Conclusion
A NUMBER of key lessons have been learned regarding existing inadequacies in solvency assessment. These include regulatory focus being concentrated at the microeconomic level and not enough being undertaken at a macro-level; lack of oversight and monitoring of nonregulated subsidiaries and activities; legal and legislative limitations on insurance group supervision; limitations in the quality and content of both regulatory structure and supervisory practice; lack of coordination of responsibilities and established coordination mechanisms between supervisors; and lack of effective tools to minimize regulatory arbitrage on a cross-sector and cross-border basis.
The International Association of Insurance Supervisors (IAIS) has responded to the need for reform by accelerating their plans to promote common regulatory standards and cooperation. Common themes emerging from current international regulatory developments are the move towards more risk-based approaches to capital and solvency measurement; a greater focus on risk management and governance; increased use of stress and scenario testing; and group supervision.
Insurance supervisors are looking to harmonize these regulatory approaches by increasing cooperation and coordination of their activities by formal mechanisms, such as memorandums of understanding between one another and the development of a project within the IAIS to build a common framework for the supervision of internationally active insurance groups.
Such initiatives at the international level complement the significant efforts by many jurisdictions in further strengthening their own local requirements. In Europe, Solvency II is driving further regulatory harmonization, and this could eventually be extended to non-EU countries, which is relevant to the region’s insurance market through the concept of “equivalence.” However, in the short-term, broader cross-border mutual recognition of regimes is likely to remain limited as few regions share the same degree of economic and political union.
Countries such as the US are mindful of the changes and have commenced their own reforms such as the Solvency Modernization Initiative where developments are more aligned to the IAIS’s new insurance core principles (ICPs) concerning solvency and group supervision mechanisms.
In the Asia Pacific, an area of significant focus for inward investment by many international insurance groups, regulators are very much aware of developments in risk and capital management in Europe and by the IAIS; most have already effected or are considering significant change.
The crisis once again highlighted capital adequacy as a key concern for all regulators and a renewed push for reform commenced. Globally, it is expected that supervisors will increasingly move to ensure insurers are adequately capitalized with risk-based capital requirements, will require valuations of assets and liabilities on a consistent and economic basis and will increasingly allow the use of internal models. These will be subject to stringent standards and prior supervisory approval and will enable regulatory capital requirements to be calculated using insurers’ own internal models, which are a better reflection of their risks than a common standard formula.
What are the implications?
The introduction of the new IAIS ICPs in October 2011 will herald a significant new step in achieving international convergence and consistency in regulatory requirements. Covering capital adequacy and internal models, enterprise-risk management, investments, systems and controls and group supervision, they will have a profound impact on both insurance supervisors and the insurance industry.
All supervisors will have to enact the requirements into their local supervisory frameworks. If they don’t, the relevant territory risks receiving an adverse finding from the IMF and the World Bank who conduct the Financial Sector Assessment Program reviews. So, understanding the changing regulatory landscape has never been more important. Firms that are aware of such changes and actively involved in shaping the new reforms stand to gain a competitive advantage and will be best prepared to meet the new challenges ahead.
Above all, the substantial regulatory changes now being implemented will further reinforce the underlying structural changes insurers are making to their business models, particularly in regards to cultural change; improved and enhanced sophistication of tools being used for effective risk and capital management; enhancing the quality and timeliness of making better business decisions; and demonstrating the underlying value proposition to investors thereby attracting greater investment.
Regulation is clearly on the move: The challenge has been laid down to the sector as a whole. Understanding the changing regulatory landscape has never been more important. Firms that are aware of such changes and actively involved in shaping the new reforms stand to gain a competitive advantage and will be best prepared to meet the new challenges ahead.
(This article is co-authored by Rob Curtis, director for insurance, KPMG in the UK; David Sherwood, US head of insurance regulatory, KPMG in the UK; and Martin Noble, senior manager for insurance, KPMG in China. This article was taken from the publication Frontiers in Finance, April 2011, produced by KPMG’s Global Financial Services Practice in the UK.
For comments or inquiries, please e-mail Roberto G. Manabat at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)
