A NUMBER of key lessons have been learned regarding existing inadequacies in solvency assessment. These include regulatory focus being too concentrated at the microeconomic level and not enough being undertaken at a macro-level; lack of oversight and monitoring of non-regulated 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/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 ICPs concerning solvency and group supervision mechanisms.
In 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. To be continued
This article is written by Rob Curtis, director of insurance at KPMG United Kingdom; David Sherwood, US head of insurance regulatory at KPMG United States, and Martin Noble, insurance senior manager at KPMG China. This article was taken from the publication Agenda magazine, April to May 2011, produced by KPMG’s Global Advisor Services Practice.
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