The International Association of Insurance Supervisors (IAIS) today proposed a draft of the Common Framework (ComFrame) for the Supervision of Internationally Active Insurance Groups (IAIG), marking the completion of the second step in its three-year development phase.
In the new draft, the IAIS has identified criteria by which IAIGs will be selected.
First, to be an IAIG, premiums must be written in not less than three jurisdictions/countries and the percentage of gross premiums written outside the home jurisdiction is not less than 10% of the group's total gross written premium.
The size criteria is not a surprise. It mirrors other thresholds for systemically important financial institutions (SIFIs) developed by U.S. regulators under the Financial Stability Oversight Council (FSOC). The threshold for IAIGs total assets of $50 billion –and gross written premiums of $10 billion.
Prudential Insurance Co., for example, is a prime contender. It did not comment, nor did MetLife.
IAIS also said there would be "constrained supervisory discretion" to allow groups that do not meet this criteria to still be IAIGs and ones who do to be excluded.
Under the proposed criteria, there are about 50 groups that could be considered IAIGs, according to Dr. Monica Mächler, Swiss financial regulator–vice chair of the board of directors of FINMA– and chair of the Technical Committee of the IAIS.
The Technical Committee is the central standard-setting body for the IAIS. Mächler spoke with National Underwriter Life & Health today from Zurich.
ComFrame does not address systemic risks, as does the IAIS work on potential Global Systemically Important Insurers (G-SIIs) done under the guidance of the G-20sFinancial Standards Board. The proposed criteria for the IAIS G-SII Package was released on May 31. Total assets are an assessment criteria, but the amount is not identified.
The IAIS does not intend to develop a definitive list of IAIGs–it will provide criteria that IAIS members will apply to assess whether a particular insurance group or financial conglomerate should be supervised according to ComFrame.
Mächler said though none G-SIIs have yet been identified, there is a "great likelihood that, if there are any G-SIIs, these G-SIIs are also IAIGs."
IAIS, Basel, Switzerland, is working to prevent financial and policyholder calamity on a global scale in the wake of supervisory shortfalls and gaps in oversight revealed by the 2008 financial crisis.
The goal is to identify potential or developing material risks in IAIGs, which potentially could have an adverse impact on the IAIG and individual insurers and its policyholders and address those risks though certain supervisory actions.
The IAIS began work on ComFrame on July 1, 2010, as part of a three-year development phase ending July 1, 2013, and followed by impact assessments to work out some of the calibrations and parameters necessary for certain requirements.
More work will be done in the following year to finalize the draft. In the current draft, "we are very, very general" about the methodology for capital standards. "This needs to be elaborated yet," Mächler said.
IAIS is striving to create an international " partiallyharmonized approach to capital assessment," and lis ooking at the various risks of a group, she said, so that the assessment methodology can be commonly understood. She emphasized flexibility and also a system with providing clarity among the involved countries and supervisors.
ComFrame does not address systemic risks, as does the IAIS work on potential Global Systemically Important Insurers (G-SIIs). The criteria for the IAIS G-SII Package was released on May 31. Total assets are an assessment criteria, but the amount is not identified.
There won't be uniform global standards but a series of elements that work together, a common approach that allows for different options –but they will need to be reconcilable and commonly understood, Mächler noted.
The IAIS said does not intend to develop a definitive list of IAIGs–it will provide criteria that IAIS members will apply to assess whether a particular insurance group or financial conglomerate should be supervised according to ComFrame. The intention is that at least those groups which meet the criteria to be an IAIG will be supervised according to ComFrame.
"In our increasingly globally interconnected financial marketplace, supervisors need the ability to efficiently coordinate and cooperate across multiple borders," said Peter Braumüller, Chair of the IAIS Executive Committee. "ComFrame will provide the foundation needed to effectively work together in supervising complex cross-border insurance groups and, in addition to contributing to global financial stability, will help protect the individual policyholder."
ComFrame's draft says that the approach to supervisory analysis "should not be prescriptive but should focus on substance. The group-wide supervisor must undertake supervisory analysis at the group level but work with other involved supervisors in doing so." U.S. and other insurers want to make sure ComFrame sticks to its principles-based stated approach, but is not sure it has done so.
The draft contains many parameters on group capital assessments methodologies and tries to define sufficient levels of capital required to protect policyholders by scoping out target criteria.
The draft states that the company will need to maintain capital resources above solvency control levels. This is a Prescribed Capital Requirement (PCR).
If the IAIG goes below its PCR, or its set of PCRs, then the group-wide supervisor, in cooperation with other involved supervisors, will initiate a 'ladder of intervention'– the supervisor will determine what supervisory actions should be taken, in what timescale, in which entity, in order to ensure that the IAIG is able to get back to, and maintain, appropriate capital resources.
Enterprise Risk Management (ERM) and the Total Balance Sheet approach would form the common foundation for development of the capital component of solvency assessment.
