Conclusion
Industry comments throughout the drafting have focused on the overly prescriptive nature of some of the requirements, such as the need for a group actuarial audit and group-wide underwriting and claims policies.
PART 2
Another area of more recent concern is the definitions of capital resources, especially the establishment of two tiers of capital and the exclusion of certain items such as intangibles, subordinated debt, and deferred tax assets from Tier-1 capital. Observers have also encouraged the International Association of Insurance Supervisor to expand upon the role of supervisory colleges in ComFrame, pointing out that there are unanswered issues as to how to resolve conflicts among supervisors.
Although the International Association of Insurance Supervisors or IAIS will be assessing the comments made during the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) consultation period and considering amendments in June 2014, substantial changes are not expected. Another consultation will take place in 2015 after the Insurance Capital Standards proposal has been completed.
Field-testing
The IAIS will be field-testing all three ComFrame modules, in addition to the ICS. Some of these tests are quantitative and some are qualitative. Over 25 insurance groups and their group-wide supervisors have expressed an interest in participating in the tests, including the nine designated G-SIIs. The field test will run until the end of 2018, at which time the complete ComFrame package is to be adopted. Because the IAIS is also working on capital requirements for Global Systemically Important Institutions and Internationally Active Insurance Groups (IAIGs), work on these areas has been combined with the ComFrame field-testing.
Other activity impacting ComFrame
In 2013 the IAIS approved an issues paper on Supervision of Branches that was based on a survey of IAIS members as to how branches were regulated in each jurisdiction. The report was prompted because of concerns in some jurisdictions that branches were not as secure as subsidiaries, although in the end the report presented a more balanced view.
The IAIS is also expected to release an issues paper on Approaches to Governance in 2014. The paper arose due to the growing awareness of the divergent approaches to group governance adopted within groups, and the different impact and demands those approaches can have on control functions which form a key element of the corporate governance framework of a group.
IAIS reorganization
The IAIS announced last year that it would be streamlining its structure to improve its efficiency and target its resources on the major tasks related to capital, groups, and G-SIIs. Part of the expressed objectives of the reorganization was to enable the IAIS to adapt to “evolving external expectations.”
Details of the plan are being finalized, but in general IAIS subcommittees will be disbanded in favor of smaller, task-oriented working groups. These working groups will be encouraged to engage more by conference calls and will be closed to observers. Participation by observers in the IAIS policy process will instead be limited to special hearings at the Technical and Executive Committee meetings and formal consultations. Observers would be excluded from all other meetings unless invited as experts.
KPMG Perspective
We very much support IAIS efforts to achieve a more coherent and consistent set of international requirements for the supervision of IAIGs.
However, an open and transparent debate is required to engage all stakeholders on such an important initiative. The IAIS must be clear about the level of policyholder protection (confidence level) it is seeking as part of these reforms. Attempting to construct a new framework in the absence of an agreed target capital level for regulatory purposes will make the task of obtaining agreement among all stakeholders, particularly insurance supervisors themselves, much more difficult.
It is also not clear how the proposed Insurance Capital Standards and ICS will operate in practice with the current capital requirements of regulators once completed. How these various capital measures will be aligned requires further articulation from the IAIS.
A fully informed debate concerning the appropriate level of capital for IAIGs to hold for economic and regulatory purposes should be held and the results of those outcomes should then inform the construction of any Risk-Based Capital framework and subsequent requirements, especially with regards to calibration, stress tests and other risk management and governance requirements.
Industry’s readiness for ComFrame
In December 2013 KPMG member-firms conducted an online survey on the possible costs and potential benefits of global regulatory change, in particular the development by the IAIS of their ComFrame proposals. ComFrame is designed to develop a common framework for the supervision of IAIGs.
Our survey was aimed at understanding how these changes might reshape the market and assess the industry’s readiness for change.
Thirty IAIGs were invited to participate in the survey, with nearly two-thirds providing valuable insights that are summarized below.
Main findings:
- High-level awareness among IAIGs surveyed of the IAIS ComFrame developments, with 89 percent awareness but only 50 percent currently preparing.
- Good support for the development of a global prudential framework and little support for a harmonized set of consumer-protection requirements. However, a number of IAIGs remain uncertain of the merits of developing common standards.
- Concerns regarding unintended negative consequences, such as an unlevel playing field and regulatory arbitrage to ComFrame being duplicative and burdensome for firms.
- Clear demand from IAIGs for consistent international accounting standards and better harmonization of legal frameworks to enable ComFrame to become effective across multiple jurisdictions.
- Strong support for ComFrame to be risk-based and address valuation standards—both at an accounting and actuarial level—and for consistent requirements relating to the Own Risk and Solvency Assessment, regulatory disclosure and governance requirements.
- No support for consistent pricing or for global remuneration requirements.
- Challenges in implementing a global framework, centered on a lack of standard accounting practices for the valuation of assets and liabilities. Concerns were also raised from IAIGs that insurance supervisors themselves may be unable to agree upon new global standards due to their own self-interests and difficulty in aligning local and global objectives.
- Concern that a lack of political leadership to develop a global framework could seriously hamper international efforts. Respondents were concerned that ComFrame could follow a similar path as Solvency II in terms of the difficulty in reaching agreement.
- Fear that ComFrame would result in additional costs, particularly concerning systems changes and capital and unlikely to result in any expense reductions.
- Most IAIGs surveyed were unable to estimate their current regulatory resourcing costs.
- Support for a single group-wide supervisor in both Europe and the US markets, with concerns raised over having multiple group-supervisors for an IAIG creating unnecessary costs and confusion.
Global participation
The survey received responses from 19 of the world’s leading insurance groups, with a good geographical spread.
Strong awareness of the IAIS ComFrame requirements among IAIGs
It was encouraging to see that 74 percent of respondents were fully aware of the IAIS ComFrame developments, with only 26 percent of respondents having a moderate to low level awareness of ComFrame. This is a positive sign for the IAIS, and demonstrates that IAIGs are actively wanting to be engaged and are committing resources to assist global regulators to shape the new international insurance framework.