IAIS eyes new capital standards for insurers

MANILA, Philippines - Standard & Poor’s Ratings Services said the regulatory challenges facing the world’s largest insurance groups have just become much harder.

The International Association of Insurance Supervisors (IAIS) has proposed a global insurance capital standard (ICS). The ICS is intended to be a key component of the IAIS’ common framework (ComFrame) for internationally active insurance groups (IAIGs).

The IAIS is to the world’s insurance industry, as the Bank for International Settlement (BIS) is to the world’s banking industry.

Impetus for the new standard comes from the Financial Stability Board, which coordinates the work of international standard-setting bodies for the global financial sector. Introducing an ICS would bring the insurance industry in line with the banking industry.

“The proposals would initially affect about 50 insurers that qualify as IAIGs,” S&P said in a report.

Testing for the new standard would begin just as the European Union (EU) reaches the finishing straight in implementing its Solvency II directive and as the United States starts implementing some elements of its Solvency Modernization Initiative.

However, many insurers question the need for an ICS, most question the priority being given to it, and nearly all question the proposed timeline.

Reportedly affected initially are nine groups designated as global systemically important insurers (G-SIIs) by the Financial Stability Board.

The IAIS plans to introduce relatively simple capital requirements, known as backstop capital requirements (BCRs).

These will serve as a foundation for its higher loss absorbency requirements for G-SIIs.

The IAIS timeline has the following milestones: by November 2014, it will have finalized the BCRs; by 2015, it will develop its higher loss absorbency requirements; by 2016, it will develop a comprehensive ICS; between 2017 and 2018, it will test and refine the ICS; and by 2019, it will implement the ICS and higher loss absorbency requirements.

Regional and national supervisors are already developing a plethora of different insurance standards based on the IAIS’ insurance core principles.

The ICS and BCRs add to this proliferation.

“However, in the long term, the industry could benefit from these proposals,” the international rating agency said.

The ICS could replace its national standards at some point, or may form the basis of the capital analysis, in the future.

The ICS adds another layer of uncertainty to insurers’ regulatory agendas.

“No near-term rating actions are expected, but we will monitor these developments closely to assess their potential impact on insurers’ competitive advantages, strategic choices, regulatory burden, capital adequacy, and cost of capital,” S&P added.