The International Association of Insurance Supervisors (IAIS) has issued a revised draft of its Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs), known as ComFrame. ComFrame establishes international supervisory standards focusing on the effective group-wide supervision of IAIGs. ComFrame identifies an IAIG as being an insurance group that has total assets of at least $50 billion or gross written premium of at least $10 billion (on a rolling three year average basis), premiums written in three or more jurisdictions and at least 10 per cent of the group’s total gross written premium is written outside the home jurisdiction.
ComFrame is divided into three modules: the scope of ComFrame (Module 1); the IAIG (Module 2); and the Supervisor (Module 3). IAIS has not indicated what changes have been made to the revised draft, however, it notes that further consultation will take place to establish a risk-based global Insurance Capital Standard (ICS) (Module 2, Element 5) and develop measures to address crisis management and resolution (Module 3, Element 3).
Insurance Capital Standard
IAIS has published a list of ten principles that it intends to follow in the development of the ICS. The ICS will eventually form Module 2, Element 5 of ComFrame. The ICS is being developed in the context of the IAIS Mission ‘to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.’ Principles include that the ICS: is intended to capture all material risks of IAIGs’ portfolios of activities; aims at comparability across jurisdictions; and promotes sound risk management by IAIGs and Global Systemically Important Insurers (G-SIIs).
Higher Loss Absorbency
The risk-based global ICS will form the foundation for Higher Loss Absorbency (HLA) for G-SIIs. The IAIS has published ten principles that will be followed in the development of HLA. The HLA measure will build on the Base Capital Requirement (BCR) and is intended to address additional capital requirements for G-SIIs reflecting their systemic importance in the international financial system. The HLA principles are:
- Comparability. Outcomes should be comparable across jurisdictions.
- G-SII risks. The HLA should reflect the drivers (but is not restricted to only those drivers) of the assessment of G-SII status.
- Internalise costs. The failure or distress of a G-SII may result in costs to the financial system and overall economy. The HLA should internalise some of these costs that are otherwise external to that G-SII.
- Resilient. HLA should work, and remain valid, in a wide variety of economic conditions (including a stressed macro environment).
- Going concern. The HLA, and its foundation, assume G-SIIs are ‘going concerns’.
- Quality of capital. The HLA capital requirement is to be met by the ‘highest quality capital’.
- Pragmatic. The design of the HLA needs to be pragmatic and practical, with an appropriate balance between granularity and simplicity.
- Consistent. The structure of the HLA should be consistent and be applicable over the range of insurance and non-insurance entities it will need to cover and over time.
- Transparent. The level of transparency, particularly with regard to the final results provided and the use of public data, should be optimised.
- Refinement. The HLA will be refined in light of experience and data gathered by the IAIS in the course of field testing exercise.
The IAIS is expected to publish a consultation paper on HLA in December 2014 with a view to completing its work on HLA by the end of 2015.