Global Capital Standards
The development of new global capital standards is one of a number of initiatives introduced by the International Association of Insurance Supervisors (IAIS) as part of its work to prevent financial instability and enhance global supervision of the insurance industry.
Capital standards are used by financial supervisors to monitor the solvency of financial institutions. They determine the level of capital that a firm must hold as a percentage of its risk-based assets. Global capital standards were first introduced for the banking sector under the Basel framework, however work at international level has moved on to develop similar standards for insurers. Once implemented the global standards will require insurers to hold levels of regulatory capital to comply with the requirements in place.
The FSB first announced its intentions for the IAIS to develop capital standards for insurers in a press release in July 2013, which also revealed its list of nine Global Systemically Important Insurers (G-SIIs). It said:
- Policy measures applied to G-SIIs would include higher loss absorbency requirements (HLA), to be met by the highest quality capital.
- The HLA would be built upon “straightforward, backstop requirements for all group activities, including non-insurance subsidiaries.”
- The IAIS would develop a work plan for a supervisory and regulatory framework for Internationally Active Insurance Groups (IAIGs), “including a quantitative capital standard.”
Details of each of these capital standards are set out below.
The Basic Capital Requirement (BCR)
This is the foundation of the HLA (see below). Together, they will constitute a group-wide capital requirement, applying to G-SIIs only. The IAIS ran two public consultations on the BCR and the G20 endorsed it in November 2014. G-SIIs started reporting the BCR to their supervisors confidentially in 2015.
The BCR is intended to reflect major categories of risk affecting G-SIIs, split between insurance and non-insurance. The capital requirement resulting from the calculation based on risk factors must be met from qualifying capital resources.
Higher Loss Absorbency (HLA) Requirement
HLA capacity will be added to BCR to constitute a consolidated group-wide capital requirement for G-SIIs. It is intended to ensure that G-SIIs are required by their supervisors to hold higher levels of regulatory capital than would be the case if they were not designated as G-SIIs. In October 2015, the IAIS announced a finalised HLA proposal, which the FSB and G20 endorsed.
The HLA is privately reported by G-SIIs to group-wide supervisors
International Capital Standard (ICS)
The ICS is part of ComFrame and will apply to all Internationally Active Insurance Groups (IAIGs) and G-SIIs. Once finalised, the ICS will be a measure of capital adequacy and will constitute a minimum standard to be achieved.
The ICS has been divided into two versions. In July 2017, the IAIS announced the release of ICS Version 1.0 for extended filed testing to all IAIGs and other interested firms.
The ICS Version 2.0 for the monitoring period was agreed by the IAIS Executive Committee on 13 November 2019. The five-year monitoring period is for confidential reporting and discussion in supervisory colleges from the beginning of 2020. The purpose of the five-year monitoring period is to monitor the performance of the ICS over a period of time, and not the capital adequacy of IAIGs.