The ICS will be fleshed out through field testing in 2014 and 2015. In the 2014 quantitative field test, the IAIS is requiring volunteers to provide information on four balance sheets, for comparative purposes.
1) The group’s existing economic capital models on a consolidated group-wide basis without modification. The IAIS will determine a set of principles that it will create which will be required for comparability purposes while maintaining appropriate risk sensitivity.
2) The group’s consolidated statutory balance sheet in its home jurisdiction (baseline data only).
3) The group’s consolidated balance sheet based on generally accepted accounting principles in the home jurisdiction.
4) A Market Adjusted Valuation using public financial reporting information adjusted based on criteria set by the IAIS to increase comparability. Although the IAIS is not proposing a fully market-based valuation balance sheet, it is asking for market-based valuations using specifications provided by the IAIS for material assets and liabilities. Capital resources will be adjusted based on the ComFrame draft that excludes goodwill, deferred tax assets, certain reinsurance recoverable and subordinated debt.
Liabilities will be based on a current estimate, excluding any prudential margins, although simplified approximation will be allowed. The IAIS will prescribe an adjusted risk free rate curve to be used in the calculation of liabilities.
Stress tests will be used to assess the responsiveness of the balances sheets. These will include an interest rate stress, an equity stress, a mortality stress (for life) and an increased claims stress (for nonlife).
The IAIS will then issue a consultation draft on ICS in December 2014. The IAIS has been exploring the possibility of testing two different target criteria for the ICS, preliminarily described as 99.5-percent value at risk or VaR and 90 percent conditional tail expectation or CTE over one year.
ComFrame
IN 2009, in the wake of the global financial crisis, the IAIS expanded its core principles to 26 and began the development of a Common Framework for the Supervision of Insurance Groups (commonly referred to as ComFrame). The ComFrame project included three formal consultation periods to outline the framework and initial requirements, one each in the summers of 2011 and 2012 and the third consultation was completed in December 2013. The IAIS is currently evaluating the final comments.
In the course of the development phase, the ComFrame proposal has undergone considerable revisions in its wording, but the scope of the project has changed little.
The 2013 consultation draft was been reduced to three modules. It also added certain preconditions assumed to be in place related to legal authority of the supervisor, sufficient regulatory resources and confidentiality.
Module one focuses on the definition of an IAIG that will be subject to ComFrame. Although there is some supervisory discretion, the criteria have changed little in three years:
A group must write business in three or more jurisdictions, including branch activity.
The percentage of gross premiums written outside the home jurisdiction is at least 10 percent of the group’s total gross written premium.
The group must have total assets related to the insurance business of at least $50 billion or gross written premiums of at least $10 billion.
Module one also sets criteria for the selection of the group-wide supervisor if there is a disagreement in the college, based on location of the head of the IAIG, where insurance business activities are controlled, where the largest proportion of balance sheet is located, or where the main business activities are undertaken.
The IAIS is currently field testing the criteria and the level of discretion needed for deciding if a group should be classified as an IAIG.
Module two focuses on the action that must be taken by the IAIG. These requirements related to management structure, governance, enterprise risk management and capital adequacy. The biggest issue for this module concerns capital resources and requirements.
A decision on these issues has been deferred to field-testing, as described below.
Module three details the role of the group-wide supervisor and the coordination process in the colleges. Only two sections of this module (the group-wide supervisory process and supervisory colleges and cooperation) were released in the consultation. The third area, crisis management and resolution, is still being drafted pending additional work by the Financial Stability Board on the Key Attributes of Effective Resolution and Recovery Plans, but will include requirements for cooperative agreements, recovery and resolution plans, and crisis management groups.
The IAIS continues to debate which of these aspects will apply to IAIGs and which will only apply to global systemically important insurers. This section will be released for consultation in mid-2014. It is also possible that the IAIS or a newly formed FSB working group on crisis management for insurers might develop a binding agreement regarding distribution of funds in a crisis to avoid the ring-fencing of available funds by local supervisors. However, such a proposal would likely face opposition from certain regulators.