The International Association of Insurance Supervisors Releases Memorandum to G-SIIs on Confidential Reporting of the Basic Capital Requirement and Higher Loss Absorbency

On February 17, the International Association of Insurance Supervisors (IAIS) released a public version of a memorandum1 to Global Systemically Important Insurers (G-SIIs),2 dated December 18, 2015, providing guidance on the IAIS approach for confidential reporting of the Basic Capital Requirement (BCR) and Higher Loss Absorbency (HLA)3 to group-wide supervisors. This reporting will be required as part of the IAIS field testing data collection process, which began in 2015 for the BCR and will begin in 2016 for the HLA, for the period up to and including 2018.4 Each G-SII will be required, among other things, to report its BCR and HLA to its group-wide supervisor annually and upon request of the supervisor. The IAIS has committed to maintain appropriate governance and security protocols to protect the confidentiality of the information collected. Technical instructions and a reporting template will be specified by the IAIS to facilitate consistent reporting by G-SIIs of the BCR and HLA.

BCR and HLA Confidential Reporting Requirements

The memorandum sets forth the following requirements regarding confidential reporting of the BCR and HLA:

Frequency of Reports: Each G-SII will report its BCR and HLA to its group-wide supervisor annually. In addition, the group-wide supervisor may request the G-SII to report its BCR and HLA on an ad hoc basis at the supervisor’s discretion. The memorandum notes that such additional reporting would be necessary during stressed market conditions or immediately following a material event to the G-SII. Each G-SII should recalculate its BCR and HLA whenever its risk profile changes significantly from the assumptions underlying its previous submission or upon the request of its group-wide supervisor.5 It is the responsibility of each G-SII to monitor its BCR and HLA, along with its risk profile.

Granularity and Quality of Data: Each G-SII must provide sufficiently granular data to allow the IAIS to evaluate and, if necessary, refine the BCR and HLA. This data must include all exposure measures by the segmentation specified in the BCR and HLA. In addition, information on the relevant jurisdictional Prescribed Capital Requirement that applies to the G-SII must be included to allow IAIS to monitor the calibration level of the BCR and HLA relative to existing jurisdictional requirements. The IAIS expects each G-SII to use its “best efforts” in calculating data for BCR and HLA purposes and that the data provided will be of high quality.

Verification by Group-wide Supervisors: Group-wide supervisors should verify the data submitted by each G-SII against regulatory reporting, financial statements or other means before providing the data to the IAIS. This verification is intended to incentivize G-SIIs to report accurately and ensure sufficient data quality. The memorandum notes that the IAIS considered, but rejected for practical reasons, requiring the BCR- and HLA-related information to be audited.

Objectives of Confidential Reporting

The memorandum lists three objectives supported by the confidential reporting of the BCR and HLA. Specifically, this confidential reporting supports (i) the evaluation of the G-SII’s ability to comply with the BCR and HLA requirements, including any future changes that may be required to maintain or achieve compliance; (ii) the identification and analysis of potential changes to the BCR and HLA requirements; and (iii) the opportunity to restructure risk and capital (if needed) and the ability to engage in conversations with relevant supervisors.