Significant regulatory change is occurring. The International Association of Insurance Supervisors (IAIS) this year celebrated its 20th anniversary, and while the IAIS accomplishments in that time are impressive, the future independence of the organization could now be in question as the Financial Stability Board (FSB) exerts increasing authority over the IAIS’s agenda.
In the past two years, this new influence has been apparent in several IAIS developments, including the development of a global capital standard; the identification and regulation of global systemically important insurers (G-SIIs); instituting peer reviews, which the FSB insisted the IAIS undertake as soon as the insurance core principles (ICPs) were adopted; and the reorganization of the IAIS which includes reducing the transparency of subcommittee meetings and limiting participation by observers.
Dawn of a new IAIS
IN the past year under pressure from the FSB and G-20, the IAIS made two critical decisions that will affect the direction of its overall policy and that of the largest insurers. The IAIS has decided that insurance supervisors should exercise comprehensive supervision over the head of the insurance group and that, as part of that supervision, there should be a global risk-based insurance capital standard (ICS).
Yoshi Kawai, secretary-general of the IAIS, in his 2013 annual report to the membership, described the decision to develop a global insurance capital standard as the “dawn of a new IAIS.” Kawai said that the ICS would provide the common language that supervisors need to communicate with each other and the tools to address financial stability issues.
The decisions regarding these developments will impact the insurance core principles, the common framework, or ComFrame, and systemic risk. The IAIS now envisions a complex set of regulatory standards, which will apply at either the legal entity level, the group level, or to IAIGs and G-SIIs. The ICPs provide the base line for all the other standards. Rules for IAIGs and G-SIIs may go beyond the ICPs, but should not conflict with them. The architecture envisioned by the IAIS is illustrated in the diagram on this page, although final decisions as to where certain specific requirements such as the ICS apply are yet to be decided.
Group-wide supervision
AT the time of adoption of the ICPs, the IAIS allowed for either direct or indirect supervision of insurance groups. As acceptance of group supervision has increased in the past few years and because many found the references to group-wide supervision in the ICPs ‘incomplete, confusing, and subject to varying interpretations’ the IAIS has undertaken a revision of the references to group-wide supervision throughout the core principles, although the focus of group supervision requirements will remain in ICP 23.
The IAIS has appointed a working group to address the issues. As part of their work, the working group has suggested clarifying the definition of an insurance group and confirming that the scope of the ICPs is directly applicable to the insurance holding company (the point at which all the insurance entities come together), not the financial conglomerate or the wider group. The IAIS will thus be in line with the Joint Forum definition that the head of the insurance group is the lowest entity at which exerts control over all insurance operations. This may be a financial conglomerate, but is more likely to be a separate holding company. Any other financial institution or nonregulated entity which fall under that insurance holding company is to be considered in the supervision of the insurance group, but any entity above the holding company should be considered only as it poses a risk to the insurance group. This clarification, once approved by the Technical Committee, will also clarify the scope of ComFrame.
The working group is rewriting ICP 23 and discussing a series of clarifying changes to a number of other ICPs to ensure that they include provisions for supervision of insurance groups, including the head of group. The main thrust of the changes is to ensure that supervisors have authority for group-wide supervision of insurance holding companies. The test for these powers is to be outcomes-based, as defined in the Joint Forum Principles on Financial Conglomerates. The use of the terms direct and indirect supervision will be dropped. The IAIS will also be working with the IMF to develop guidance for the assessment of group-wide supervision in the Financial Sector Assessment Program, or FSAPs to avoid the problems encountered with ICP 23.
Insurance capital standard
THE details of the IAIS ICS and the scope of its application are still under debate, but it is clear that it will at a minimum apply to IAIGs and will replace the current capital requirement in ComFrame.
The ICS will be developed by 2016 and be operational by 2019. The IAIS is working on the assumption that the ICS will be developed as a model group-wide prescribed capital requirement as defined in ICP 17.
To be Continued