News eDaily03 Nov 2017

IAIS achieves breakthrough in path towards converging group capital standards

| 03 Nov 2017

The International Association of Insurance Supervisors (IAIS) has agreed on an implementation plan for the Insurance Capital Standard (ICS) Version 2.0 - a significant milestone towards creating a consistent capital measure for globally active insurers. The agreement was announced yesterday at the 24th Annual Conference of the IAIS hosted by Bank Negara Malaysia in Kuala Lumpur.

Ms Vicky Saporta, Chair of the IAIS Executive Committee, said: “By reaching this agreement, the IAIS will achieve its aim of creating a common language for supervisory discussions of group solvency. We have reflected the priorities of our Members and made significant progress towards our ultimate goal.”

Earlier in July, the IAIS had allowed for extended field testing of ICS Version 1.0, although there were growing calls for greater clarity on what the implementation of ICS Version 2.0 will mean in practice after the completion of field testing in 2019.

Dubbed the ‘Kuala Lumpur Agreement’, the IAIS yesterday agreed that implementation of ICS Version 2.0 will be conducted in two phases – a five-year monitoring phase followed by an implementation phase: 

1. In the first phase, referred to as the “monitoring period”, ICS Version 2.0 will be used for confidential reporting to group-wide supervisors and discussion in supervisory colleges. ICS will not be used as a Prescribed Capital Requirement (PCR ) in this phase (i.e. the ICS results will not be used as a basis to trigger supervisory action).

This will allow group-wide supervisors and host supervisors to discuss and assess the ICS in comparison with existing group capital standards or calculations that are in development. The monitoring period will last for five years. 

2. The second phase will be “implementation of the ICS as a group-wide PCR”.

The IAIS embarked on the development of the ICS to create a common language for supervisory discussions of group solvency to enhance global convergence among group capital standards.  Setting out goals for the development of the ICS (i.e. Version 1.0, Version 2.0 and the Ultimate Goal) indicated the need to take a carefully considered step-by-step approach to this convergence process. Hence, the decision to take a two-phase approach to the implementation of ICS Version 2.0 is a further demonstration of this stepwise convergence process. 

Positive way forward

The ICS will apply to Internationally Active Insurance Groups (IAIGs) and Globally Systemically Important Insurers (G-SIIs) in 2019. This follows concerns of many insurance regulators, especially following the Global Financial Crisis, that they did not have a good picture of companies as a whole because capital is measured differently in different jurisdictions. This makes it hard for a supervisory college to identify where there may be shortfalls in capital in a particular entity in one or more jurisdictions.

However, the endeavour towards achieving a common global capital standard has been a challenging one – with disagreements particularly between the U.S. and other international stakeholders over the structure of, if not the very need for ICS.  

Mr Hiroshi Ota, Deputy Commissioner for International Affairs at the Japan Financial Services Agency and Vice Chair of the IAIS Executive Committee, said: “Despite coming from different economies and societies, with this agreement we have once again shown how our Members can come together to accomplish great things. While Members have at times expressed different opinions, our aim has been the same - to help the insurance market be more stable and resilient while continuing to look forward.”

Mr Gabriel Bernardino, Chair of the European Insurance and Occupational Pensions Authority (EIOPA), said: “This agreement achieves the clarity we needed for the way forward. When we reach the ultimate goal, we will look back on the agreement forged in Kuala Lumpur as a watershed moment in the development of the ICS.” 

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