The task of setting a global regulatory framework is not an easy one. Since 2016, when the International Association of Insurance Supervisors (IAIS) introduced the Insurance Capital Standards (ICS) both the industry and some of the supervisors pushed for fundamental changes in a number of areas that were deemed unfit for the insurance business. With the new consultation package, IAIS aspires to square the circle. Aggelos Andreou reports
Almost a year after the heated IAIS meeting in Kuala Lumpur, where the first version of the ICS was introduced, the global supervisor released from Moscow a consultation package consisting of the ICS version 2.0 and the common framework for the supervision of the internationally active insurance groups, widely known as ComFrame.
(https://www.insuranceerm.com/analysis/ics-version-1.0-inspires-little-faith-in-iais-timetable.html#article-head)
With the introduction of the package, the IAIS believes that despite wide anticipation that the framework will have to be delayed, 2019 as an implementation year is feasible.
The consultation will last for 90 days until the end of October this year, and the final text will take effect on November 2019, at the IAIS’ annual general meeting. In the meantime, depending on the feedback, the global supervisor is open to making any further amendments to both documents, to ensure full implementation of the package.
ComFrame
The introduction of a common framework specifically for internationally active insurance group is built upon the already existing ICSs, and despite being presented as a standalone regulation, it will eventually be integrated into the ICS version 2.0.
The IAIS says that ComFrame will allow supervisors to get a consistent supervisory strategy and simplify regulatory actions and compliance.
In that sense, the framework identifies the internationally active insurance groups (IAIGs) by applying two criteria: international activity and size.
The IAIS will leave the listing of these groups to regional supervisors, who need to inspect whether a group is writing premiums in more than three jurisdictions and if the total worth of assets sums up to $50bn.
ComFrame touches upon ten insurance core principles (ICPs), including risk management and internal controls, enterprise risk management for solvency purposes and corporate governance.
According to IAIS, there is a strong correlation between IAIGs and the global systemically important insurers (G-SIIs) as had previously been defined at the supervisors’ framework for addressing systemic risks.
While different in nature, IAIGs and G-SIIs fall in the same spectrum of supervision. As the draft regulation says, ComFrame will serve as the basis upon which G-SII policy measures can be added.
ICS controversy
ICS version 2.0 was presented alongside ComFrame during the Moscow meeting, an introduction that was highly anticipated by both the industry and the supervisors.
The changes made by IAIS have been designed to satisfy both the different jurisdictions as well as the insurance industry itself.
For example, IAIS says that it has narrowed down the components of the reference ICS.
The draft states that IAIGs’ five-year mandatory confidential reporting will now be based the market-adjusted valuation (MAV) with a single discounting approach, the standard method for the calculation of ICS risk charges and the converged criteria for qualifying capital resources.
IAIS’ efforts aspired to tone down the initial controversy around the use of internal models in capturing the capital requirements, which was the main friction point amongst several jurisdictions.
(https://www.insuranceerm.com/analysis/iais-faces-fresh-debate-on-systemic-risk-and-clash-on-capital-standard.html)
Romain Paserot, deputy secretary general at IAIS, tells InsuranceERM, that ICS Version 2.0 has taken into account many of the different views, as evidenced in the new updated version.
“There are developments about what our vision and explanations around what is expected from group supervisors and all the involved parties,” he says. “We are taking feedback around the additional reporting with the internal models since we have worked to develop our strategy around that.”
US objection
Back in 2017, the United States through their supervisory body, National Associations of Insurance Commissioners (NAIC), had rejected the use of internal models, insisting on adopting an aggregation-based method for calculating the capital requirements. However, in the updated ICS version this is still not included.
Paserot argues that the US proposal could not be adopted because it is simply an implantation modality, rather than a modality in the design of ICS.
“The ICS is still a consolidated-based approach to capital requirement,” he says. “Because of this difference, and because of the desire of the US to implement the ICS through an aggregation method, the agreement states that we are going to deliver criteria to assess whether an aggregation method can deliver the same outcome as the ICS.”
A spokesperson for NAIC tells InsuranceERM that it is too soon to comment on that issue as they are currently reviewing the consultation package and plans to submit comments as part of the public consultation process.
He did say, however, that the US will adopt a wait-and-see stance as the aggregation method is still on the works.
“As noted in the Kuala Lumpur agreement and the current ICS consultation document, the aggregation method is still at an early stage of development,” the spokesperson said. “Beginning this year, the IAIS is collecting data from interested jurisdictions to the development of the aggregation method; we expect to know more once this concludes.”
Paserot confirms that IAIS is experimenting with that method, by collecting data results from volunteer groups to understand what the differences and similarities with the IAIS’ proposed method are. “When we finish this task, we will be able to build the criteria for assessing the equivalence of these two methods,” he adds.
A Naic’s spokesperson adds that there is no definite date for the finalisation of the project, but the US supervisor expects that there will be a comparable outcome to the ICS method.
Systemic Risk
Supervisors see the introduction of ComFrame and the ICS version 2.0 as part of the IAIS’ goal to address systemic risk.
To this extent, during global supervisors’ meeting at Moscow, there has been a reconfirmation of the IAIS’ plans to leave behind the entities-based versus activities-based approach debate and proceed with a holistic framework, irrespective of what the source or the challenge of systemic risk is.
Paserot says that supervisors think that there are two primary aspects of this plan that need to be worked extensively. One of them, he says, is the monitoring of systemic risk, which can be done by data collection.
The second is to examine the policy measures. “We have to look at what there is available for a policy measure, what are the measures that need to be developed to address the systemic risk that has been identified, do some gap analysis and see if there is a need to develop a new policy measure, or extend some others,” he says. “And of course, we need to ensure there is going to be an implementation of these policy measures.”
However, the United States remains sceptical of the IAIS’ approach, holding their position that an entities-based approach should be completely abandoned.
NAIC says that it will follow closely the developments on IAIS’ plan, to ensure that there not going to be any more issues and that supervisory community could implement a thorough and effective plan on systemic risk.
“Both ComFrame and the ICS can be used to help address systemic risk; the IAIS continues to develop its holistic framework for systemic risk in the insurance sector and we look forward to the public consultation on this, which is planned towards the end of this year,” a NAIC’s spokesperson says. “Given a number of issues with an entities-based approach, an activities-based approach should replace, not complement the entities-based approach.”
The distance between IAIS and the US is what makes the implementation of IAIS’ plan the most critical step to tackling systemic risk on a global scale. The third pillar of the framework is to ensure that there will be consistency in the way regulators across the world will adopt and practice this holistic framework.
As Paserot puts it, “the IAIS have to make sure that there is a coordinated answer to systemic risk, otherwise [the plan] will fail before it even hits the ground running.