of assets that are not eligible for 
inclusion in the liquidity buffer, as defined below. Additionally, 
cash-flow sources should not include borrowings from sources such as 
lines of credit or the Federal Home Loan Bank. While these can provide 
valuable sources of liquidity, the allowance of off-balance sheet 
funding to decrease the liquidity buffer requirement would encourage 
firms to place undue reliance on these transactions, which may not be 
available when needed in times of stress. Additionally, the borrowings 
could serve to exacerbate systemic risk by spreading risk to other 
significant financial institutions. Systemically important insurance 
companies could incorporate into the stress tests other cash-flow 
sources, including future premiums, and would be expected to make 
conservative assumptions that are consistent with the stress scenario 
regarding the availability of these sources over the planning horizon.
    In all liquidity stress tests, the proposal would require 
systemically important insurance companies to appropriately address 
assets in restricted accounts such as those in legally-insulated 
separate accounts and in any closed block.\28\ Changes in the value of 
these assets can affect the rest of the insurer's balance sheet through 
guarantees and hedging programs. Additionally, sales or purchases of 
large amounts of assets in these accounts can affect the markets more 
broadly. Consequently, separate account assets and closed block assets 
could be included as cash-flow sources only in proportion to the cash 
flow needs in these same accounts. Separate account assets have first 
priority to meet separate account commitments and would not be 
available to meet general account liquidity needs.
---------------------------------------------------------------------------

    \28\ Closed blocks are discrete pools of assets that are set 
aside to support the dividend expectations of participating 
policyholders from the periods prior to demutualization. Typically, 
changes of their values would be largely offset by future changes in 
the dividend rates on these participating policies.
---------------------------------------------------------------------------

    The proposed rule would require a systemically important insurance 
company to impose a discount to the fair market value of an asset that 
is used as a cash-flow source to offset projected funding needs in 
order to help account for credit risk and market volatility of the 
asset when there is market stress. The discounts would be required to 
appropriately reflect differences in credit and market volatilities 
across asset types. The proposed rule would require that sources of 
funding used to generate cash to offset projected funding needs be 
sufficiently diversified throughout each stress test time horizon.
    The proposed rule further provides that liquidity stress testing 
must be tailored to, and provide sufficient detail to reflect, a 
systemically important

[[Page 38619]]

insurance company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk-related factors. This 
requirement is intended to ensure that the proposed liquidity stress 
testing is tied directly to a systemically important insurance 
company's business profile and the regulatory environment in which the 
company operates; provides for the appropriate level of aggregation; 
captures all appropriate risk drivers, including internal and external 
influences; and incorporates other key considerations that may affect 
the company's liquidity position. In addition, a systemically important 
insurance company's liquidity stress testing scenarios should 
appropriately capture limitations on the transfer of funds.
    The proposed rule would not allow a systemically important 
insurance company to assume for the purposes of stress testing that the 
company would delay payments under insurance contracts. Although many 
insurance contracts allow insurers to defer payments by up to six 
months at the election of either the company or their insurance 
regulator, the proposal would not allow firms to assume such deferrals 
in liquidity stress testing. Crediting stays would be inconsistent with 
preventing the failure or material financial distress of a systemically 
important insurance company. Stays are measures of last resort that 
systemically important insurance companies would be very hesitant to 
invoke for reputational reasons. Because of this, assuming claims 
payments would be delayed also may not be realistic. Additionally, a 
stay by a systemically important insurance company could have 
substantial adverse systemic implications.
    The proposed rule would impose various governance requirements 
related to a systemically important insurance company's liquidity 
stress testing. First, a systemically important insurance company would 
be required to establish and maintain certain policies and procedures 
governing its liquidity stress testing practices, methodologies, and 
assumptions. Second, a systemically important insurance company would 
be required to establish and maintain a system of controls and 
oversight to ensure that its liquidity stress testing processes are 
effective, including by ensuring that each stress test appropriately 
incorporates conservative assumptions around its stress test scenarios 
and the other elements of the stress test process. In addition, the 
proposal would require that the assumptions be approved by the chief 
risk officer and subject to review by the independent review function. 
Third, the proposed rule would require a systemically important 
insurance company to maintain management information systems and data 
processes sufficient to enable it to collect, sort, and aggregate data 
and other information related to liquidity stress testing in an 
effective and reliable manner.
    Question 14: Are the proposed stress testing horizons ranging from 
seven days to one year appropriate?
    Question 15: How often should systemically important insurance 
companies be required to conduct stress tests? What are the costs and 
benefits of such a frequency?
    Question 16: What changes, if any, should be made to the definition 
of available cash-flow sources for the liquidity stress tests? How 
should the proposed standard treat separate account and closed block 
assets?
    Question 17: In what scenario, if any, would delaying payments to 
policyholders be effective in allowing a systemically important 
insurance company to continue operating as a going concern without 
adverse impact to the company's reputation, ability to attract and 
retain business, and cash flows? Should systemically important 
insurance companies be allowed to assume that they would delay payments 
to policyholders in liquidity stress testing (including for purposes of 
calculating the liquidity buffer requirement described below)? If so, 
under which scenarios and planning horizons would this be appropriate 
and what documentation, planning, and other requirements should be 
placed around this? Are there historical data to support an alternative 
approach to the one contained in the proposal?
    Question 18: What other changes, if any, should be made to the 
proposed liquidity stress-testing requirements (including the stress 
scenario requirements and required assumptions) to ensure that analyses 
of stress testing will provide useful information for the management of 
a systemically important insurance company's liquidity risk? What 
alternatives to the proposed liquidity stress-testing requirements, 
including the stress scenario requirements and required assumptions, 
should the Board consider? What additional parameters for the liquidity 
stress tests should the Board consider defining?
2. Liquidity Buffer Requirement
    The proposed rule would require a systemically important insurance 
company to maintain a liquidity buffer sufficient to meet net cash 
outflows for 90 days over the range of liquidity stress scenarios used 
in the internal stress testing. Although the Board requires large bank 
holding companies to use a 30-day period for the Dodd Frank Act section 
165 liquidity buffer requirement under the Board's Regulation YY, this 
proposed 90-day period for systemically important insurance companies 
is consistent with the generally longer-term nature of insurance 
liabilities. The 90-day period represents an intermediate view between 
the length of a fast-moving liquidity scenario that transpires quickly 
over a month or less, and the length of a persistent liquidity scenario 
that could take longer than a year to resolve.
    For the purposes of calculating the required buffer, the proposal 
would exclude intragroup transactions. Including intragroup outflows 
within the buffer calculation would result in double counting many 
transactions. For instance, if intragroup transactions were included 
when calculating the size of the buffer, a systemically important 
insurance company that uses a single legal entity to enter into 
derivative transactions for hedging could be penalized. Such a company 
would have to hold buffer assets not only for the derivative 
transaction with a third party, but also for any offsetting intra-group 
transactions that transfer the benefits of this hedge back to the legal 
entity with the hedged item. To account for the liquidity risks of 
intragroup transactions, this proposal instead places limitations on 
where the buffer can be held.
    The proposal would limit the type of assets that may be included in 
the buffer to highly liquid assets that are unencumbered. Limitation of 
the buffer to highly liquid assets would ensure that the assets in the 
liquidity buffer can be converted to cash over a 90-day period with 
little or no loss of value. The proposal's definition of highly liquid 
assets is tailored to reflect the assets generally held by systemically 
important insurance companies and the 90-day stress test period 
proposed for a systemically important insurance company. Over a 90-day 
time period, the Board would expect that a wider variety of assets 
could be effectively liquidated than in a shorter period (e.g., 30 
days).
    For purposes of the proposed rule, highly liquid assets would 
include a range of assets, subject to the additional limitations 
discussed further below. Highly liquid assets would include securities 
backed by the full faith and credit of the U.S. government, and 
securities issued or guaranteed by a U.S. government sponsored 
enterprise if they

[[Page 38620]]

are investment-grade as defined by 12 CFR part 1 and the claim is 
senior to preferred stock. Highly liquid assets would include 
securities of sovereign entities outside of the U.S. as well as some 
international organizations, including the Bank for International 
Settlements, the International Monetary Fund, and the European Central 
Bank, if the security would have a risk weight below 20 percent under 
12 CFR part 217 or the security is issued by a sovereign entity in its 
own currency and the systemically important insurance company holds the 
security in order to meet its stressed net cash outflows in the 
sovereign's jurisdiction.
    Investment-grade corporate debt would also be eligible if the 
issuer's obligations have a proven record as reliable sources of 
liquidity during stressed market conditions. In addition, highly liquid 
assets would include publicly traded common equity shares if they are 
included in the Russell 1000 Index, issued by an entity whose publicly 
traded common equity shares have a proven record as a reliable source 
of liquidity during stressed market conditions, and, if held by a 
depository institution, were not acquired in satisfaction of a debt 
previously contracted. Investment-grade general obligation securities 
issued or guaranteed by public sector entities would be eligible under 
the same limitations as corporate debt.
    To be included as highly liquid assets, all assets other than 
securities issued or guaranteed by the U.S. Treasury would have to be 
liquid and readily-marketable. To be liquid and readily marketable 
under the proposal, the security must be traded in an active secondary 
market with more than two committed market makers. There must also be a 
large number of non-market maker participants on both the buying and 
selling sides of the transactions and there must also be timely and 
observable market prices. Further, trading volume must be high. These 
requirements would help ensure that the included assets could be 
quickly converted to cash.
    Because of the concerns about wrong-way risk that correlates with 
the broader economy and exacerbates stress and because of the potential 
for increased systemic risk due to counterparty exposures, most 
instruments issued by financial institutions would be excluded from the 
definition of highly liquid assets. Bonds from banks or insurance 
companies may not be included within the buffer. Similarly bank 
deposits would not be eligible because of potential contagion. If a 
systemically important insurance company were to experience liquidity 
stress and withdraw its bank deposits, the stress event could be spread 
to other parts of the financial system as banks may be forced to 
liquidate assets in order to honor the withdrawals.
    In addition to the enumerated assets, the proposal includes 
criteria that could be used to identify other assets to be included in 
the buffer as highly liquid assets. Specifically, the proposed 
definition of highly liquid assets includes any other asset that a 
systemically important insurance company demonstrates to the 
satisfaction of the Board (1) has low credit risk and low market risk, 
(2) is liquid and readily-marketable, and (3) is a type of asset that 
investors historically have purchased in periods of financial market 
distress during which market liquidity has been impaired.
    The proposal also would limit the type of assets in the liquidity 
buffer to assets that are unencumbered so as to be readily available at 
all times to meet a systemically important insurance company's 
liquidity needs. Under the proposed rule, unencumbered would be defined 
to mean an asset that is (1) free of legal, regulatory, contractual, 
and other restrictions on the ability of a systemically important 
insurance company promptly to liquidate, sell, or transfer the asset, 
and (2) not pledged or used to secure or provide credit enhancement to 
any transaction.
    Because of intercompany restrictions on the transfer of funds, the 
proposal would limit where a systemically important insurance company 
can hold assets in the liquidity buffer. Assets held at regulated 
entities could be included in the buffer up to the amount of their net 
cash outflows as calculated under the internal liquidity stress tests 
plus any additional amounts that would be available for transfer to the 
top-tier holding company during times of stress without statutory, 
regulatory, contractual, or supervisory restrictions. The proposal 
would also require that the top-tier holding company hold an amount of 
highly liquid assets sufficient to cover the sum of all stand-alone 
material entity net liquidity deficits. The stand-alone net liquidity 
deficit of each material entity would be calculated as that entity's 
amount of net stressed outflows over a 90-day planning horizon less the 
highly liquid assets held at the material entity. For the purposes of 
evaluating liquidity deficits of material entities, systemically 
important insurance companies would be required to treat inter-
affiliate exposures in the same manner as third-party exposures.
    To account for deteriorations in asset valuations when there is 
market stress, the proposed rule also would require a systemically 
important insurance company to impose a discount to the fair market 
value of an asset included in the liquidity buffer to reflect the 
credit risk and market volatility of the asset. Discounts relative to 
fair market value would be expected to appropriately reflect the 90-day 
forecast period used to calculate the buffer. Longer periods allow 
firms more time to liquidate assets strategically to minimize losses.
    In addition, to ensure that the liquidity buffer is not 
concentrated in a particular type of highly liquid assets, the proposed 
rule provides that the pool of assets included in the liquidity buffer 
must be sufficiently diversified by instrument type, counterparties, 
geographic market, and other liquidity risk identifiers.
    Question 19: Is 90 days the right planning horizon for calculation 
of the buffer? Why or why not?
    Question 20: Do the proposed rule's stress testing and liquidity 
buffer requirements appropriately capture restrictions on the 
transferability of funds between legal entities within a consolidated 
organization? Why or why not?
    Question 21: The Board invites comment on all aspects of the 
proposed definition of ``highly liquid assets''. Does the definition 
appropriately reflect the range of assets that an insurer could use to 
meet cash outflows over the extended 90-day time horizon?
    Question 22: Should the board include specific requirements that 
specify when an asset can be considered a source of liquidity during 
stress (e.g., less than a 20 percent drop in price within 30 days)? If 
so, what should those requirements be?
    Question 23: Should bank deposits be eligible as highly liquid 
assets? Why or why not?
    Question 24: What changes, if any, should be made to the proposal's 
guidance concerning the discounting of assets relative to their fair 
value? How should these discounts vary based on the length of the 
stress test's planning horizon?
    Question 25: What changes, if any, should the Board make to the 
proposed definition of unencumbered to ensure that assets in the 
liquidity buffer will be readily available at all times to meet a 
systemically important insurance company's liquidity needs?
    Question 26: The Board requests comment on all aspects of the 
proposed liquidity risk-management standard. What alternative 
approaches to liquidity risk management should the Board consider? Are 
the liquidity risk-management requirements of this

[[Page 38621]]

proposal too specific or too narrowly defined?

IV. Transition Arrangements and Ongoing Compliance

    To provide for reasonable time frames for systemically important 
insurance companies to develop and implement procedures, policies, and 
reporting, the Board is proposing to provide meaningful phase-in 
periods for these enhanced prudential standards. A company that is a 
systemically important insurance company on the effective date of the 
final rule would be required to comply with the corporate governance 
and risk-management standard and the liquidity risk-management standard 
of the proposed rule beginning on the first day of the fifth quarter 
following the effective date of the proposal. While the Board does not 
anticipate that, if the rule is adopted as proposed, systemically 
important insurance companies would be required to make extensive 
changes to their structures or risk governance frameworks, outside of 
certain improvements that the companies are already planning to 
implement, the five-quarter period would ensure that systemically 
important insurance companies would have at least one opportunity to 
make any needed changes at the board of directors level through a proxy 
vote. Systemically important insurance companies would be encouraged to 
comply earlier, if possible. For the liquidity risk-management 
standard, the five-quarter phase-in period would balance the need for 
this liquidity standard with the Board's expectation that more work 
would be required for the systemically important insurance companies to 
comprehensively project cash flows in a manner that supports the 
proposal's stress-testing requirement. A company that becomes a 
systemically important insurance company after the effective date of 
the proposed rule would be required to comply with the corporate 
governance and risk-management standard and the liquidity risk-
management standard no later than the first day of the fifth quarter 
following the date on which the Council determined that the company 
should be supervised by the Board.
    Question 27: Are the proposed transition measures and compliance 
dates appropriate? What aspects of the proposed rule present 
implementation challenges and why? The Board invites comments on the 
nature and impact of these challenges and whether the Board should 
consider implementing transitional arrangements in the rule to address 
these challenges.

V. Impact Assessment

    In developing this proposal, the Board considered a variety of 
alternatives and considered an initial balancing of costs and benefits 
of the proposal. Based on the information currently available to the 
Board, the Board believes that the benefits of the proposal outweigh 
the relatively modest costs of the proposal. The Board notes that a 
number of the expected costs and benefits from the proposal, while 
real, are very difficult to measure or quantify. The Board invites 
comment and information regarding various alternatives, as well as 
regarding the costs and benefits of the alternatives and the Board's 
proposal.
    The primary benefits of this proposal would be the results of 
improvement in the management and resiliency of affected companies that 
reduce the likelihood that a systemically important insurance company 
would fail or experience material financial distress. These 
improvements may also result in increased efficiencies at systemically 
important insurance companies through improvements in the 
identification of risks and resulting reductions in losses and costs of 
operation.
    The systemically important insurance companies covered by this 
proposal are large, complex financial firms that the Council has 
determined the failure of which would likely cause risk to the 
financial stability of the United States. Benefits of a reduction in 
the probability of failure of one of these firms include avoiding: (1) 
The costs to the economy from the disruption of key markets or the 
creation of significant losses or funding problems for other firms with 
holdings similar to a systemically important insurance company; (2) the 
cost of such a failure to policyholders through lost payments and lost 
coverage; (3) the cost of an insurance failure to taxpayers and other 
insurers, who act as guarantors for large portions of a systemically 
important insurance company's obligations; and (4) the cost of a 
failure to a systemically important insurance company's creditors.

A. Analysis of Potential Costs

1. Initial and Ongoing Costs To Comply
    The corporate governance and risk-management provisions of the 
proposal are expected to have only modest initial and ongoing costs for 
the affected companies. Under the proposal, systemically important 
insurance companies would be required to maintain a risk committee of 
the board of directors that approves and periodically reviews the risk-
management policies of the systemically important insurance company's 
global operations and oversees the operation of the systemically 
important insurance company's global risk-management framework. The 
systemically important insurance companies currently have board-level 
engagement on key risks, and any structural modifications to establish 
and operate a stand-alone risk committee of the board of the directors 
are likely to be modest.
    Under the proposal, a systemically important insurance company's 
global risk-management framework would be required to include policies 
and procedures establishing risk-management governance, risk-management 
procedures, and risk control infrastructure for its global operations, 
as well as processes and systems for implementing and monitoring 
compliance with such procedures; identifying and reporting risks and 
risk-management deficiencies; establishing managerial and employee 
responsibility for risk management; ensuring the independence of the 
risk-management function; and integrating risk-management and 
associated controls with management goals and its compensation 
structure for its global operations. The systemically important 
insurance companies currently have both risk-management frameworks and 
policies already in place. They have already invested significant 
resources in building up their risk-management frameworks in recent 
years. The Board expects that these frameworks, along with the 
companies' planned improvements, would largely comply with the proposed 
standards. The proposal is designed to ensure that these policies and 
procedures are maintained and are developed as the risks within the 
firm change. The primary costs of maintaining and adapting these 
policies and procedures would be from the opportunity cost of 
management's time to make the changes to the framework, as well as the 
costs of establishing or improving new management information systems 
to assure the timely presentation of information to these senior level 
officials. These costs might also include additional staffing to 
administer the global risk-management framework.
    Under the proposal, systemically important insurance companies also 
would be required to have a chief risk officer and a chief actuary. The 
systemically important insurance companies currently have both a chief 
risk officer and a chief actuary or co-chief actuaries. The proposal 
may require the companies to modify their reporting structures and 
compensation to ensure that the positions have sufficient stature and 
independence

[[Page 38622]]

from individual profit centers in order to comply with the proposal. 
The costs associated with such changes could include, but may not be 
limited to, ongoing payroll and benefit costs and the opportunity cost 
of the time spent making the necessary changes. These costs are 
expected to be minimal.
    Under the proposed liquidity risk-management standard, systemically 
important insurance companies would be required to meet key internal 
control requirements with respect to liquidity risk management. The 
companies currently have existing processes in place to oversee 
liquidity risk. These processes, along with planned improvements, would 
largely comply with the liquidity risk-management standard's internal 
control requirements. Some additional changes may be required 
pertaining to new product approval and to ensure periodic review of all 
significant products and activities for liquidity risk features. These 
costs are expected to be relatively small.
    The proposed rule would also require systemically important 
insurance companies to generate comprehensive cash flow projections. 
Both companies have procedures in place to generate cash-flow 
projections. Additional work may be needed to ensure that all cash 
flows, including those in unregulated or run-off entities, are included 
within the projections, and to ensure that the cash-flow projections 
are timely and updated at the appropriate frequency. The additional 
frequency of updating might require systemically important insurance 
companies to either hire additional staff to run these projections or 
to build or buy new systems that can produce these comprehensive 
forecasts in a timely and efficient manner. Because these firms already 
have in place basic infrastructure to make these projections, any 
marginal costs to meet the minimum requirements under the proposal are 
expected to be relatively modest.
    The proposed rule would also require systemically important 
insurance companies to maintain a contingency funding plan. Both 
systemically important insurance companies have plans in place to 
respond to a liquidity crisis, and both are working to develop these 
plans further. Some additional work on these plans may be required to 
meet the requirements of the proposed rule, such as quantitatively 
assessing cash-flow needs and sources across legal entities.
    The proposed rule also would require systemically important 
insurance companies to conduct liquidity stress tests and require the 
systemically important insurance companies to maintain liquid assets 
sufficient to meet net cash outflows for 90 days over the range of 
liquidity stress scenarios used in the internal stress tests. Both of 
the systemically important insurance companies have systems in place to 
project the company's liquidity position under stressed conditions. 
However, the proposal may cause the systemically important insurance 
companies to update these systems to facilitate monthly testing and 
ensure that the scenarios include all exposures and entities within the 
systemically important insurance company. The costs associated with 
these improvements are expected to be modest within the context of the 
organizations and could include, but may not be limited to, the costs 
to recruit and hire staff, including ongoing payroll and benefits 
costs, and the costs of development and implementation of management 
information systems with appropriate data to support analysis and 
reporting on a monthly frequency.
    In addition, systemically important insurance companies may need to 
make balance sheet adjustments in order to come into and maintain 
compliance with the proposed liquidity risk-management requirements, if 
adopted as proposed. While both systemically important insurance 
companies currently appear to maintain an adequate amount of liquidity 
on a consolidated basis, some movement of funds between legal entities 
may be required to provide appropriate responsiveness in times of 
stress.
2. Impact on Premiums and Fees
    The initial and ongoing costs of complying with the standard, if 
adopted as proposed, could affect the premiums and fees that the 
systemically important insurance companies charge. Insurance products 
are priced to allow insurers to recover their costs and earn a fair 
rate of return on their capital. In the long run, all costs of 
providing a policy are borne by policyholders.
    Because the expected costs associated with implementing the 
proposal, if adopted, are not expected to be material within the 
context of the institutions' existing budgets, there is not expected to 
be a material change in the pricing of systemically important insurance 
companies' products from the proposed standards, if adopted as 
proposed. Moreover, the better identification and management of risk 
that is expected to result from the proposal may lead to improved 
efficiencies, fewer losses, and lower costs in the long term, which may 
offset the effects of the costs of compliance on premiums.
3. Reduced Financial Intermediation
    If premiums or fees increase on some or all products, it could 
discourage some potential customers from purchasing these products. 
However, the possibility of reduced financial intermediation or 
economic output in the United States related to the proposed rule's 
corporate governance and risk-management standard and liquidity risk-
management standard appears unlikely.

B. Analysis of Potential Benefits

    Based on an initial assessment of available information, the 
benefits of the proposed standards are expected to outweigh the costs. 
Most significantly, the intent of the proposed rule is to reduce the 
probability of a systemically important insurance company failing or 
experiencing material financial distress. Even small changes in the 
probability of a systemically important firm failing can confer large 
expected benefits because of the enormous cost of financial crises. 
Additionally, the proposal would have an ancillary benefit of 
facilitating an orderly resolution of a systemically important 
insurance company, and could increase consumer confidence in the 
companies. Moreover, as explained below, improved risk management may 
improve efficiency by reducing losses and costs in the long term.
1. Benefits From a Reduction in the Likelihood That a Systemically 
Important Insurance Company Would Fail or Experience Material Financial 
Distress
    This proposal is intended to reduce the risk that a systemically 
important insurance company would experience material financial 
distress or fail. A reduction of this probability carries numerous 
direct and indirect benefits.
    The most important benefit from a reduction in the probability of 
default of a systemically important insurance company is a decreased 
potential for a potential negative impact on the United States economy 
caused by the failure or material financial distress of a systemically 
important insurance company. The Council has determined that material 
financial distress at each of the systemically important insurance 
companies could cause an impairment of financial intermediation or of 
financial market functioning that would be sufficiently severe to 
inflict significant damage on the broader economy. A reduction in the 
probability of failure or material financial distress at both 
systemically important insurance companies would promote financial 
stability and concomitantly materially

[[Page 38623]]

reduce the probability that a financial crisis would occur in any given 
year. The proposed rule would therefore advance a key objective of the 
Dodd-Frank Act and help protect the American economy from the 
substantial potential losses associated with a higher probability of 
financial crises.
    In addition to the benefits to the broader economy, a reduction in 
a systemically important insurance company's default probability 
benefits its counterparties. The majority of funding for systemically 
important insurance companies comes from policyholders. Some of these 
policyholders would bear losses if the company were to fail. These 
losses can take the form of reduced payment for claims, reduced amounts 
available for withdrawal from policyholder accounts, or long delays.
    The overall costs of these losses to policyholders extend beyond 
just their dollar value. Policyholders purchase insurance policies 
because they provide money when it is most needed. Insurance policies 
can replace lost wages when a policyholder is disabled or help a 
policyholder afford shelter after a natural catastrophe destroys his or 
her home and possessions. Other policyholders might not yet have 
experienced a loss event, but could be unable to obtain new coverage in 
the event a systemically important insurance company fails. For 
instance, an elderly policyholder who purchased a whole life contract 
many years ago would likely have difficulty obtaining a replacement 
policy.
    Reducing the probability of a systemically important insurance 
company's failure or distress decreases the expected costs to 
policyholders, taxpayers, other counterparties, other insurance 
companies, and the financial system generally.
    The proposal is also expected to benefit other creditors of 
systemically important insurance companies. In the event of a failure, 
the lenders and general creditors of a company also experience losses. 
While it is not the primary goal of this proposed regulation to protect 
these parties, they could potentially benefit.
    The savings from a reduced probability of default would also have 
indirect benefits. They could also translate into lower borrowing costs 
for systemically important insurance companies. The lower costs could 
also affect insurance premiums. If systemically important insurance 
companies expect lower guaranty fund assessment costs, these savings 
could be passed on to policyholders in the form of lower premiums and 
fees. These savings are, however, unlikely to be material.
2. A Reduction in the Impact of a Firm's Failure or Distress on the 
Economy
    While the primary benefit of the proposed rule would be a reduction 
in the probability of a firm failing or experiencing material financial 
distress, the proposed rule is also expected to produce benefits in a 
resolution of a systemically important insurance company. Liquidity is 
valuable in resolutions, and the restrictions on the liquidity buffer 
that require the buffer to be held at the holding company to be down-
streamed, could facilitate a variety of strategies for an orderly 
resolution.
3. Improved Efficiencies Resulting From Better Risk Management
    The proposed rule may result in efficiencies at systemically 
important insurance companies through improved risk-management 
practices. The proposed rule is expected to improve systemically 
important insurance companies' internal controls and identification and 
management of risks that may arise through their activities and 
investments. For example, the increased internal controls and liquidity 
stress-testing requirements could result in a systemically important 
insurance company discovering that a product's liquidity risks are 
different than it previously estimated and thus result in the 
systemically important insurance company being able to price that 
product in a way that more accurately reflects its risks. If 
systemically important insurance companies are better able to manage 
risk, then over the long term, the proposed rule may result in 
decreased losses and related costs to systemically important insurance 
companies.
    Question 28: The Board invites comment on all aspects of the 
foregoing evaluation of the costs and benefits of the proposed rule. 
Are there additional costs or benefits that the Board should consider? 
Would the magnitude of costs or benefits be different than as described 
above?

VI. Administrative Law Matters

A. Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rule in a 
simple and straightforward manner, and invites comment on the use of 
plain language.

B. Paperwork Reduction Act Analysis

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the Board may not conduct or sponsor, and 
the respondent is not required to respond to, an information collection 
unless it displays a currently valid Office of Management and Budget 
(OMB) control number. The OMB control number is 7100-NEW. The Board 
reviewed the proposed rule under the authority delegated to the Board 
by the OMB.
    The proposed rule contains requirements subject to the PRA. The 
recordkeeping requirements are found in sections 252.164(e)(3), 
252.164(f), 252.164(h), and 252.165(a)(7). These information collection 
requirements would be implemented pursuant to section 165 of the Dodd-
Frank Act for systemically important insurance companies.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the Board's functions, including whether the 
information has practical utility;
    (b) The accuracy of the Board's estimate of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer: By mail to U.S. Office of 
Management and Budget, 725 17th Street NW., #10235, Washington, DC 
20503 or by facsimile to 202-395-5806, Attention, Federal Reserve Desk 
Officer.

[[Page 38624]]

Proposed Information Collection
    Title of Information Collection: Recordkeeping Requirements 
Associated with Enhanced Prudential Standards (Regulation YY).
    Agency Form Number: Reg YY-1.
    OMB Control Number: 7100--NEW.
    Frequency of Response: Annual.
    Affected Public: Businesses or other for-profit.
    Respondents: Systemically important insurance companies.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
implement enhanced prudential standards for nonbank financial companies 
that the Council has determined should be supervised by the Board. 
Section 165 of the Dodd-Frank Act also permits the Board to establish 
such other prudential standards for such companies as the Board 
determines are appropriate.
    Current Actions: Pursuant to section 165 of the Dodd-Frank Act, the 
Board is proposing the application of enhanced prudential standards to 
certain nonbank financial companies that the Council has determined 
should be supervised by the Board. The Board is proposing corporate 
governance, risk-management, and liquidity risk-management standards 
that are tailored to the business models, capital structures, risk 
profiles, and systemic footprints of the nonbank financial companies 
with significant insurance activities.
    Section 252.164(e)(3) would require a systemically important 
insurance company to adequately document its methodology for making 
cash flow projections and the included assumptions.
    Section 252.164(f) would require a systemically important insurance 
company to establish and maintain a contingency funding plan that sets 
out the company's strategies for addressing liquidity needs during 
liquidity stress events and describes the steps that should be taken to 
ensure that the systemically important insurance company's sources of 
liquidity are sufficient to fund its normal operating requirements 
under stress events. To operate normally, a firm must have sufficient 
funding to pay obligations in the ordinary course as they become due 
and meet all solvency requirements for the writing of new and renewal 
policies. The contingency funding plan must be commensurate with the 
company's capital structure, risk profile, complexity, activities, 
size, and established liquidity risk tolerance. The company must update 
the contingency funding plan at least annually, and when changes to 
market and idiosyncratic conditions warrant. The contingency funding 
plan must include specified quantitative elements, an event management 
process that sets out the systemically important insurance company's 
procedures for managing liquidity during identified liquidity stress 
events, and procedures for monitoring emerging liquidity stress events. 
The procedures must identify early warning indicators that are tailored 
to the company's capital structure, risk profile, complexity, 
activities, and size.
    Section 252.164(h)(1) would require a systemically important 
insurance company to establish and maintain policies and procedures to 
monitor assets that have been, or are available to be, pledged as 
collateral in connection with transactions to which it or its 
affiliates are counterparties and sets forth minimum standards for 
those procedures.
    Section 252.164(h)(2) would require a systemically important 
insurance company to establish and maintain procedures for monitoring 
and controlling liquidity risk exposures and funding needs within and 
across significant legal entities, currencies, and business lines, 
taking into account legal and regulatory restrictions on the transfer 
of liquidity between legal entities.
    Section 252.164(h)(3) would require a systemically important 
insurance company to establish and maintain procedures for monitoring 
intraday liquidity risk exposure of the systemically important 
insurance company if necessary for its business. These procedures must 
address how the management of the systemically important insurance 
company will (1) monitor and measure expected daily gross liquidity 
inflows and outflows, (2) identify and prioritize time-specific 
obligations so that the systemically important insurance company can 
meet these obligations as expected and settle less critical obligations 
as soon as possible, (3) coordinate the purchase and sale of 
derivatives so as to maximize the effectiveness of their hedging 
programs, (4) consider the amounts of collateral and liquidity needed 
to meet obligations when assessing the systemically important insurance 
company's overall liquidity needs, and (5) where necessary, manage and 
transfer collateral to obtain intraday credit.
    Section 252.35(a)(7) would require a systemically important 
insurance company to establish and maintain policies and procedures 
governing its liquidity stress testing practices, methodologies, and 
assumptions that provide for the incorporation of the results of 
liquidity stress tests in future stress testing and for the enhancement 
of stress testing practices over time. The systemically important 
insurance company would establish and maintain a system of controls and 
oversight that is designed to ensure that its liquidity stress testing 
processes are effective in meeting the final rule's stress-testing 
requirements. The systemically important insurance company would 
maintain management information systems and data processes sufficient 
to enable it to effectively and reliably collect, sort, and aggregate 
data and other information related to liquidity stress testing.
Estimated Paperwork Burden
    Number of Respondents: 2 systemically important insurance 
companies.
    Estimated Burden per Response: 200 hours (Initial set-up 160 
hours).
    Estimated Annual Burden: 720 hours (320 hours for initial set-up 
and 400 hours for ongoing compliance).

C. Regulatory Flexibility Act Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
\29\ (RFA), the Board is publishing an initial regulatory flexibility 
analysis of the proposed rule. The RFA requires an agency either to 
provide an initial regulatory flexibility analysis with a proposed rule 
for which a general notice of proposed rulemaking is required or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. Based on its analysis 
and for the reasons stated below, the Board believes that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities. Nevertheless, the Board is publishing an 
initial regulatory flexibility analysis. A final regulatory flexibility 
analysis will be conducted after comments received during the public 
comment period have been considered.
---------------------------------------------------------------------------

    \29\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    In accordance with section 165 of the Dodd-Frank Act, the Board is 
proposing to adopt Regulation YY (12 CFR 252 et seq.) to establish 
enhanced prudential standards for systemically important insurance 
companies.\30\ The enhanced standards include liquidity standards and 
requirements for overall risk-management (including establishing a risk 
committee) for companies that the Council has determined pose a grave 
threat to financial stability.
---------------------------------------------------------------------------

    \30\ See 12 U.S.C. 5365 and 5366.

---------------------------------------------------------------------------

[[Page 38625]]

    Under Small Business Administration (SBA) regulations, the finance 
and insurance sector includes direct life insurance carriers and direct 
property and casualty insurance carriers, which generally are 
considered ``small'' if a life insurance carrier has assets of $38.5 
million or less or if a property and casualty insurance carrier has 
less than 1,500 employees.\31\ The Board believes that the finance and 
insurance sector constitutes a reasonable universe of firms for these 
purposes because such firms generally engage in activities that are 
financial in nature. Consequently, systemically important insurance 
companies with asset sizes of $38.5 million or less if such an entity 
is a life insurance carrier and less than 1,500 employees if such an 
entity is a property and casualty insurance carrier are small entities 
for purposes of the RFA.
---------------------------------------------------------------------------

    \31\ 13 CFR 121.201.
---------------------------------------------------------------------------

    As discussed in the SUPPLEMENTARY INFORMATION, the proposed rule 
generally would apply to a systemically important insurance company, 
which includes only nonbank financial companies that the Council has 
determined under section 113 of the Dodd-Frank Act must be supervised 
by the Board and for which such determination is in effect. Companies 
that are subject to the proposed rule therefore substantially exceed 
the $38.5 million asset threshold at which a life insurance entity and 
the less than 1,500 employee threshold at which a property and casualty 
entity is considered a ``small entity'' under SBA regulations. The 
proposed rule would apply to a systemically important insurance company 
designated by the Council under section 113 of the Dodd-Frank Act 
regardless of such a company's asset size. Although the asset size of 
nonbank financial companies may not be the determinative factor of 
whether such companies may pose systemic risks and would be designated 
by the Council for supervision by the Board, it is an important 
consideration.\32\ It is therefore unlikely that a financial firm that 
is at or below the $38.5 million asset threshold for a life insurance 
carrier or below the 1,500 employee threshold for a property and 
casualty carrier would be designated by the Council under section 113 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \32\ See 76 FR 4555 (January 26, 2011).
---------------------------------------------------------------------------

    As noted above, because the proposed rule is not likely to apply to 
any life insurance carrier with assets of $38.5 million or less or to 
any property and casualty carrier with less than 1,500 employees, if 
adopted in final form, it is not expected to apply to any small entity 
for purposes of the RFA. The Board does not believe that the proposed 
rule duplicates, overlaps, or conflicts with any other Federal rules. 
In light of the foregoing, the Board does not believe that the proposed 
rule, if adopted in final form, would have a significant economic 
impact on a substantial number of small entities supervised. 
Nonetheless, the Board seeks comment on whether the proposed rule would 
impose undue burdens on, or have unintended consequences for, small 
organizations, and whether there are ways such potential burdens or 
consequences could be minimized in a manner consistent with section 165 
of the Dodd-Frank Act.

List of Subjects

    Administrative practice and procedure, Banks, banking, Holding 
companies, Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, chapter II of title 12 
of the Code of Federal Regulations is amended as set forth below:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
1. The authority citation for part 252 continues to read as follows:

    Authority: 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 1844(b), 
1844(c), 5361, 5365, 5366.

0
2. Add subpart P to read as follows:

Subpart P--Enhanced Prudential Standards for Systemically Important 
Insurance Companies

Sec.
252.160 Scope.
252.161 Applicability.
252.162 [Reserved]
252.163 Risk-management and risk committee requirements.
252.164 Liquidity risk-management requirements.
252.165 Liquidity stress testing and buffer requirements.


Sec.  252.160  Scope.

    This subpart applies to systemically important insurance companies. 
Unless otherwise specified, for purposes of this subpart, the term 
systemically important insurance company means a nonbank financial 
company that meets two requirements:
    (a) The Council has determined pursuant to section 113 of the Dodd-
Frank Act that the company should be supervised by the Board and 
subjected to enhanced prudential standards; and
    (b) The company has 40 percent or more of its total consolidated 
assets related to insurance activities as of the end of either of the 
two most recently completed fiscal years (systemically important 
insurance companies) or otherwise has been made subject to this subpart 
by the Board.


Sec.  252.161  Applicability.

    (a) General applicability. Subject to the initial applicability 
provisions of paragraph (b) of this section, a systemically important 
insurance company must comply with the risk-management and risk-
committee requirements set forth in Sec.  252.163 and the liquidity 
risk-management and liquidity stress test requirements set forth in 
Sec. Sec.  252.164 and 252.165 beginning on the first day of the fifth 
quarter following the date on which the Council determined that the 
company shall be supervised by the Board.
    (b) Initial applicability. A systemically important insurance 
company that is subject to supervision by the Board on the date that 
this rule was adopted by the Board must comply with the risk-management 
and risk-committee requirements set forth in Sec.  252.163 and the 
liquidity risk-management and liquidity stress test requirements set 
forth in Sec. Sec.  252.164 and 252.165, beginning on [date].


Sec.  252.162  [Reserved].


Sec.  252.163  Risk-management and risk committee requirements.

    (a) Risk committee--(1) General. A systemically important insurance 
company must maintain a risk committee that approves and periodically 
reviews the risk-management policies of the systemically important 
insurance company's global operations and oversees the operation of the 
systemically important insurance company's global risk-management 
framework. The risk committee's responsibilities include liquidity 
risk-management as set forth in Sec.  252.164(b).
    (2) Risk-management framework. The systemically important insurance 
company's global risk-management framework must be commensurate with 
its structure, risk profile, complexity, activities, and size and must 
include:
    (i) Policies and procedures establishing risk-management 
governance, risk-management procedures, and risk-control infrastructure 
for its global operations; and
    (ii) Processes and systems for implementing and monitoring 
compliance with such policies and procedures, including:
    (A) Processes and systems for identifying and reporting risks and 
risk-management deficiencies, including

[[Page 38626]]

regarding emerging risks, and ensuring effective and timely 
implementation of actions to address emerging risks and risk-management 
deficiencies for its global operations;
    (B) Processes and systems for establishing managerial and employee 
responsibility for risk-management;
    (C) Processes and systems for ensuring the independence of the 
risk-management function; and
    (D) Processes and systems to integrate risk-management and 
associated controls with management goals and its compensation 
structure for its global operations.
    (3) Corporate governance requirements. The risk committee must:
    (i) Have a formal, written charter that is approved by the 
systemically important insurance company's board of directors;
    (ii) Be an independent committee of the board of directors that 
has, as its sole and exclusive function, responsibility for the risk-
management policies of the systemically important insurance company's 
global operations and oversight of the operation of the systemically 
important insurance company's global risk-management framework;
    (iii) Report directly to the systemically important insurance 
company's board of directors;
    (iv) Receive and review regular reports on not less than a 
quarterly basis from the systemically important insurance company's 
chief risk officer provided pursuant to paragraph (b)(2)(ii) of this 
section; and
    (v) Meet at least quarterly, or more frequently as needed, and 
fully document and maintain records of its proceedings, including risk-
management decisions.
    (4) Minimum member requirements. The risk committee must:
    (i) Include at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex financial 
firms; and
    (ii) Be chaired by a director who:
    (A) Is not an officer or employee of the systemically important 
insurance company and has not been an officer or employee of the 
systemically important insurance company during the previous three 
years;
    (B) Is not a member of the immediate family, as defined in Sec.  
225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(3)), of a 
person who is, or has been within the last three years, an executive 
officer of the systemically important insurance company, as defined in 
Sec.  215.2(e)(1) of the Board's Regulation O (12 CFR 215.2(e)(1)); and
    (C)(1) Is an independent director under Item 407 of the Securities 
and Exchange Commission's Regulation S-K (17 CFR 229.407(a)), if the 
systemically important insurance company has an outstanding class of 
securities traded on an exchange registered with the U.S. Securities 
and Exchange Commission as a national securities exchange under section 
6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national 
securities exchange); or
    (2) Would qualify as an independent director under the listing 
standards of a national securities exchange, as demonstrated to the 
satisfaction of the Board, if the systemically important insurance 
company does not have an outstanding class of securities traded on a 
national securities exchange.
    (b) Chief risk officer--(1) General. A systemically important 
insurance company must appoint a chief risk officer with experience in 
identifying, assessing, and managing risk exposures of large, complex 
financial firms.
    (2) Responsibilities. (i) The chief risk officer is responsible for 
overseeing:
    (A) The establishment of risk limits on an enterprise-wide basis 
and the monitoring of compliance with such limits;
    (B) The implementation of and ongoing compliance with the policies 
and procedures set forth in paragraph (a)(2)(i) of this section and the 
development and implementation of the processes and systems set forth 
in paragraph (a)(2)(ii) of this section; and
    (C) The management of risks and risk controls within the parameters 
of the insurance nonbank company's risk control framework, and 
monitoring and testing of the company's risk controls.
    (ii) The chief risk officer is responsible for reporting risk-
management deficiencies and emerging risks to the risk committee and 
resolving risk-management deficiencies in a timely manner.
    (3) Corporate governance requirements. (i) The systemically 
important insurance company must ensure that the compensation and other 
incentives provided to the chief risk officer are consistent with 
providing an objective assessment of the risks taken by the 
systemically important insurance company; and
    (ii) The chief risk officer must report directly to both the risk 
committee and chief executive officer of the company.
    (c) Chief actuary--(1) General. A systemically important insurance 
company must appoint a chief actuary with the ability to assess and 
balance risk selection, pricing, and reserving issues across product 
lines and geographies. A systemically important insurance company with 
significant life insurance business and property and casualty insurance 
business may appoint co-chief actuaries, one with responsibility for 
the company's life business and one with responsibility for the 
company's property and casualty business, in which case the below 
requirements would apply to each chief actuary.
    (2) Responsibilities. (i) The chief actuary is responsible for 
determining on an enterprise-wide basis the adequacy of reserves and 
reviewing and advising senior management on the level of reserves.
    (ii) The chief actuary is responsible for overseeing various 
activities, including but not limited to:
    (A) Implementation of measures that assess the sufficiency of 
reserves;
    (B) Review of the appropriateness of actuarial models, data, and 
assumptions used in reserving; and
    (C) Implementation of and compliance with appropriate policies and 
procedures relating to actuarial work in reserving.
    (iii) The systemically important insurance company must ensure that 
the compensation and other incentives provided to the chief actuary are 
consistent with providing an objective assessment of the systemically 
important insurance company's reserves.
    (iv) The chief actuary must report directly to the audit committee 
of the company and may also have additional lines of reporting.


Sec.  252.164  Liquidity risk-management requirements.

    (a) Responsibilities of the board of directors--(1) Liquidity risk 
tolerance. The board of directors of a systemically important insurance 
company must:
    (i) Approve the acceptable level of liquidity risk that the 
systemically important insurance company may assume in connection with 
its operating strategies (liquidity risk tolerance) at least annually, 
taking into account the systemically important insurance company's 
capital structure, risk profile, complexity, activities, and size; and
    (ii) Receive and review at least semi-annually information provided 
by senior management to determine whether the systemically important 
insurance company is operating in accordance with its established 
liquidity risk tolerance.
    (2) Liquidity risk-management strategies, policies, and procedures. 
The board of directors must approve and periodically review the 
liquidity risk-management strategies, policies, and procedures 
established by senior

[[Page 38627]]

management pursuant to paragraph (c)(1) of this section.
    (b) Responsibilities of the risk committee. The risk committee (or 
a designated subcommittee of such committee composed of members of the 
board of directors) must approve the contingency funding plan described 
in paragraph (f) of this section at least annually, and must approve 
any material revisions to the plan prior to the implementation of such 
revisions.
    (c) Responsibilities of senior management--(1) Liquidity risk. (i) 
Senior management of a systemically important insurance company must 
establish and implement strategies, policies, and procedures designed 
to effectively manage the risk that the systemically important 
insurance company's financial condition or safety and soundness would 
be adversely affected by its inability or the market's perception of 
its inability to meet its cash and collateral obligations (liquidity 
risk). The board of directors must approve the strategies, policies, 
and procedures pursuant to paragraph (a)(2) of this section.
    (ii) Senior management must oversee the development and 
implementation of liquidity risk measurement and reporting systems, 
including those required by this section and Sec.  252.165.
    (iii) Senior management must determine at least quarterly whether 
the systemically important insurance company is operating in accordance 
with such policies and procedures and whether the systemically 
important insurance company is in compliance with this section and 
Sec.  252.165 (or more often, if changes in market conditions or the 
liquidity position, risk profile, or financial condition warrant), and 
establish procedures regarding the preparation of such information.
    (2) Liquidity risk tolerance reporting. Senior management must 
report to the board of directors or the risk committee regarding the 
systemically important insurance company's liquidity risk profile and 
liquidity risk tolerance at least quarterly (or more often, if changes 
in market conditions or the liquidity position, risk profile, or 
financial condition of the company warrant).
    (3) Business activities and products. (i) Before a systemically 
important insurance company offers a new product or initiates a new 
activity that could potentially materially adversely affect the 
designated insurer's liquidity, senior management must approve such 
product or activity after evaluating the liquidity costs, benefits, and 
risks associated with such product or activity. In determining whether 
to approve the new activity or product, senior management must consider 
whether the liquidity risk of the new activity or product (under both 
current and stressed conditions) is within the company's established 
liquidity risk tolerance.
    (ii) Senior management must review at least annually significant 
business activities and products to determine whether any activity or 
product creates or has created any unanticipated liquidity risk, and to 
determine whether the liquidity risk of each activity or product is 
within the company's established liquidity risk tolerance.
    (4) Cash-flow projections. Senior management must review the cash-
flow projections produced under paragraph (e) of this section at least 
quarterly (or more often, if changes in market conditions or the 
liquidity position, risk profile, or financial condition of the 
systemically important insurance company warrant) to ensure that the 
liquidity risk is within the established liquidity risk tolerance.
    (5) Liquidity risk limits. Senior management must establish 
liquidity risk limits as set forth in paragraph (g) of this section and 
review the company's compliance with those limits at least quarterly 
(or more often, if changes in market conditions or the liquidity 
position, risk profile, or financial condition of the company warrant).
    (6) Liquidity stress testing. Senior management must:
    (i) Approve the liquidity stress testing practices, methodologies, 
and assumptions required in Sec.  252.165(a) at least quarterly, and 
whenever the systemically important insurance company materially 
revises its liquidity stress testing practices, methodologies or 
assumptions;
    (ii) Review the liquidity stress testing results produced under 
Sec.  252.165(a) at least quarterly;
    (iii) Review the independent review of the liquidity stress tests 
under paragraph (d) of this section periodically; and
    (iv) Approve the size and composition of the liquidity buffer 
established under Sec.  252.165(b) at least quarterly.
    (d) Independent review function. (1) A systemically important 
insurance company must establish and maintain a review function to 
evaluate its liquidity risk-management.
    (2) The independent review function must:
    (i) Regularly, but no less frequently than annually, review and 
evaluate the adequacy and effectiveness of the company's liquidity 
risk-management processes, including its liquidity stress test 
processes and assumptions;
    (ii) Assess whether the company's liquidity risk-management 
function complies with applicable laws, regulations, supervisory 
guidance, and sound business practices;
    (iii) Report material liquidity risk-management issues to the board 
of directors or the risk committee in writing for corrective action, to 
the extent permitted by applicable law; and
    (iv) Be independent of management functions that execute funding.
    (e) Cash-flow projections. (1) A systemically important insurance 
company must produce comprehensive cash-flow projections that project 
cash flows arising from assets, liabilities, and off-balance sheet 
exposures over, at a minimum, short- and long-term time horizons, 
including time horizons longer than one year. The systemically 
important insurance company must update short-term cash-flow 
projections daily and must update longer-term cash-flow projections at 
least monthly.
    (2) The systemically important insurance company must establish a 
methodology for making cash-flow projections that results in 
projections that:
    (i) Include cash flows arising from anticipated claim and annuity 
payments; policyholder options including surrenders, withdrawals, and 
policy loans; intercompany transactions; premiums on new and renewal 
business; expenses; maturities and renewals of funding instruments, 
including through the operation of any provisions that could accelerate 
the maturity; investment income and proceeds from assets sales; and 
other potential liquidity exposures;
    (ii) Include reasonable assumptions regarding the future behavior 
of assets, liabilities, and off-balance sheet exposures;
    (iii) Identify and quantify discrete and cumulative cash flow 
mismatches over these time periods; and
    (iv) Include sufficient detail to reflect the capital structure, 
risk profile, complexity, currency exposure, activities, and size of 
the systemically important insurance company, and any applicable legal 
and regulatory requirements, and include analyses by business line, 
currency, or legal entity as appropriate.
    (3) The systemically important insurance company must adequately 
document its methodology for making cash flow projections and the 
included assumptions.
    (f) Contingency funding plan. (1) A systemically important 
insurance company must establish and maintain a contingency funding 
plan that sets out the company's strategies for addressing

[[Page 38628]]

liquidity needs during liquidity stress events and describes the steps 
that should be taken to ensure that the systemically important 
insurance company's sources of liquidity are sufficient to fund its 
normal operating requirements under stress events. To operate normally, 
a firm must have sufficient funding to pay obligations in the ordinary 
course as they become due and meet all solvency requirements for the 
writing of new and renewal policies. The contingency funding plan must 
be commensurate with the company's capital structure, risk profile, 
complexity, activities, size, and established liquidity risk tolerance. 
The company must update the contingency funding plan at least annually, 
and when changes to market and idiosyncratic conditions warrant.
    (2) Components of the contingency funding plan--(i) Quantitative 
assessment. The contingency funding plan must:
    (A) Identify liquidity stress events that could have a significant 
impact on the systemically important insurance company's liquidity;
    (B) Assess the level and nature of the impact on the systemically 
important insurance company's liquidity that may occur during 
identified liquidity stress events;
    (C) Identify the circumstances in which the systemically important 
insurance company would implement its action plan described in 
paragraph (f)(2)(ii)(A) of this section, which circumstances must 
include failure to meet any minimum liquidity requirement imposed by 
the Board;
    (D) Assess available funding sources and needs during the 
identified liquidity stress events;
    (E) Identify alternative funding sources that may be used during 
the identified liquidity stress events; and
    (F) Incorporate information generated by the liquidity stress 
testing required under Sec.  252.165(a).
    (ii) Liquidity event management process. The contingency funding 
plan must include an event management process that sets out the 
systemically important insurance company's procedures for managing 
liquidity during identified liquidity stress events. The liquidity 
event management process must:
    (A) Include an action plan that clearly describes the strategies 
the company will use to respond to liquidity shortfalls for identified 
liquidity stress events, including the methods that the company will 
use to access alternative funding sources;
    (B) Identify a liquidity stress event management team that would 
execute the action plan described in paragraph (f)(2)(ii)(A) of this 
section;
    (C) Specify the process, responsibilities, and triggers for 
invoking the contingency funding plan, describe the decision-making 
process during the identified liquidity stress events, and describe the 
process for executing contingency measures identified in the action 
plan; and
    (D) Provide a mechanism that ensures effective reporting and 
communication within the systemically important insurance company and 
with outside parties, including the Board and other relevant 
supervisors, counterparties, and other stakeholders.
    (iii) Monitoring. The contingency funding plan must include 
procedures for monitoring emerging liquidity stress events. The 
procedures must identify early warning indicators that are tailored to 
the company's capital structure, risk profile, complexity, activities, 
and size.
    (3) Testing. The systemically important insurance company must 
periodically test:
    (i) The components of the contingency funding plan to assess the 
plan's reliability during liquidity stress events;
    (ii) The operational elements of the contingency funding plan, 
including operational simulations to test communications, coordination, 
and decision-making by relevant management; and
    (iii) The methods the systemically important insurance company will 
use to access alternative funding sources to determine whether these 
funding sources will be readily available when needed.
    (g) Liquidity risk limits--(1) General. A systemically important 
insurance company must monitor sources of liquidity risk and establish 
limits on liquidity risk, including limits on:
    (i) Concentrations in sources of funding by instrument type, single 
counterparty, counterparty type, secured and unsecured funding, and as 
applicable, other forms of liquidity risk;
    (ii) Potential sources of liquidity risk arising from insurance 
liabilities;
    (iii) The amount of non-insurance liabilities that mature within 
various time horizons; and
    (iv) Off-balance sheet exposures and other exposures that could 
create funding needs during liquidity stress events.
    (2) Size of limits. Each limit established pursuant to paragraph 
(g)(1) of this section must be consistent with the company's 
established liquidity risk tolerance and must reflect the company's 
capital structure, risk profile, complexity, activities, and size.
    (h) Collateral, legal entity, and intraday liquidity risk 
monitoring. A systemically important insurance company must establish 
and maintain procedures for monitoring liquidity risk as set forth in 
this paragraph.
    (1) Collateral. The systemically important insurance company must 
establish and maintain policies and procedures to monitor assets that 
have been, or are available to be, pledged as collateral in connection 
with transactions to which it or its affiliates are counterparties. 
These policies and procedures must provide that the systemically 
important insurance company:
    (i) Calculates all of its collateral positions on a weekly basis 
(or more frequently, as directed by the Board), specifying the value of 
pledged assets relative to the amount of security required under the 
relevant contracts and the value of unencumbered assets available to be 
pledged;
    (ii) Monitors the levels of unencumbered assets available to be 
pledged by legal entity, jurisdiction, and currency exposure;
    (iii) Monitors shifts in the systemically important insurance 
company's funding patterns, such as shifts in the tenor of obligations 
and collateral requirements; and
    (iv) Tracks operational and timing requirements associated with 
accessing collateral at its physical location (for example, the 
custodian or securities settlement system that holds the collateral).
    (2) Legal entities, currencies, and business lines. The 
systemically important insurance company must establish and maintain 
procedures for monitoring and controlling liquidity risk exposures and 
funding needs within and across significant legal entities, currencies, 
and business lines, taking into account legal and regulatory 
restrictions on the transfer of liquidity between legal entities.
    (3) Intraday exposures. The systemically important insurance 
company must establish and maintain procedures for monitoring the 
intraday liquidity risk exposure of the systemically important 
insurance company if necessary for its business. If applicable, these 
procedures must address how the management of the systemically 
important insurance company will:
    (i) Monitor and measure expected daily gross liquidity inflows and 
outflows;
    (ii) Identify and prioritize time-specific obligations so that the

[[Page 38629]]

systemically important insurance company can meet these obligations as 
expected and settle less critical obligations as soon as possible;
    (iii) Coordinate the purchase and sale of derivatives so as to 
maximize the effectiveness of their hedging programs;
    (iv) Consider the amounts of collateral and liquidity needed to 
meet obligations when assessing the systemically important insurance 
company's overall liquidity needs; and
    (v) Where necessary, manage and transfer collateral to obtain 
intraday credit.


Sec.  252.165  Liquidity stress testing and buffer requirements.

    (a) Liquidity stress testing requirement--(1) General. A 
systemically important insurance company must conduct stress tests to 
assess the potential impact of the liquidity stress scenarios set forth 
in paragraph (a)(3) of this section on its cash flows, liquidity 
position, profitability, and solvency, taking into account its current 
liquidity condition, risks, exposures, strategies, and activities.
    (i) The systemically important insurance company must take into 
consideration its balance sheet exposures, off-balance sheet exposures, 
size, risk profile, complexity, business lines, organizational 
structure, and other characteristics of the systemically important 
insurance company that affect its liquidity risk profile in conducting 
its stress test. Mechanisms that would imperil a systemically important 
insurance company's ability to continue operations--such as contractual 
stays--should not be taken into consideration as a source of liquidity 
in stress testing.
    (ii) In conducting a liquidity stress test using the scenarios 
described in paragraph (a)(3) of this section, the systemically 
important insurance company must address the potential direct adverse 
impact of associated market disruptions on the systemically important 
insurance company and incorporate the potential actions of other market 
participants experiencing liquidity stresses, contract holders, and 
policyholders under the market disruptions that would adversely affect 
the systemically important insurance company.
    (2) Frequency. The liquidity stress tests required under paragraph 
(a)(1) of this section must be performed at least monthly. The Board 
may require the systemically important insurance company to perform 
stress testing more frequently.
    (3) Stress scenarios. (i) Each liquidity stress test conducted 
under paragraph (a)(1) of this section must include, at a minimum:
    (A) A scenario reflecting adverse market conditions;
    (B) A scenario reflecting an idiosyncratic stress event for the 
systemically important insurance company; and
    (C) A scenario reflecting combined market and idiosyncratic 
stresses.
    (ii) The systemically important insurance company must incorporate 
additional liquidity stress scenarios into its liquidity stress test, 
as appropriate, based on its financial condition, size, complexity, 
risk profile, scope of operations, or activities. The Board may require 
the systemically important insurance company to vary the underlying 
assumptions and stress scenarios.
    (4) Planning horizon. Each stress test conducted under paragraph 
(a)(1) of this section must include a seven-day planning horizon, a 30-
day planning horizon, a 90-day planning horizon, a one-year planning 
horizon, and any other planning horizons that are relevant to the 
systemically important insurance company's liquidity risk profile. For 
purposes of this section, a ``planning horizon'' is the period over 
which the relevant stressed projections extend. The systemically 
important insurance company must use the results of the stress test 
over the 90-day planning horizon to calculate the size of the liquidity 
buffer under paragraph (b) of this section.
    (5) Requirements for assets used as cash-flow sources in a stress 
test. (i) To the extent an asset is used as a cash-flow source to 
offset projected funding needs during the planning horizon in a 
liquidity stress test, the fair market value of the asset must be 
discounted to reflect any credit risk and market volatility of the 
asset.
    (ii) Assets used as cash-flow sources during a planning horizon 
must be diversified by collateral, counterparty, borrowing capacity, 
and other factors associated with the liquidity risk of the assets.
    (iii) For stress tests with a planning horizon of 90 days or less, 
cash-flow sources cannot include future borrowings or the liquidation 
of assets unless they meet the requirement to be part of the buffer as 
defined in (b)(3) of this section. In all stress tests and 
notwithstanding the limitations on asset liquidity, separate account 
assets and closed block assets would be permitted to be included as 
cash-flow sources in proportion to the cash flow needs in these same 
accounts.
    (6) Tailoring. Stress testing must be tailored to, and provide 
sufficient detail to reflect, a systemically important insurance 
company's capital structure, risk profile, complexity, activities, and 
size.
    (7) Governance--(i) Policies and procedures. A systemically 
important insurance company must establish and maintain policies and 
procedures governing its liquidity stress testing practices, 
methodologies, and assumptions that provide for the incorporation of 
the results of liquidity stress tests in future stress testing and for 
the enhancement of stress testing practices over time.
    (ii) Controls and oversight. A systemically important insurance 
company must establish and maintain a system of controls and oversight 
that is designed to ensure that its liquidity stress testing processes 
are effective in meeting the requirements of this section. The controls 
and oversight must ensure that each liquidity stress test appropriately 
incorporates conservative assumptions with respect to the stress 
scenario in paragraph (a)(3) of this section and other elements of the 
stress-test process, taking into consideration the systemically 
important insurance company's capital structure, risk profile, 
complexity, activities, size, business lines, legal entity or 
jurisdiction, and other relevant factors. The assumptions must be 
approved by the chief risk officer and be subject to the independent 
review under Sec.  252.164(d).
    (iii) Management information systems. The systemically important 
insurance company must maintain management information systems and data 
processes sufficient to enable it to effectively and reliably collect, 
sort, and aggregate data and other information related to liquidity 
stress testing.
    (b) Liquidity buffer requirement. (1) A systemically important 
insurance company must maintain a liquidity buffer that is sufficient 
to meet the projected net stressed cash-flow need over the 90-day 
planning horizon of a liquidity stress test conducted in accordance 
with paragraph (a) of this section under each scenario set forth in 
paragraph (a)(3) of this section.
    (2) Net stressed cash-flow need. The net stressed cash-flow need 
for a systemically important insurance company is the difference 
between the amount of its cash-flow need and the amount of its cash 
flow sources over the 90-day planning horizon.
    (3) Asset requirements. The liquidity buffer must consist of highly 
liquid assets that are unencumbered, as defined in paragraph (b)(3)(ii) 
of this section:
    (i) Highly liquid asset. A highly liquid asset includes:

[[Page 38630]]

    (A) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury;
    (B) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, a U.S. government 
agency (other than the U.S. Department of the Treasury) whose 
obligations are fully and explicitly guaranteed by the full faith and 
credit of the U.S. government provided that the security is liquid and 
readily-marketable, as defined in paragraph (b)(3)(iii) of this 
section;
    (C) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, a sovereign entity, 
the Bank for International Settlements, the International Monetary 
Fund, the European Central Bank, European Community, or a multilateral 
development bank, that is:
    (i) Either:
    (A) Assigned no higher than a 20 percent risk weight under subpart 
D of Regulation Q (12 CFR part 217); or
    (B) Issued by a sovereign entity in its own currency and the 
systemically important insurance company holds the security in order to 
meet its net cash outflows in the jurisdiction of the sovereign entity;
    (ii) Liquid and readily-marketable, as defined in paragraph 
(b)(3)(iii) of this section;
    (iii) Issued or guaranteed by an entity whose obligations have a 
proven record as a reliable source of liquidity in repurchase or sales 
markets during stressed market conditions; and
    (iv) Not an obligation of a financial sector entity and not an 
obligation of a consolidated subsidiary of a financial sector entity;
    (D) A security issued by, or guaranteed as to the timely payment of 
principal and interest by, a U.S. government sponsored enterprise, that 
is investment grade under 12 CFR part 1 as of the calculation date, 
provided that the claim is senior to preferred stock and liquid and 
readily-marketable, as defined in paragraph (b)(3)(iii) of this 
section;
    (E) A corporate debt security that is:
    (i) Liquid and readily-marketable, as defined in paragraph 
(b)(3)(iii) of this section
    (ii) Investment grade under 12 CFR part 1 as of the calculation 
date;
    (iii) Issued or guaranteed by an entity whose obligations have a 
proven record as a reliable source of liquidity in repurchase or sales 
markets during stressed market conditions; and
    (iv) Not an obligation of a financial sector entity and not an 
obligation of a consolidated subsidiary of a financial sector entity; 
or
    (F) A publicly traded common equity share that is:
    (i) Liquid and readily-marketable, as defined in paragraph 
(b)(3)(iii) of this section;
    (ii) Included in: The Russell 1000 Index;
    (iii) Issued by an entity whose publicly traded common equity 
shares have a proven record as a reliable source of liquidity in 
repurchase or sales markets during stressed market conditions;
    (iv) Not issued by a financial sector entity and not issued by a 
consolidated subsidiary of a financial sector entity; and
    (vi) If held by a depository institution, is not acquired in 
satisfaction of a debt previously contracted (DPC);
    (G) A general obligation security issued by, or guaranteed as to 
the timely payment of principal and interest by, a public sector entity 
where the security is:
    (i) Liquid and readily-marketable, as defined in paragraph 
(b)(3)(iii) of this section;
    (ii) Investment grade under 12 CFR part 1 as of the calculation 
date;
    (iii) Issued or guaranteed by a public sector entity whose 
obligations have a proven record as a reliable source of liquidity in 
repurchase or sales markets during stressed market conditions; and
    (iv) Not an obligation of a financial sector entity and not an 
obligation of a consolidated subsidiary of a financial sector entity, 
except that a security will not be disqualified as a highly liquid 
asset solely because it is guaranteed by a financial sector entity or a 
consolidated subsidiary of a financial sector entity if the security 
would, if not guaranteed, meet the criteria of this section.
    (H) Any other asset that the systemically important insurance 
company demonstrates to the satisfaction of the Board:
    (1) Has low credit risk and low market risk;
    (2) Liquid and readily-marketable, as defined in paragraph 
(b)(3)(iii) of this section and
    (3) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which market liquidity 
has been impaired.
    (ii) Unencumbered. An asset is unencumbered if it:
    (A) Is free of legal, regulatory, contractual, or other 
restrictions on the ability of such systemically important insurance 
company promptly to liquidate, sell or transfer the asset; and
    (B) Is not pledged or used to secure or provide credit enhancement 
to any transaction.
    (iii) Liquid and readily marketable. Liquid and readily-marketable 
means, with respect to a security, that the security is traded in an 
active secondary market with:
    (1) More than two committed market makers;
    (2) A large number of non-market maker participants on both the 
buying and selling sides of transactions;
    (3) Timely and observable market prices; and
    (4) A high trading volume.
    (iv) Limitations on intra-group transfer of funds. Insurance non-
bank financial companies must hold enough highly liquid, unencumbered 
assets at the top-tier holding company to cover the sum of all stand-
alone material entity net liquidity deficits. The stand-alone net 
liquidity deficit of each material entity would be calculated as that 
entity's amount of net stressed outflows over a 90-day planning horizon 
less the highly liquid assets held at the material entity. For the 
purposes of evaluating liquidity deficits of material entities, 
systemically important insurance companies should treat inter-affiliate 
exposures in the same manner as third-party exposures. The remaining 
highly liquid, unencumbered assets that are held to satisfy the 
liquidity buffer requirement can be held at a regulated company up to:
    (A) The average amount of net cash outflows of the company holding 
the assets during the 90-day planning horizon in the scenarios set 
forth in paragraph (a)(3) plus.
    (B) Any additional amount of assets, including proceeds from the 
monetization of assets that would be available for transfer to the top-
tier company during times of stress without statutory, regulatory, 
contractual, or supervisory restrictions.
    (v) Calculating the amount of a highly liquid asset. In calculating 
the amount of a highly liquid asset included in the liquidity buffer, 
the systemically important insurance company must discount the fair 
market value of the asset to reflect any credit risk and market price 
volatility of the asset.
    (vi) Diversification. The liquidity buffer must not contain 
significant concentrations of highly liquid assets by issuer, business 
sector, region, or other factor related to the systemically important 
insurance company's risk, except with respect to cash and securities 
issued or guaranteed by the United States, a U.S. government agency, or 
a U.S. government-sponsored enterprise.


[[Page 38631]]


    By order of the Board of Governors of the Federal Reserve 
System, June 9, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-14005 Filed 6-13-16; 8:45 am]
 BILLING CODE 6210-01-P