Current economic outlook and challenges facing insurers
The outlook for the global economy has been evolving rapidly since I was appointed vice-commissioner for international affairs at Japan’s Financial Services Agency (FSA) in July 2021.
On one hand, there are signs that we may be inching closer to overcoming the COVID-19 pandemic, although Asia may need some more time. On the other, we are facing a completely different set of challenges, such as geopolitical tensions, higher inflation, constraints on global supply chain, which may pose risks to economic activities in a global scale.
The global financial system, including the insurance sector, has withstood these challenges so far and has remained stable and resilient against negative spillovers. That being said, it is clear that both insurers and supervisors need to stay vigilant against future developments. We need carefully to assess and calibrate the implications of various scenarios on insurers’ operations and financial positions in an holistic and forward-looking manner.
We also need to keep in mind that we are experiencing long-term structural changes, including but not limited to: Longevity, diversifying lifestyles and consumer preferences, digitalisation, climate change and increasing natural disasters.
Insurance can play a role in enhancing the resilience of our society and economy to adapt to such changes – a constructive dialogue between supervisors and insurers on their business models, governance and risk management could be helpful to meet such challenges.
Policy topics for the insurance sector
Insurance solvency regime
Let me start from the international front. Since the publication of the Insurance Capital Standard (ICS) version 2.0 in November 2019, the International Association of Insurance Supervisors (IAIS) has made significant progress towards its finalisation during the last two years, despite operational challenges from COVID-19 pandemic.
This June, the IAIS released a public consultation on the draft criteria that will be used to assess whether the Aggregation Method (AM) provides comparable outcomes to the ICS. The ICS project is on track and we need to keep this momentum towards another milestone scheduled next year, i.e., the issuance of a public consultation package on the ICS and the launch of the comparability assessment between the ICS and the AM.
On the domestic front, FSA published the provisional outline of the new economic value-based solvency ratio (ESR) this June, with particular focus on pillar 1 (regulatory responses). The published outline incorporates the structure of the proposed ICS with some minor tweaks, considering that the new regulation will be applied to all insurers including those who are not Internationally Active Insurance Groups (IAIGs). We envisage the introduction of the new framework in 2025, and will accelerate the discussion on remaining issues, including technical fine-tuning of pillar 1 as well as establishing a framework for pillar 2 (supervision) and pillar 3 (disclosure).
In the face of the increased frequency and elevated severity of natural disasters, non-life insurers are expected to play a role as provider of protection against such risks.
However, it is often pointed out that there still remains a substantial protection gap, which could become more pronounced if the level of premiums rises as a result of further intensification of natural disasters. Addressing such protection gaps is a policy issue which could be discussed from multiple angles, such as risk management, pricing and product design, access and financial inclusion, and potential roles of public and private sector. I believe that this is a topic worth discussing in various international fora including the IAIS.
Climate change and sustainability
Let me briefly touch upon some of FSA’s initiatives on climate change and sustainability.
Firstly, we published the final version of Supervisory Guidance on Climate-related Risk Management and Client Engagement in July. It will serve as a baseline for supervisory dialogues with financial institutions, including insurers, regarding their climate-related risk management as well as their engagement with their clients to support the clients’ responses to climate-related opportunities and risks.
The FSA also initiated a pilot exercise of scenario analysis using NGFS scenarios as common scenarios for several major financial institutions, including three large non-life insurance groups. We have also made progress on climate-related disclosure, requiring certain listed companies to disclose on a ‘comply or explain basis’ building on the recommendations by the Task Force on Climate-related Financial Disclosures (TCFD). We are also working towards enhanced disclosure of non-financial information on broader sustainability issues.
2023 IAIS Annual General Meeting
Last but not the least, the FSA will host the IAIS Annual General Meeting and Annual Conference in November 2023. This will mark the first time for us to host IAIS’s most important event, which will be joined by hundreds of participants.
This will be an excellent opportunity to discuss and deepen our understanding on issues including those I mentioned above. I hope it will also help strengthen the cooperation among insurance supervisors as well as to facilitate our interaction with the industry. We are committed to make our utmost effort to make the event a successful and memorable one and look forward to welcoming you all to Tokyo. A
Mr Shigeru Ariizumi is vice commissioner for international affairs with Japan FSA.