The International Association of Insurance Supervisors (the “IAIS”)
held its annual conference in Amsterdam October 20-25, 2014. Given
the increasing integration of the financial services regulatory
framework, particularly for the largest insurers, a group of Debevoise
& Plimpton LLP insurance and banking attorneys from the London
and New York offices attended the conference.
This memorandum provides background about the critical features
of this framework and covers highlights and implications of the
conference, including the adoption of final Basic Capital
Requirements (“BCR”) for Global Systemically Important Insurers
(“G-SIIs”), a key first step towards the development of a suite of
capital standards that will apply to large insurers globally. The
conference also featured panel discussions about resolution planning
now being undertaken by G-SIIs; group-wide supervision and
governance; and insurance in emerging markets.
In response to the financial crisis, the G20 and the Financial Stability
Board (the “FSB”) have initiated an effort to reform the global
financial system. As part of this effort, the FSB and multi-lateral
standard-setting organizations have worked to establish global
regulatory standards for various elements of the financial system,
including the insurance sector. To that end, the standard-setting
body for the insurance sector, the IAIS, is working with the FSB to
Alexander R. Cochran
Eric R. Dinallo
Ethan T. James
Thomas M. Kelly
Marilyn A. Lion
Gregory J. Lyons
Nicholas F. Potter
John M. Vasily
Samuel E. Proctor
Jeremy G. Hill
James C. Scoville
E. Drew Dutton
Stuart J. Valentine
establish global regulatory standards for G-SIIs and internationally active insurance
groups (“IAIGs”). Once promulgated, the standards must be implemented by individual
jurisdictions to have legal effect. We provide an overview of these standards below.
OVERVIEW OF IAIS STANDARDS FOR G-SIIS AND IAIGS AND IAIS CONFERENCE
In July 2013, the FSB designated nine G-SIIs using a five-category assessment methodology
developed by the IAIS.1 The categories are: (i) size; (ii) global activity; (iii)
interconnectedness; (iv) non-traditional insurance/non-insurance (“NTNI”) activities2; and
(v) substitutability, with the most important considered by the IAIS to be the level of
interconnectedness and NTNI activities. The list of designated G-SIIs will be updated
every November, starting in November 2014, using the IAIS assessment methodology.
Under the IAIS Common Framework for the Supervision of IAIGs (“ComFrame”), an
insurance group is an IAIG if it meets certain criteria as to international activity and size.
■ International Activity. Premiums written in three or more jurisdictions and percentage
of gross premiums outside home jurisdiction constitute at least 10 percent of the
group’s total gross written premium.
■ Size. Total assets of at least $50 billion or gross written premiums of at least $10
Importantly, an IAIG may be (i) an insurance group that conducts only insurance business;
(ii) a financial conglomerate dominated by insurance business that also includes other
financial business, such as banking or securities; (iii) part of a financial conglomerate
dominated by other financial business; or (iv) part of a diversified conglomerate including
1 The nine current G-SIIs are Allianz SE, American International Group, Inc., Assicurazioni Generali S.p.A., Aviva plc,
Axa S.A., MetLife, Inc., Ping An Insurance (Group) Company of China, Ltd., Prudential Financial, Inc. and Prudential
plc. See FSB, FSB Identifies Global Systemically Important Insurers (G-SIIs) and the Policy Measures That Will Apply to Them
(July 18, 2013), http://www.financialstabilityboard.org/publications/r_130718.htm; IAIS, G-SIIs: Initial Assessment
Methodology (July 18, 2013), http://www.iaisweb.org/view/element_href.cfm?src=1/19151.pdf.
2 NTNI activities include (i) non-policy holder liabilities and non-insurance revenues from financial activities; (ii)
derivatives trading; (iii) short-term funding; (iv) financial guarantees; (v) minimum guarantees on variable insurance
products; (vi) intra-group commitments; and (vii) highly liquid insurance liabilities.
3 IAIS, ComFrame Revised DRAFT (Sept. 2014), http://www.iaisweb.org/view/element_href.cfm?src=1/23156.pdf.
non-financial activities. Thus, a financial group need not be primarily engaged in
insurance underwriting in order to be considered an IAIG.
Direct regulators (and not the IAIS or the FSB) are responsible for identifying financial
groups as IAIGs. The IAIS expects that approximately fifty companies will be designated
IAIGs pursuant to the announced criteria.4
The IAIS capital framework for G-SIIs is composed of two components: (i) BCR and (ii)
higher loss absorbency (“HLA”) requirements, which build on the BCR and are intended
to address G-SII’s systemic importance in the international financial system. Following the
release of two consultative documents on the BCR in 2013 and 2014, the IAIS released the
final BCR framework on October 23.5 The HLA is due to be completed by the end of 2015
and to apply to G-SIIs from 2019.
BCR. The final BCR framework largely follows the proposal outlined by the IAIS in its
consultation paper published in July 2014. The BCR uses a factor-based approach to
determine the level of Required Capital for G-SIIs, calculated on a consolidated groupwide
basis. It consists of three components: (i) insurance; (ii) banking, which uses the
Basel III Leverage Ratio; and (iii) non-insurance financial activities not currently subject to
regulatory capital requirements.6 An additional component for material non-financial
activities will be added following further field testing.7 Fifteen factors apply risk
weightings across Traditional Life, Traditional Non-life, Non-Traditional and Asset
segments. The factor values, which are largely the same as those proposed in the
consultation papers, that will initially be applied to the various factors are as follows:
4 IAIS, Frequently Asked Questions for the IAIS ComFrame (Oct. 9, 2013),
5 IAIS, BCR for G-SIIs: Proposal (Dec. 16, 2013), http://www.iaisweb.org/view/element_href.cfm?src=1/20710.pdf;
IAIS, BCR for G-SIIs (July 9, 2014), http://www.iaisweb.org/view/element_href.cfm?src=1/22594.pdf;
IAIS, BCR for G-SIIs (Oct. 23, 2014), http://www.iaisweb.org/view/element_href.cfm?src=1/23741.pdf (hereinafter “Final
6 IAIS, Final BCR at 8.
7 IAIS, Final BCR at 8 & 16.
BCR segment Proxy measure for risk exposure Factor
Traditional Life (TL)
Protection life Net Amount At Risk a1 0.06%
Participating products Net Current Estimate8 a2 0.6%
Annuities Net Current Estimate a3 1.2%
Other life Net Current Estimate a4 0.6%
Traditional Non-life (TNL)
Property Premium Measure b1 6.3%
Motor Net Current Estimate b2 6.3%
Casualty Net Current Estimate b3 11.3%
Other non-life Net Current Estimate b4 7.5%
Variable annuities Notional Value c1 1.2%
Mortgage insurance Risk in Force c2 4.0%
GICS & Synthetic GICS Notional Value c3 1.1%
Other non-traditional Net Current Estimate c4 1.3%
Credit - investment grade Fair Value d1 0.7%
Credit - non investment
Fair Value d2 1.8%
Equity, real estate & noncredit
Fair Value d3 8.4%
A scalar is then applied to the calculation in order to calibrate the amount of Required
Capital at the level desired by the IAIS.
The final BCR framework classifies qualifying capital as either “core” or “additional”. A
G-SII’s BCR ratio is determined by summing Core Capital and Additional Capital,
applying certain deductions, exclusions and adjustments, and then dividing by Required
Capital.9 Core Capital is permanent capital that is fully available to cover losses of the
insurer at all times on a going-concern and winding-up basis, while Additional Capital is
8 “The current estimate reflects the expected present value of all relevant future cash flows that arise in fulfilling
insurance obligations, using unbiased, current assumptions.” IAIS, ICP On-line Tool,
9 IAIS, Final BCR at 19 & Annex D.
subordinated to the rights of policyholders and provides additional loss absorption
capacity for losses arising in winding-up.10 Importantly for U.S. insurers, the BCR adopts
the proposed requirement that core capital consist of undated financial instruments,
thereby effectively excluding financial instruments with a specified maturity, including
The final BCR does not reflect many of the criticisms raised in the comments to the July
consultation paper and elsewhere. Most fundamentally, the BCR continues to apply a
market adjusted valuation approach in order to provide for comparability of outcomes
across jurisdictions. Liabilities are generally discounted using IAIS-specified discount
curves (based on risk adjusted liquid interest rate swaps or government bonds for the
relevant jurisdiction), while financial instruments are generally adjusted to fair value as
determined under the G-SII’s applicable IFRS or GAAP standards for reporting or
disclosure purposes. Many argue that the market adjusted valuation approach will be
excessively volatile and pro-cyclical, although the IAIS notes that this will be reviewed in
the development of the Insurance Capital Standards (“ICS”) applicable to IAIGs (see
below).12 Many other issues – such as the impact of diversification and asset-liability
management on the capital standard – were deferred for consideration in the design of the
ICS, so that the BCR could remain a simplified capital standard.
Following field testing of the proposed BCR with G-SIIs and some other insurers, the level
of the BCR has been set to fall between the upper and lower thresholds for regulatory
supervision (between the Prescribed Capital Requirement and the Minimum Capital
Requirement under Solvency II).13 The IAIS believes that at this level, frequent breaches of
the BCR should not occur “assuming normal business conditions”, although the final level
of capital requirements will not be known until HLA requirements – which will be added
to the BCR for G-SIIs – are finalized, which is expected to happen by the end of next year.
The IAIS stated that it may reconsider BCR calibration levels once the HLA is determined.
HLA. The IAIS believes that “G-SIIs should have higher loss absorption capacity to reflect
the greater risks that they pose to the global financial system and the global economy.”14
To that end, G-SIIs will be required to maintain HLA capacity in addition to the BCR. HLA
is composed of (i) a “base” capital requirement, which will vary based on the type of
10 IAIS, Final BCR at 19 & Annex D.
11 IAIS, Final BCR at Annex D.
12 IAIS, Final BCR at 42.
13 IAIS, Final BCR at 21.
14 IAIS, G-SIIs: Policy Measures (July 18, 2013) at 27, http://www.iaisweb.org/view/element_href.cfm?src=1/19150.pdf.
activities conducted by the G-SII and the entity in which the activity is conducted; and (ii)
a percentage uplift applied to the G-SII’s NTNI activities. The percentage uplift for NTNI
may be reduced if the G-SII demonstrates “effective separation” of its NTNI activities. The
HLA is expected to be applied to the entity where NTNI activities are carried out.
The HLA is scheduled to be adopted in November 2015 and applied to G-SIIs from 2019.
Initially, the BCR will be the foundation for the HLA, but once the ICS is adopted, the ICS
is expected to replace the BCR.
The IAIS is developing a risk-based group-wide ICS for IAIGs. The ICS will be informed
by the development of the BCR, will be completed by the end of 2016, and applied to
IAIGs in 2019 after refinement and calibration in 2017 and 2018. It is intended to be a
comprehensive framework, so the IAIS expects to consider certain business risks, such as
operational and liquidity risk, that are not accounted for in the BCR.15 The ICS has
prompted concern among industry participants and some regulators about the speed of
these significant developments, as well as the overall structure – with the latter concern
focused on the appropriateness of setting capital requirements based on the market value
of both assets and liabilities, and the volatility that may cause.
The current draft of ComFrame provides a “placeholder” for the ICS, in anticipation of
further development of the BCR and HLA. The IAIS states that once the ICS is developed,
the BCR and HLA will be reassessed using the ICS as a foundation.
Anticipated milestones for the development of the BCR, HLA and ICS are shown in the
Nov. 2014 G20 Leaders expected to endorse final BCR proposal
Dec. 2014 Initial consultation document on ICS released
From 2015 Confidential reporting of BCR to group-wide supervisors with
access by the IAIS for the purpose of reviewing and refining the BCR
Feb. 2015 Deadline for responses to the ICS consultation document
Mar. to Sept. 2015 Field testing of HLA and ComFrame, including ICS
Nov. 2015 HLA proposal to be finalized and endorsed by G20
Mar. to Sept. 2016 Further field testing of ComFrame, including ICS
Dec. 2016 ICS to be agreed, subject to further refinement via field testing
15 IAIS, Final BCR at 12.
2017 and 2018 Further refinement of ComFrame, including ICS, via field testing
Late 2018 ComFrame, including ICS, to be adopted by IAIS
From 2019 Implementation of ComFrame, including ICS, to commence
From 2019 HLA commences to apply to G-Slls, initially based on BCR as a
foundation, later to be based on ICS as a foundation
Resolution planning was a key area of discussion at the IAIS conference. The FSB and IAIS
intend for G-SIIs to develop recovery and resolution plans to (i) to avoid severe systemic
disruption and to protect taxpayers from exposure to loss; (ii) to control loss absorption by
maintaining a claims hierarchy in the event of the G-SII’s liquidation; (iii) prioritize the
protection of policyholders during winding up and liquidation proceedings; and
(iv) ensure that non-viable G-SIIs can exit the market in an orderly fashion. G-SIIs
designated in 2013 must complete recovery and resolution plans by the end of 2014.
Unlike for G-SIIs, ComFrame does not require IAIGs to prepare recovery and resolution
plans. Rather, ComFrame contemplates that IAIGs will develop contingency plans and
procedures that enable them to deal with crisis situations, maintain an acceptable financial
condition and protect policyholders.
Regulators and industry representatives on the Recovery and Resolution panel discussed
several elements of the resolution plans to be required of the nine G-SIIs, and which are
likely, ultimately, to be extended to IAIGs. The FSB has published the general framework
for these plans, Key Attributes of Effective Resolution Regimes of Financial Institutions, and this
month provided updates to the framework focused on insurers.16 The regulators on the
panel noted that in addition to being an important protection for taxpayers, they also will
view the plan as a good risk management technique for affected companies.
Regulators on the panel recognized that insurers differ from banks (for example, it may be
more difficult to determine “critical functions” with insurers) but warned that those
differences “should not be overstated”, and thus lessons from the bank framework are
relevant to pending insurer plans. The G-SII plans will be prepared at a group level,
although filers also will need to devote significant attention to the resolution of underlying
insurance entities. Panelists also emphasized that the insurance resolution planning
process will be a “learning curve” for both the industry and the regulators, and that they
16 FSB, Key Attributes of Effective Resolution Regimes of Financial Institutions (Oct. 15, 2014),
expect annual plans to be refined and improved during the first 3-5 years after the initial
plan is filed. The panelists cited the first resolution plans filed by the U.S. insurer
systemically important financial institutions, AIG and Prudential, as informative models
for both process and content. The FDIC representative stated that comments on those
plans will be provided to the insurers soon, and that in any event (as with the banks), the
agencies expect increased analysis with each succeeding plan. Debevoise assisted AIG in
the preparation of its resolution plan.
Participants noted that, except in a few jurisdictions (notably the U.S.), the IAIS initiative to
require recovery and resolution plans is not currently part of local law. However, it is
likely that at least some jurisdictions will formally adopt the requirement and extend it to a
larger class of insurers, for instance, through a directive in the European Union. Among
other issues, the panelists noted that the regulatory regime will have to address how to
maintain the confidentiality of a plan applying to a multi-jurisdictional institution.
D. Enhanced Supervision
The IAIS views an enhanced supervisory framework as a critical element of the regulatory
apparatus for G-SIIs, and thus the IAIS policy measures for G-SIIs include a variety of
requirements relating to enhanced supervision, including group-wide supervision,
development of systemic risk management plans, enhanced liquidity planning and
management, and the effective supervision of NTNI activities. In addition, the IAIS
contemplates that G-SIIs will undertake additional prudential measures to reduce
potential systemic risks, including effective internal controls, appropriately diversified
investment and reinsurance activities, heightened disclosure and stress testing obligations
as compared to other firms.
As with G-SIIs, the IAIS believes group supervision is a “fundamental” element of
ComFrame, which contemplates that supervisors will have direct powers over the IAIG’s
head.17 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 groupwide
Discussions of IAIS initiatives for group-wide supervision and governance of G-SIIs and
IAIGs focused on failures of governance as a key cause of the financial crisis and on the
need for regulatory supervision and internal governance to take account of the risk culture
of the particular company. There is a renewed focus on corporate governance at both
group and individual entity levels by the International Monetary Fund (the “IMF”), the
17 IAIS, ComFrame Revised DRAFT at 3.
G20 and the FSB, including in the FSB’s Guidance on Supervisory Interaction with Financial
Institutions on Risk Culture: A Framework for Assessing Risk Culture, published in April 2014.18
Panelists drew particular attention to the need for strong board membership at both the
parent and individual subsidiary level, for the building of a culture of ethical conduct
through example at the most senior levels and for aligning incentives with behavior.
Regulatory community commentators called for greater supervisory powers at the parent
entity level, including access to the parent’s board, access to and inspection of the parent’s
records and the power to conduct on-site supervisory visits at the parent level. An IMF
spokesperson cited the conclusion of a recent IMF report that the lack of a group-wide
supervisory framework in many jurisdictions represents a significant shortcoming in
potential supervisory effectiveness.
The IAIS conference also highlighted emerging market issues, with a panel on financial
inclusion, or low-income access to insurance, and the prominent presence of Ping An, the
Chinese insurer and major conference sponsor (and a designated G-SII). Panelists
emphasized the importance of educating consumers on insurance matters and
strengthening insurance supervision in emerging markets. They also discussed insurers’
efforts to improve access to insurance by, for example, rethinking developed world
distribution mechanisms that may not work well in emerging economies. Emerging
markets issues also arose in other contexts, including during a panel on capital, where
commentators noted that a global capital standard could help established insurers looking
to expand in emerging markets through consistent capital requirements.
The IAIS standards for G-SIIs and IAIGs reflect an emerging view as to how financial
institutions, including insurers, should be regulated. Consequently, the standards will
have significant impacts on the insurance sector.
Most visibly, in light of the recently released final BCR framework, enhanced capital
standards will have a significant impact in the near-term on G-SIIs and, over the longer
term, on IAIGs and potentially on other insurers should domestic regulators opt to enlarge
the reach of the standards. First, in order to fully comply with the new global capital
standards, G-SIIs and IAIGs may need to fundamentally restructure the type and quantity
of capital held. Accordingly, these insurers will need to work with regulators to raise
capital necessary to meet IAIS standards and to develop new and innovative capital
Enhanced capital standards also may lead to follow-on effects in firm structure. For
example, as certain activities become more capital intensive, and therefore less profitable,
insurers may become more active in mergers and acquisitions. Such a trend has precedent
in European insurers’ sales of U.S. operations in anticipation of Solvency II. Regulators
may be hesitant to encourage consolidation and perceived systemic risks in the insurance
sector, so it is possible that non-G-SIIs will experience greater M&A opportunities.
The new standards’ negative treatment of NTNI activities may also have a significant
impact. Group-wide supervisors may require G-SIIs to effectively separate NTNI from
their insurance businesses in order to reduce or mitigate systemic risks, leading G-SIIs to
seek to divest or restructure these activities. The HLA additional capital requirements,
which are explicitly designed to discourage NTNI activities, may also lead to the
divestment or restructuring of those activities.
It is currently unclear to what extent G-SII resolution planning will have a substantial
impact on these firms and the extent to which resolution planning requirements may be
extended to IAIGs and other non-G-SII insurers.
Finally, due to ComFrame’s governance and risk management requirements, IAIGs will
need to place greater emphasis on group-wide strategy, management and planning. These
group-wide standards have the potential to deter more risky investments for insurers and
may increase the difficulty of obtaining regulatory approval for new activities.
The development of global insurance standards by the IAIS is one component of an overall
effort to reform the global financial system in response to the financial crisis. As with
other parts of this effort (e.g., Basel Committee on Banking Supervision reform of banking
sector standards), the IAIS process is far from complete, and thus the ultimate impact
remains unknown. In any event, it is clear that the IAIS and standards it develops will
have a significant impact on the evolving regulatory framework for insurers worldwide.