Pau Ling Yap and Paolo Cadoni on the recently agreed reforms that aim to improve supervision of internationally active insurance groups
On 14 November 2019, during its Annual Conference in Abu Dhabi, the International Association of Insurance Supervisors (IAIS) announced the adoption of the first global frameworks for the supervision of Internationally Active Insurance Groups (IAIGs) and the mitigation of systemic risk in the insurance sector. This comprehensive set of reforms will enable effective cross-border supervision of IAIGs and contribute to global financial stability.
The agreement was the culmination of significant contributions from regulatory institutions around the globe since 2013, including the Bank of England and the Prudential Regulation Authority, which over the years have led and otherwise contributed to the different IAIS activities. From 2020 onwards, IAIS members commit to implement:
- The Common Framework for the supervision of IAIGs (ComFrame)
- The Holistic Framework for the mitigation of systemic risk in the insurance sector
- Version 2.0 of the risk-based global Insurance Capital Standard (ICS) for a five-year monitoring period (2020-2024), ie the insurance equivalent to the Basel capital standards for banks.
What is an IAIG?
ComFrame identifies an IAIG as an insurance group that meets criteria related to its international activity and size. ComFrame deems a group internationally active if it writes gross premiums in at least three jurisdictions and at least 10% of its total gross written premiums comes from outside its home jurisdiction. A group may meet the size criteria by holding at least US$50bn of total assets or by writing at least US$10bn of gross written premium, both assessed on a rolling three-year average basis. The two measures for size are designed to capture life, non-life and composite insurers. Notwithstanding these quantitative considerations, ComFrame allows some supervisory discretion in the identification of IAIGs.
From July 2020, the IAIS will publish a register of IAIGs that have been identified and publicly disclosed by group-wide supervisors in their respective jurisdictions, with annual review points thereafter. This register may evolve over time as insurers change their business strategies and partake in (de)mergers, acquisitions and disposals.
The global insurance supervisory landscape before November 2019
Before November, the only international standards on the supervision of insurance legal entities and groups (irrespective of size) were the IAIS’s Insurance Core Principles (ICPs). In other words, supervisory materials tailored to IAIGs did not exist prior to the adoption of ComFrame. ComFrame material is now integrated into a subset of the revised ICPs: Suitability of Persons, Corporate Governance, Risk Management and Internal Controls, Supervisory Review and Reporting, Preventive Measures, Corrective Measures and Sanctions, Exit from the Market and Resolution, Investments, ERM for Solvency Purposes, Group-Wide Supervision, Supervisory Cooperation and Coordination.
The Holistic Framework replaces the previous approach to mitigating systemic risk in the global insurance sector, which saw a set of pre-determined policy measures applied solely to a small group of identified global systemically important insurers (G-SIIs) – insurance groups identified as having a global financial stability impact in the event of failure. The new approach recognises that systemic risk can arise both from sector-wide activities and exposures, as well as from a concentration of these within individual insurers. It includes a proportionate application of an enhanced set of policy measures to a broader portion of the insurance sector. The annual identification of G-SIIs is suspended from 2020, subject to an implementation review in 2022.
The impact of changes introduced by these reforms varies across jurisdictions, depending on the extent of gaps in existing regulatory frameworks.
ICS: field testing, monitoring and beyond
Between 2014 and 2019, the IAIS conducted six quantitative field testing exercises, extensive stakeholder engagement and three consultations. The agreement of ICS Version 2.0 in November 2019 represents a major step forward in the pathway to the ultimate goal of a single global capital standard, ie a prescribed capital standard (PCR), for IAIGs by the end of the monitoring period in 2024.
The monitoring period is intended as a period of stability during which the IAIS will monitor the performance of the ICS. It is not intended for monitoring the capital adequacy of IAIGs (ie the ICS will not trigger supervisory actions, and IAIGs need not manage their business to the ICS), or for third party use. However, this does not preclude amendments to address unintended consequences or major flaws.
An important element of the monitoring period is the discussion of ICS confidential reporting in supervisory colleges. This is to gather feedback from frontline supervisors on the design and performance of the ICS. The IAIS will use this feedback – together with ongoing data analysis, a public consultation (2023) and an economic impact assessment (2023-2024) – to address material issues before implementing the ICS as a group-wide PCR.
Active participation of IAIGs and supervisors is important for providing valuable feedback on the ICS. IAIS members have therefore agreed collectively to make participation in the monitoring period as large as possible.
The frameworks: in brief
ComFrame provides minimum supervisory standards tailored to the international activity and size of IAIGs.
It gives home and host supervisors a common language with which they can supervise IAIGs effectively. It builds on the ICPs that are applicable to all insurers, beyond IAIGs.
The Holistic Framework recognises that systemic risk can arise both from sector-wide activities and exposures, and from a concentration of these in individual insurers. It consists of an enhanced set of supervisory policy measures and powers of intervention for macroprudential purposes, an annual IAIS global monitoring exercise to identify potential issues leading to systemic risk, and a robust implementation assessment.
ICS Version 2.0 for the monitoring period is the quantitative component of ComFrame that assesses the consolidated group-wide capital adequacy of IAIGs. It is a single reference methodology for valuing assets and liabilities, assessing eligible capital resources and calculating capital requirements. The ICS aims to enhance global convergence in group solvency and insurance capital standards through the use of a common language.
Since the 2017 IAIS Annual Meeting in Kuala Lumpur, US members have indicated that their supervisory framework does not support a group-wide consolidated approach to a PCR. The US and other interested jurisdictions are thus developing the Aggregation Method (AM), which aims to deliver an outcome-equivalent implementation of the ICS.
The AM is not part of ICS Version 2.0 for the monitoring period, nor is it being developed by the IAIS as an alternative global standard. The IAIS will hold two public consultations before beginning, in Q4 2023, a technical assessment of whether the AM provides comparable outcomes to the ICS and can be considered an outcome-equivalent approach for the implementation of ICS as a PCR. The 2020 consultation will be on the draft definition of comparable outcomes and high-level principles to inform the comparability criteria. The 2021 consultation will be on the draft criteria to assess whether an AM provides comparable outcomes to the ICS.
Impact of COVID-19
In late March, the IAIS reviewed the impact of the pandemic on global insurance and revised the original work plan to provide operational relief to stakeholders. As of early April, the key decisions for 2020 were:
- ComFrame: The monitoring of IAIG identification and the development of the public register of IAIGs will continue remotely.
- Holistic Framework: The timeline for the 2020 global monitoring exercise is under review, with at least a four-month delay to the data submission deadline. In the immediate term, the IAIS will focus its efforts on undertaking a targeted assessment of the impact of COVID-19 on the global insurance sector.
- ICS Monitoring Period: The data submission deadline is extended from 31 August to 31 October (the end of April launch date is unchanged). The 31 March 2020 balance sheet will be collected as the ICS stressed balance sheet to reflect COVID-19.
The IAIS will monitor the pandemic and revise decisions and timelines as necessary. We refer our readers to the IAIS website for updates on the reforms, or indeed other IAIS initiatives in response to the outbreak.
Key elements of ICS Version 2.0
- It is a risk-based, consolidated group-wide capital standard. It consists of the reporting of the reference ICS, additional reporting at the option of group-wide supervisors, and supervisory college discussions.
- The reference ICS consists of a market-adjusted valuation (MAV) approach for the balance sheet, criteria for qualifying capital resources, and standard method for the capital requirement calculation. The ICS ratio is the qualifying capital resources divided by the capital requirement.
- The MAV approach requires adjustments to audited, consolidated jurisdictional generally accepted accounting principles (GAAP) or statutory accounting principles accounts, eg current estimate (the best estimate) for insurance liabilities determined using IAIS methodology for yield curves in discounting insurance liability cash flows; and fair values for financial instruments.
- The standard method for the capital requirement follows a modular approach and is calibrated to a 99.5% value at risk over a one-year time horizon of adverse changes to the qualifying capital resources. Risk charges are measured using a stress approach or a factor-based approach, apart from the natural catastrophe risk charges where models (subject to safeguards) are allowed.
- Capital resources are classified into two tiers based on loss absorbing capacity, level of subordination, availability to absorb losses, permanence and absence of both encumbrances and mandatory servicing costs.
- Additional reporting includes a GAAP with adjustments valuation approach (GAAP+) and other methods for capital requirements calculation, for example internal models, dynamic hedging, and supervisory-owned and controlled credit assessment processes (SOCCA). The IAIS will decide by the end of the monitoring period whether these methods would feature in the final ICS design.
Pau Ling Yap is a technical specialist in the Bank of England International Insurance Policy Team and has represented the UK in the development of the ICS since 2018
Dr Paolo Cadoni is technical head of department for insurance policy at the Bank of England, acting chair of the IAIS Policy Development Committee and chair of the IAIS Capital, Solvency and Field Testing Working Group