IAIS will publish comparison between US and international capital standards in 2024

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

The International Association of Insurance Supervisors intends to publish a report in October 2024 to see whether the US aggregation method provides comparable outcomes to the Insurance Capital Standard.

The IAIS is developing the ICS as a consolidated group-wide capital standard for internationally active insurance groups. The ICS will provide “a common language” for supervisory discussions of group solvency of IAIGs and enhance global convergence among group capital standards.

In parallel to the development of the ICS by the IAIS, the US has developed an aggregation method approach to a group capital calculation.

The announcement comes as the IAIS has agreed on the criteria that will be used to assess whether the AM provides comparable outcomes to the ICS, following public consultation and the resolution of comments

According to the IAIS, comparable outcomes to the ICS means that the AM would produce similar, but not necessarily identical, results over time that trigger supervisory action on group capital adequacy grounds.

“The finalisation of the comparability criteria, through a robust and transparent process, marks further progress toward our commitment to assess whether the AM provides comparable outcomes to the ICS,” said Vicky Saporta, IAIS executive committee chair. 

Timeline of the IAIS comparability assessment project: 

Q3 2023: Assessment of whether the AM provides comparable outcomes to the ICS begins; 

Q2 2024: Assessment of whether the AM provides comparable outcomes to the ICS ends; 

Q3 2024: Decision on whether the AM provides comparable outcomes to the ICS;

Q3 2024: Publication of a report on the outcome of the assessment of whether the AM provides comparable outcomes to the ICS.

The US National Association of Insurance Commissioners expressed support for the AM and described the approach as “adaptable to the diverse business models, product designs and risk management approaches” employed by insurance groups around the world.

The NAIC added: “Because the AM relies on a fully transparent methodology and is consistent with existing legal entity requirements, it will help contribute to the overall stability of the insurance sector as a ready and sound capital framework for detecting a need for appropriate supervisory intervention at the group level.”

Why is there another method besides the ICS? 

The project represents years of work by supervisors at the IAIS to develop a comprehensive, group-wide supervisory and regulatory framework. 

In November 2017, IAIS set out an agreement on the implementation of version 2.0 of the ICS, the quantitative component of ComFrame. The purpose of the ICS is to create a common language for supervisory discussions of group solvency “to enhance global convergence among group capital standards”. It will apply to IAIGs - the world’s largest re/insurers. 

The association has agreed on a five-year monitoring period for confidential reporting and discussion in supervisory colleges from the beginning of 2020. During the monitoring period, ICS results will not be used as a basis for triggering supervisory action. Following the end of the monitoring period, the ICS will be implemented as a group-wide prescribed capital requirement.

However, not everyone is prepared for convergence of group capital standards. The US is developing its own method – the AM  – for group capital calculation. While the AM is not part of the ICS, the IAIS has agreed to collect data to aid in the development of the AM. The AM data collection is separate from ICS confidential reporting and is open to US-based volunteer groups and any other jurisdiction/volunteer group at the option of the group-wide supervisor.

During a stakeholder meeting organised by the IAIS on 15 December, one representative of a US insurer said: “We see very little benefit from the introduction of ICS as a consistent global standard for us. That's because we feel that we have a very robust measure of capital in the group capital calculation in the United States… It is also tailored to each jurisdiction in which we operate and allows us to be competitive and operate on a level playing field in every jurisdiction in which we operate. It’s an excellent communication tool with stakeholders, in part because it replicates those existing jurisdictional frameworks. So we're very confident, we're very proud of the group capital calculation in the United States.”

Another stakeholder, from a trade association, doubted whether the ICS would create a level playing field in the US “because it would apply only to IAIGs and not to the rest of the companies that we believe have been well established in good record and solvency regulation”.

Another critic believed there would not be consistent implementation of the ICS so the benefits “are likely to prove elusive”. He said: “Europe will continue to stick with Solvency II [and] the US has a strong tool in the [group capital calculation]. So those are going to create challenges for consistent application of an ICS.”

Stakeholders also raised the issue of implementation costs as a result of added IT infrastructure and training expenditure, which was “sometimes overlooked”. One speaker said: “I think there's also sort of an investor relations cost and that whenever you introduce any new form of model or sophisticated mode of measurement, that it requires a fair bit of not just internal education, but external education.”

Another stakeholder agreed: “Even before you get to the cost of the investor relations of your external facing, there is a significant cost in terms of educating your senior management in terms of how these metrics operate, and how they interact with the other priority metrics that the firms are managing towards.”

Who are the world’s largest insurers?

As of 6 February 2023, 52 IAIGs were identified by their group-wide supervisors. They are subject to the Common Framework for supervision, which creates supervisory standards of guidance for effective group-wide supervision of the world’s largest insurers. 

In the UK, M&G and Phoenix Group recently joined Aviva, BUPA and Legal & General as IAIGs.

RSA is no longer on the list after it was sold to Canada’s Intact and Denmark’s Tryg in 2021. As part of the acquisition, Intact retains RSA's Canadian, UK and international entities, while Tryg retains RSA's Swedish and Norwegian businesses, and Intact and Tryg co-own RSA's Danish business.

The list can be found here

More from mallowstreet