Progress on global capital standards
The article provides an update of the International Association of Insurance Supervisors (IAIS) progress on its proposals for a risk-based global Insurance Capital Standard (ICS).
On the international regulatory scene, the Financial Stability Board (FSB) continues to place pressure on the International Association of Insurance Supervisors (IAIS) to develop global capital standards for insurers. The IAIS is therefore committed to introducing group-wide global capital standards to promote effective and globally consistent insurance supervision for the protection of policyholders and to contribute to global financial stability.
- The IAIS’s pilot project in the area of insurance capital requirements was the Basic Capital Requirement (BCR). Having received formal endorsement from the G20, the BCR applies to Global Systemically Important Insurers (G-SIIs) as of 1 January 2015, on a confidential reporting basis. The BCR is intended to reflect major categories of risk which affect 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.
- The BCR forms the basis for Higher Loss Absorbency (HLA) requirements where HLA capacity is 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. The IAIS announced a finalised HLA proposal, endorsed by the FSB and G20 in 2015. The HLA is privately reported by G-SIIs to group-wide supervisors.
- The third step is the development of a risk-based global Insurance Capital Standard (ICS), which is currently underway and due to be adopted by the end of 2019. The ICS is to be included within ‘ComFrame’, the common framework of international supervisory requirements for the supervision of Internationally Active Insurance Groups (IAIGs). The ICS is a group-wide, consolidated insurance capital standard applicable to IAIGs. It is not intended to be a legal entity requirement. Once finalised, the ICS will be a measure of capital adequacy for IAIGs. It will constitute a minimum standard to be achieved.
The ICS has been divided into two versions: ICS 1.0 and ICS 2.0. In July 2017, IAIS announced the release of ICS Version 1.0 for extended field testing to all IAIGs and other interested firms. This represents an important step towards the development of ICS Version 2.0 by late-2019.
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 officially 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.
In any event, the IAIS’s capital standards are likely to have an impact on general insurance regulatory capital requirements.
Following the launch of ICS Version 1.0 for field testing in July 2017, the insurance industry is currently assessing the key elements and possible areas of concerns. While no official IAIS consultation is foreseen until mid-2018, comments on ICS Version 1.0 are being compiled by the major international insurance associations for submission to IAIS to inform the development of ICS Version 2.0.
The IAIS is expected to adopt ICS Version 2.0 by the end of 2019, after which national supervisors will begin its implementation as part of ComFrame.