IAIS: progress and next steps towards the completion of a global insurance regulatory framework

Main topics covered are: IAIS Annual General Meeting held in October 2014, finalisation of the first Basic Capital Requirement (BCR) by the IAIS and recent developments on Recovery and Resolution Planning for Insurers (RRP).

IAIS Annual Conference

The 21st IAIS Annual Conference was held in Amsterdam 20-25 October 2014 and marked the celebration of the 20th anniversary of the organisation. Industry representatives (including a delegation from Lloyd’s) and insurance supervisors discussed and took stock of several key topics, such as the adoption of the first BCR for Global Systemically Important Insurers (G-SIIs) and the development of other global capital standards. The conference also featured panel discussions of recovery and resolution planning now being undertaken by G-SIIs and the next steps towards the completion of ComFrame.

Following the conclusion of the conference, the IAIS announced the decision to cease industry sponsorship at the end of 2014. As a result, effective from 2015 onward, the annual conference will be funded from the IAIS budget and will be open to supervisors only.

Global Capital Standards

At the end of October the IAIS published the final BCR framework following the release of two consultation papers in 2013 and 2014.  This proposal was included in the package presented by the FSB to the G20 leaders for endorsement at the Brisbane Summit held on 15-16 November.  As of 2015 G-SIIs will be required to report their regulatory capital as calculated under the BCR using a factor-based approach.

The BCR is the first in a series of proposed new capital standards that are intended to apply to large insurers globally. The second step is the development of Higher Loss Absorbency (HLA) requirements for G-SIIs which will build on the BCR. HLA is scheduled for completion in 2015 and full application from 2019. On 22 September the IAIS issued ten HLA founding principles to serve as the basis for the development of this standard.

The third step is to develop a risk-based group-wide global Insurance Capital Standard (ICS) by the end of 2016. On 22 September the IAIS issued a document setting out ten principles to be followed in the development of an ICS, currently under discussion. An ICS consultative document is expected by the end of the year.

The ICS will ultimately be included within ComFrame, which has always contained a capital component within its solvency assessment. The ICS is to apply to all IAIGs from 2019.

ComFrame

On 22 September the IAIS published a revised ComFrame draft, namely its common framework for the supervision of IAIGs.

Like the G-SII framework, ComFrame anticipates that an IAIG will be subject to group supervision, will have a group-wide supervisor and will manage itself on a group-wide basis. The latest version does not include measures to address crisis management and resolution. The IAIS is working to finalise these, taking account of FSB requirements.

Recovery and Resolution Planning (RRP)

Resolution planning was a key area of discussion at the IAIS Conference. Both the FSB and the IAIS are focusing their efforts on RRP for G-SIIs.

On 15 October, in advance of the IAIS conference, the FSB published an updated version of the Key Attributes document which includes a new Annex covering resolution of insurers. The FSB has also issued a consultation entitled “RRP for G-SIIs: critical functions and critical shared services”. Deadline for submitting feedback is 15 December.

On this momentum, supervisors and industry participants in the Recovery and Resolution panel within the IAIS conference discussed a number of elements of the resolution plans to be required of the nine identified G-SIIs, and which might be, ultimately, extended to IAIGs.

Supervisors on the panel highlighted that insurers differ from banks but warned that those differences “should not be overstated”, and thus lessons from the bank framework are relevant to pending insurer plans.

Recovery and resolution planning for non-banks is not required by law in most jurisdictions participating in the IAIS activities. However, it is understood that the European Commission will focus resources on recovery and resolution for financial market infrastructure (including insurers) with a view to submit a legislative proposal in the coming years.

Application to Lloyd’s

The BCR and HLA will apply to G-SIIs only. Because Lloyd’s has not been designated a G-SII, it is not required to comply with these standards. The ICS will apply to IAIGs, designated by group-wide supervisors in accordance with ComFrame. Although Lloyd’s may not be designated an IAIG, it is unlikely that an international capital standard will pass Lloyd’s by.

Key dates

Conclusion

The development of the global capital standards and the other IAIS initiatives is one element of the overall effort undertaken by policymakers and regulators to reform the global financial system of supervision. The IAIS’s work is far from complete; however, it is foreseeable that IAIS standards will have a significant impact on the global regulatory framework for insurers.

For further information please get in touch with the GPA team.