CIA (e)Bulletin/(e)Bulletin de l'ICA
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May 2015

International Capital Standards for Insurers

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By Robert Berendsen, FCIA

The IAIS is working on BCR, HLA, and ICS, of particular interest to G-SIIs and IAIGs, and the IAA and the CIA’s IRC are doing their part to help shape the end result. If I lost you but you are interested in capital requirements for insurers, hang in there and I’ll clarify things for you.

Explaining the Acronyms

The International Association of Insurance Supervisors (IAIS) represents insurance regulators and supervisors of more than 200 jurisdictions in nearly 140 countries, constituting 97 percent of the world’s insurance premiums. Its objectives are to (1) 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 (2) contribute to global financial stability. Canada’s Office of the Superintendent of Financial Institutions, Québec’s Autorité des marchés financiers, and British Columbia’s Financial Institutions Commission are all members of the IAIS.

In this article, I will focus on the IAIS project to develop group-wide global capital standards, and in particular the development of a risk-based group-wide global insurance capital standard (ICS), to be applied to internationally active insurance groups (IAIGs) as early as 2019. The full range of IAIS activities is beyond the scope of this article.

The IAIS project includes three planned steps. The first was the development of a Basic Capital Requirement (BCR), a very simple, factor-based capital requirement, to be applied to global systemically important insurers (G-SIIs). The IAIS has a process to identify G-SIIs, and currently it has identified nine, based in Europe, North America, and Asia; none are headquartered in Canada. This identification process will be finalized by end of 2015. The development of the BCR is now complete.

The second step is the development of Higher Loss Absorbency (HLA) requirements, again to be applied to G-SIIs. The HLA will build on the BCR and will address additional capital requirements to reflect G-SIIs’ systemic importance in the global financial system. This step is expected to be completed by the end of 2015.

The third step, being conducted in parallel, is the development of the ICS, which will have wider applicability than the BCR and HLA; i.e., it will be applicable not only to G-SIIs but to all IAIGs. As with G-SIIs, the IAIS has a process to identify IAIGs, and currently that would yield as many as 50 IAIGs globally, including two or more Canada-based groups. The ICS is expected to be finalized in late 2016.

While the development of these capital standards is led by the IAIS, members of the CIA have supported and continue to support such development as active participants on relevant committees of the International Association of Actuaries (IAA) and/or the CIA’s International Relations Council (IRC). For example, the CIA provided feedback to the IAIS on the BCR in 2014 and on the ICS in February of this year.

What is the ICS?

On December 17, 2014, the IAIS released a public consultation document, Risk-Based Global Insurance Capital Standard. It was a means to share with interested stakeholders the association’s initial thinking on all key elements of the proposed ICS. It also solicited input on 169 questions on topics ranging from the appropriateness of high-level principles guiding the development of the proposed capital standard to quantification methodologies to be applied for specific risks.

Once finalized by the IAIS, the ICS will constitute the minimum standard to be achieved and one which the supervisors represented in the IAIS will implement, or propose to implement, taking into account specific market circumstances in their respective jurisdictions. The ICS is to be a group-wide consolidated standard, applicable to IAIGs and G-SIIs across their global operations. Importantly, the ICS will not necessarily affect or replace existing capital requirements for legal entity supervision in any jurisdiction.

That doesn’t mean the ICS should be of limited interest to smaller Canadian insurers. We should not be surprised to see elements of it eventually work their way into local legal entity capital requirements.

The consultation document covers all areas one might expect in a capital standard, including the scope of application, valuation bases for assets and liabilities, determination of quantity and quality of available capital resources, determination of capital requirements, and possible approaches for measuring risk. There’s also a detailed "example" over 40-plus pages of a standard method to set capital requirements.

The CIA’s Involvement

The CIA’s Committee on International Insurance Regulations prepared feedback on the ICS consultation document on behalf of the Institute. The drafting group provided feedback on more than 110 of the 169 questions. In many cases, it expressed support for the ideas proposed in the consultation document. There were also areas where the group offered suggestions for improvement. Feedback and suggestions included:

  1. Offering incentives to insurers to maintain dynamic risk management strategies;
  2. Aligning with the International Financial Reporting Standards 4 Phase 2 developments where possible, on issues of contract boundary, the inclusion of margins, and discounting;
  3. Ideas for discounting liability cash flows that are beyond the term of deep and liquid asset markets;
  4. Considering policyholder behaviour risks beyond lapse risk;
  5. Ideas on how to deal with adjustable and participating liabilities;
  6. The need to recognize geographic differentiation and diversification; and
  7. A number of detailed suggestions concerning specific asset and liability classes.

What’s Next?

Quantitative field testing for the ICS is underway, with results to be submitted by mid-August. The IAIS then plans to publish an updated consultation document in late 2015, to be followed by another round of field testing. The ICS is scheduled to be finalized by late 2016. I have no doubt the CIA, through the IRC, will continue to monitor developments on the ICS and offer further input to help shape its ultimate form. More information on the ICS and other IAIS activities, including a monthly newsletter, can be found on the IAIS website. If you want to help shape the future, there are many ways you can do that. One is to become a volunteer for the IRC or one of its committees.

Robert Berendsen, FCIA, is Chair of the Committee on International Insurance Regulations.


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