Standard Life Investments

Inside Global Insurance Investment

Insurance Capital Standards – Risks to going global

The International Association of Insurance Supervisors (IAIS) is developing a risk-based global Insurance Capital Standard (ICS)

March 2017

The International Association of Insurance Supervisors (IAIS) is developing a risk-based global Insurance Capital Standard (ICS). This follows a request from the Financial Stability Board for a comprehensive group-wide supervisory and regulatory framework for Internationally Active Insurance Groups (IAIGs).

The broad structure of the ICS draws on recently developed Risk Sensitive Capital Regimes, such as the Pillar 1 calculation of Solvency II. The capital requirements for insurance, market, credit and operational risks within a one-year time horizon use a Value at Risk measure and a specified calibration target of at least 99.5%.

However, a number of aspects of the regime are still under development. The discount framework for liabilities is one such area where the IAIS have proposed that, initially, firms can choose between two different approaches: ‘market-adjusted valuation’ or ‘GAAP with adjustments’. In response to a recent IAIS consultation, five global insurers suggested an alternative, single approach: ‘own assets with guardrails’.

The IAIS has now confirmed that the adoption of ICS v1.0 in 2017 is undergoing extended field testing. This will be targeted at a broader group of volunteer IAIG firms, with calculations based on a narrower set of options than previous field tests.

The IAIS are, at present, still working toward the implementation of ICS v2.0 in 2019, with an expectation of supervisory consequences for IAIGs that do not meet the ICS requirements.

However, the recent election of Donald Trump as US president increases the political risk around the implementation of ICS. President Trump recently issued an Executive Order to set out his office’s Core Principles for regulating the US financial system. The Core Principles include policies to “advance American interests in international financial regulatory negotiations and meetings” and “make regulation efficient, effective, and appropriately tailored”.

A number of US institutions responded to the recent IAIS consultation on ICS. They suggest there is significant risk that ICS is deemed to be inconsistent with these Core Principles. Should the US withdraw from the ICS, it will be difficult for it to remain credible as a global standard.

Further information on the ICS can be found on the IAIS website.