During the fourth quarter of 2014, the International Association of Insurance Commissioners (IAIS) made considerable progress towards its goal of developing global capital standards for the insurance industry. On October 23, 2014, the IAIS announced that it has concluded the development of the basic capital requirements (BCR) for global systemically important insurers (G-SIIs). On December 17, 2014, the IAIS announced that it has commenced a public consultation to help develop a risk- based global insurance capital standard (ICS), which will apply to internationally active insurance groups (IAIGs).
Background regarding IAIS’s Development of Global Capital Standards
The IAIS is a voluntary organization with members consisting of insurance supervisors and regulators from more than 200 jurisdictions in approximately 140 countries. Its role is to be the global standards setting body for developing and helping with the implementation of principles and standards for insurance supervision.
Following the financial crisis in 2008, the IAIS developed the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame), which is a set of international supervisory requirements for effective group-wide supervision of IAIGs. The development phase of ComFrame started in 2010 and concluded in 2013. Currently, field testing for ComFrame is under way.
ComFrame includes the development of a risk-based global insurance capital standard as part of solvency assessment. The development of BCR for G-SIIs is the first step towards the development of the global standard. The second step will be the development of higher loss absorbency (HLA) requirements for G-SIIs, which the IAIS seeks to complete by the end of 2015; although HLA will initially be based on BCR, it will be reassessed as ICS is developed. The final step will be the development of ICS, which the IAIS seeks to complete by the end of 2016, with ICS reporting by IAIGs to their insurance supervisors to begin in 2017. Overall, the IAIS aims to adopt ComFrame including ICS by late 2018.
There are currently nine designated G-SIIs, which are the largest insurance groups in the world. IAIGs will be those insurance groups with total assets of at least USD 50 billion or gross written premiums of at least USD 10 billion (rolling 3-year average, written in three or more jurisdictions, and at least 10% of the total written outside of the home jurisdiction). The IAIS expects that there will be approximately 50 insurance groups identified as IAIGs.
The IAIS global standards will not be directly applicable in particular jurisdictions until they are adopted and implemented. The US in particular has expressed concerns about the desirability of globally uniform capital standards for the insurance industry as well as regarding the process and speed with which the IAIS has been developing its standards.
Development of BCR
BCR is to be applied to all group activities of G-SIIs, including non-insurance activities (albeit individual non- financial entities within a G-SII group may be excluded from the scope of the BCR if the risks of or from those entities are negligible). Beginning in 2015, BCR is to be reported on a confidential basis to group-wide supervisors of G-SIIs and then shared with the IAIS for purposes of refining BCR. Based on such BCR reporting, the IAIS intends to review the suitability of the BCR factors. The BCR ratio is to be calculated by a G-SII group by dividing “Total Qualifying Capital Resources” by “Required Capital”. Both Total Qualifying Capital Resources and Required Capital are to be determined on a consolidated group-wide basis for all financial and material non- financial activities and are to be based on current estimates of insurance liabilities based on a marked adjusted valuation approach.
The Total Qualifying Capital Resources will be categorized as either core or additional capital. The Required Capital will be determined based on 15 factors applied to specific segments and exposure measures for a G-SII’s activities (traditional life insurance and non-life insurance, non- traditional insurance, assets and non-insurance). All holding companies and insurance, banking and other companies within the group will be included in the consolidation, although certain entities may be excluded if the risks of or from them are negligible.
Public Consultation regarding ICS
This first public consultation regarding ICS will be open until February 16, 2015. Through this public consultation, which includes more than 160 questions, the IAIS seeks feedback from member regulators and other stakeholders regarding the elements of the proposed ICS such as valuation and potential methods for determining capital requirements.
This public consultation is part of a multi-year process that will culminate in the finalization of ICS. The IAIS intends to undertake two or more public consultations, field testing for ICS (which began in 2014) and stakeholder meetings (of which the IAIS has planned six in 2015 with a focus on the ICS and related capital standards development).