International Standards for Insurers

By Robert Berendsen, FCIA

In the May 2015 (e)Bulletin, I provided an overview of the International Association of Insurance Supervisors (IAIS) and its work to develop group-wide global capital standards to be applied to internationally active insurance groups (IAIGs). I also explained the Institute’s contribution to that effort. This article provides a follow-up on those activities and describes work by the International Actuarial Association (IAA) to develop International Standards of Actuarial Practice (ISAPs). These international activities will undoubtedly have an impact on the daily work of Canadian actuaries—maybe not next month, but perhaps sooner than you think, even if you work for a smaller insurer.

International Capital Standards for Insurers

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 (1) to 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) to contribute to global financial stability. Canada’s Office of the Superintendent of Financial Institutions (OSFI), Québec’s Autorité des marchés financiers (AMF), and British Columbia’s Financial Institutions Commission (FICOM) are all members of the IAIS.

A key IAIS project is to develop international capital standards for insurers. This project includes three planned steps. The first step 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), of which there currently are nine globally (none based in Canada). The BCR was completed in 2014.

The second step was the development of Higher Loss Absorbency (HLA) requirements, again to be applied to G-SIIs. The HLA builds on the BCR and addresses additional capital requirements to reflect G-SIIs’ systemic importance in the global financial system.

The third step, being conducted in parallel, is the development of the Insurance Capital Standard (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, of which there are expected to be about 50, including the largest Canadian insurers.

In June 2015, the IAIS published a consultation document seeking input on its proposed HLA requirements, with comments due in late August. The Institute responded. We commended the IAIS’s efforts to develop the HLA in a short time frame, but expressed two overarching concerns with the proposals. The first concern was that there is little evidence that traditional insurance causes or contributes to systemic risk, and therefore we saw little rationale to have such businesses attract HLA capital requirements. The second concern was to highlight a risk that insurers might be unable to predict and hence unable to confidently manage their HLA capital requirements.

On October 5, 2015, the IAIS announced it had completed the development of the HLA, and thereby had met a major milestone in its commitment to address risks to the global financial system from systemically important insurers. That document was formally approved by the IAIS at its Annual General Meeting on November 12, 2015, and then endorsed by G20 leaders at their summit in Turkey the following week. However, everyone understands that the BCR and HLA were developed under tight timelines and that some aspects may require refinement. To that effect, the IAIS has committed to annual reviews of the BCR and HLA to consider experience and possible impacts of changes in the environment. The first review is scheduled for 2017, allowing the collection and analysis of field-testing data in 2016 to inform that review.

As I write this article, work is now focused on completing the development of the ICS. Field testing took place in the fall of 2015, and a third round of field testing is scheduled to start in May 2016, though design and stakeholder input is currently sought to finalize the details of that round of testing. An ICS consultation document is also targeted for June 2016. The ICS is anticipated to be finalized late in 2016 or early in 2017.

In summary, significant progress was made in 2015, but even more work lies ahead. The Institute, through the International Relations Council, will continue to actively 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 at

International Standards of Actuarial Practice

The IAA’s mission as the worldwide organization of actuarial associations is (1) to represent the actuarial profession and promote its role, reputation, and recognition in the international domain; and (2) to promote professionalism, develop education standards, and encourage research, with the active involvement of its member associations and sections, in order to address changing needs. As part of that mission, it develops ISAPs. Since the IAA has no direct authority in any jurisdiction, these ISAPs are effectively model standards, intended to be adopted by member actuarial organizations. The Institute and the Actuarial Standards Board (ASB) are expected to align the Canadian actuarial standards with these ISAPs.

So far, the IAA has published three model standards, and has work in progress on at least five more, as summarized in the following table.

Title / Subject
Publication Date
General Actuarial Practice
November 2012
Governance of Models
April 2017 (expected)
Financial Analysis of Social Security Programs
October 2013
IAS 19 Employee Benefits
April 2015
IFRS X Insurance Contracts
April 2019 (expected)
Insurer Enterprise Risk Models
April 2017 (expected)
ERM Programs and IAIS Insurance Core Principles
April 2017 (expected)
ISAP 7 "Current Estimates" and other matters in relation to the IAIS capital standards
June 2018 (expected)

The IAA published exposure drafts for ISAP 1A and ISAP 5 in October 2015, with a comment deadline of March 31, 2016. The Institute, through the International Relations Council and its Committee on International Insurance Regulation developed feedback.

ISAP 1A provides guidance on appropriate model governance to manage the risks inherent in developing or using models. The fact that it covers both the development and use of models was itself controversial. It appeared to be at odds with an exposure draft issued in October 2015 by the ASB which covers the use of models but after much debate intentionally excluded the development of models from its scope. Other national actuarial standard setters have issued similar standards, in some cases including development (e.g., U.S.) and in others not (e.g., Britain). However, when reading ISAP 1A, it is clear that the proposed standard covers the governance of models, including the governance of building and using models, but does not delve into technical specifications for how to build models. In fact, the actual contents of ISAP 1A is only two pages. In the end, the Institute’s feedback was mostly supportive of this ISAP. The most significant suggested change didn’t concern the fact that the standard covers the development of models. The most significant suggested change was to permit actuaries to select models without limitation as long as it’s for exploratory analysis, i.e., not in a reporting capacity.

ISAP 5 provides guidance for the development and use of enterprise risk models, including stress tests and scenario tests, to assess solvency and produce risk metrics for enterprise risk management (ERM) programs of insurance entities. Like ISAP 1A, this one is concise, only a few pages. And as it was for ISAP 1A, the Institute was mostly supportive of this ISAP. The most significant suggested changes were to caution against (1) including a list of information sources that could be construed as a minimum requirement (though it was not believed to be meant as a minimum requirement), and (2) requiring "reconciliations" between multiple models and multiple stress tests and instead require "explanations" for the differences in results, the former being a more onerous requirement that often may not be attainable.

While neither of these two ISAPs that were reviewed in 2015 presented major concerns for Canadian actuaries when compared to existing or in-development actuarial standards of our own, we remain at the ready to offer the Canadian perspective and expertise to help ensure this trend continues.

If you have any questions about the above international developments, feel free to contact me.

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

Canadian Institute of Actuaries/Institut canadien des actuaires