The International Association of Insurance Supervisors (IAIS) told the insurance world today it would be developing a first-ever risk based global insurance capital standard by 2016.
Full implementation will begin in 2019 after two years of testing, and it will be included as part of ComFrame, applying to internationally active insurance groups (IAIGs), both property and life insurers, although some in the industry worry about a bleed over effect into all shapes and sizes of insurers.
Such a directive was anticipated, but it was not clear whether it would be developed within the ComFrame project or not. The ComFrame project, begun in 2010, applies to IAIGs.
The IAIS was instructed in a broad insurance supervisory policy directive by the G-20's Financial Stability Board (FSB) to develop "a work plan to develop a comprehensive, group-wide supervisory and regulatory framework for Internationally Active Insurance Groups (IAIGs), including a quantitative capital standard" by the end of the year.
The IAIS release today did not mention the word "quantitative."
The standard is not necessarily a feared high-level capital requirement and leaves open room for jurisdictions to allow insurers to develop their own solvency management systems and models governing under certain rules, possibly with some minimum capital floor.
However, the process will be fortified by discussions of the requirements for insurers and reinsures that have been or will be deemed to be systemically important globally.
Starting in 2014, the IAIS will also develop backstop capital requirements for global systemically important insurers (G-SIIs), whose designees include AIG, MetLife and Prudential Financial domestically, and Axa, Allianz, Aviva, Prudential plc in the U.K., Ping and Assicurazioni Generali S.p.A. The backstop capital requirements will apply to the G-SIIs by year-end 2014.
These backstop requirements would serve as the foundation for higher loss absorbency requirements, coming in 2019, for the G-SIIs. The IAIS anticipates that this development and testing will also be used for development of the capital standards for the IAIGs.
An IAIG, according to the IAIS, is not quite a G-SII. The insurer must have premiums written in not fewer than three jurisdictions, with not less than 10 percent of the group's total gross written premium in foreign countries and must have total assets of not less than $50 billion and gross written premiums of $10 billion. The IAIS expects that approximately 50 IAIGs will be identified by supervisory colleges.
The IAIS says that IAIGs need tailored and more coordinated supervision across jurisdictions due to their complexity and international activity. This requires a specific framework and coordination of supervisory activities under the aegis of a group-wide supervisor, the IAS has said.
Fundamentally, ComFrame is intended to be a comprehensive, well-balanced framework that focuses equally on both quantitative and qualitative elements. The IAIS emphasized in its original documents "that ComFrame is not intended to be a collection of overly prescriptive, narrowly defined approaches. On the contrary, ComFrame will be outcome-focused and, whilst it will not be rules-based, its requirements will be accompanied with specific parameters and specifications."
The IAIS says that ComFrame has always included a capital component within its solvency assessment. This component, which is being finalized in concept, will be used as a starting point for development of the capital standard.
"From the financial crisis, we learned that our global financial regulatory regime should be more robust and comprehensive in scope, and jurisdictions should share a commitment to global standards," stated Michael T. McRaith, chair of the IAIS Technical Committee and director of the Federal Insurance Office under the U.S. Treasury.
"The IAIS – with its mission to promote effective and globally consistent supervision of the insurance industry and to contribute to global financial stability – has an essential role in fulfilling these objectives," McRaith said.
The industry and the National Association of Insurance Commissioners (NAIC) are taking guarded position at this time, but hope to work with IAIS on the specifics, which could range from a minimum capital standard with company specific capital standard flexibility to something more prescriptive, depending on what is worked out and what is finally approved by the FSB.
The U.S. states can adopt these standards state by state, but if they do not there will be a lot of places where the IAIS and other countries can apply pressure, including in the reviews of the U.S. regulatory system, such as the Financial Sector Assessment Program (FSAP), which provides in-depth examinations of countries' financial sectors and in trade negotiations. A federal legislative approach is not out of the question. At any rate, the FIO, the NAIC, the Federal Reserve as it gains IAIS membership, and IAIS observers are all expected to work together on these standards.
