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Development of the Basic Capital Requirements

The International Association of Insurance Supervisors (IAIS) has issued a public consultation on the new Basic Capital Requirements (BCR).

Thu 30 Jan 2014

The Basic Capital Requirements, previously named the Backstop Capital Requirements, is one of three new international capital standards which were announced by the IAIS in July 2013.

As reported in our September 2013 Newsletter, the BCR will apply to Globally Systemically Important Insurers (GSIIs). It is intended to provide a basic comparable basic foundation for the development of higher loss absorbency requirements (HLA). GSIIs will be required to meet the HLA as part of the IAIS initiative for addressing systemic risk in insurance.

The BCR will also be used to inform development of global insurance capital standards (ICS), which will be applicable to all Internationally Active Insurance Groups (IAIGs) under ComFrame. However ComFrame is still in development and is not expected to be implemented until 2019. It is not yet clear whether the BCR will also apply to IAIGs.

The IAIS published this consultation on 16 December 2013. The consultation document does not provide a detailed account of the final proposal but instead sets out various considerations relevant to the BCR’s development. The stated key principles for its development are:

  • Major risk categories should be reflected. 
  • Comparability of outcomes across jurisdictions.
  • Resilience to stress.
  • Simple design and presentation. 
  • Internal consistency.
  • Optimise transparency and use of public data.

The consultation emphasises the need for simplicity and accordingly internal models will not be used. Instead the IAIS will take a “factor-based” approach to its design.

Application to Lloyd’s

Although Lloyd’s was not designated a GSII by the IAIS last year, it is likely that the standards developed for IAIGs will be applied to Lloyd’s in some form. The BCR is therefore relevant to Lloyd’s in so far as it relates to the ICS.

Lloyd’s supports a simple, factor-based approach. However there are a number of questions to be answered on how the BCR will work in practice. Lloyd’s is monitoring developments in this area closely and will be responding to the consultation via industry associations.

Next steps

The public consultation closes on 3 February 2014 and the IAIS is expected to begin field testing the BCR in March 2014. In the summer of this year we will see a further consultation before the IAIS approves the final proposal in the autumn. The BCR is expected to be finalised in time for endorsement by the G20 later this year.