IAIS to develop risk based global Insurance Capital Standard

The International Association of Insurance Supervisors (IAIS) announced today that it has committed to developing the first risk based global insurance capital standard (ICS) by 2016. Implementation will begin in 2019 after two years of testing and refinement with supervisors and global insurance groups.

The new initiative, to develop a global Insurance Capital Standard, will sit within the IAIS’ work on ComFrame, the comprehensive framework for supervision of what the IAIS terms internationally active insurance groups. The risk based global insurance capital standard will build on the capital component, which is being finalised in concept now, which was always part of the ComFrame solvency assessment.

ComFrame is not just for international insurers, it is also for reinsurers and the criteria for determining what qualifies as a ‘internationally active insurance group’ are the same no matter which part of the industry you fit into. With the focus in the reinsurance market having been firmly on new forms of capital from third-party investors, through ILS, collateralized transacations, funds and other instruments like sidecars, lately it stands to reason that these will have to be considered in any capital standards.

Of course this also means that collateralized reinsurance firms, insurance-linked securities (ILS) managers and other entities which underwrite insurance or reinsurance business using third-party capital could feasibly qualify under ComFrame as well.

“It is undeniable that the business of insurance is global, and global issues demand global responses,” commented Peter Braumüller, Chair of the IAIS Executive Committee. “This is why the IAIS, whose Members constitute nearly all of the world’s insurance supervisors, has committed to develop and implement the first-ever risk based global insurance 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,” added Michael T. McRaith, Chair of the IAIS Technical Committee. “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.”

The IAIS has been working towards a number of initiatives which seek to address issues of systemic risk, capital adequacy and solvency, with this being the latest. The IAIS considers a sound capital and supervisory framework for insurers and reinsurers essential to support financial stability and protect policyholders.

“The development of a risk based capital standard for global insurance groups has been established as a priority for the IAIS as part of its work to promote financial stability,” said Elise Liebers, Acting Chair of the IAIS Financial Stability Committee. “The IAIS is committed to advance its development and implementation.”

The IAIS will engage in public consultations with the market on ComFrame, the Insurance Capital Standard as well as its Backstop Capital Requirements for global systemically important insurers, as the development of these plans progress. It’s vital that the ILS and reinsurance market engage with this process to ensure that third-party capital and fully-collateralized structures are treated correctly.

We reached out to the IAIS who told us that once the development of the insurance capital standard begins next year, issues such as whether it applies to ILS funds and managers, how third-party capital under management at reinsurers would be factored in and how fully-collateralized capacity will be treated, will all be addressed.

The Geneva Association, the international think tank on insurance and risk management strategic issues, welcomed the IAIS initiative and said it would support the development of an insurance capital standard.

John H. Fitzpatrick, Secretary General of The Geneva Association said, “The Geneva Association supports the objectives of the FSB in achieving greater financial stability which would be for the benefit of all concerned. Our research indicates that the world should focus on identifying, monitoring and managing the largest pockets of systemic risk wherever they may be.”

“We remain committed to working with standard setters such as the IAIS on important initiatives, such as a global capital standard just proposed. It is clear that there will be significant challenges to the creation of a global capital standard for insurers, particularly within the timeframe proposed. Development and implementation of global capital standards within other financial service sectors have taken many years to develop. This is because a careful assessment of both the direct and indirect consequences of implementing a global capital standard is of fundamental importance. We acknowledge that the IAIS may need to take incremental steps towards achieving this overall goal.”