International Capital Standards for Insurers: A Common Framework? – a series of updates

International agreements are hard work. The Doha Round of international trade talks began in 2001. Closer to home, the conversations around the insurance accounting standard IFRS4 also commenced in 2001. Both sets of negotiations continue to this day.

Some degree of cynicism regarding the development of an international capital standard for insurers is understandable. In this article, however, it is outlined why such standards could be installed within a relatively short timeframe and why the profession needs to take these developments seriously.

A COMMON FRAMEWORK?

Moves to harmonise bank regulation have accelerated post global financial crisis. The darker corners of rule based regimes, and indeed differences between the rules of different countries and industries, were perceived by many as having exacerbated the crisis. The emergence of cross border systemic risks have also taxed the minds of regulators and governments. Against this background, insurance companies have come into focus. This is especially true as they have increased their activities in ‘bank-like’ areas such as private market lending.

At the direction of the G20, the International Association of Insurance Supervisors (IAIS) is developing a framework that will apply to Internationally Active Insurance Groups (IAIGs). IAIGs include large, internationally active groups operating in at least three different jurisdictions beyond their home market. Specifically, the IAIS has been asked to prepare a Common Framework (ComFrame) that will include an international capital standard alongside other qualitative requirements and a regime for group wide supervision of international operations. ComFrame is currently being ‘field tested’, with a view to having a formally adopted framework in place by the end of 2018.

Those seeking further detail of the requirements are referred to the IAIS document Supervision of Internationally Active Insurance Groups For Consultation (17 October 2013), which describes the evolving standards for specific risks against which capital must be held, and the form of that capital (refer to IAIS).

While the current definition of IAIGs precludes the majority of insurance companies, one can expect its impact will be felt on broader insurance company supervision. Indeed, the IAIS lists ‘convergence fostering’ as one of the four principal benefits of ComFrame.

THE ROLE OF THE ACTUARIAL PROFESSION

Alas, where are the actuaries? From discussions with actuaries in the field, the profession has much work to do in terms of making its presence felt. This is especially the case as the work towards the parameterisation of the final capital standard gets underway in earnest.

One can understand some weariness – physical and otherwise – in countries that have recently seen considerable changes in capital standards, such as Solvency 2, Risk Based Capital regimes in South East Asia, and the new APRA rules in Australia.

That said, there are two particular reasons for the profession to show initiative here.

To start, standardised regulatory capital minima offer some real potential gains for insurance companies. The current diversity of capital rules confronting third parties such as investors and lenders is less than ideal. This is especially the case in the absence of a functioning, consistent accounting standard.

Second, the political heft behind the IAIS mandate suggests that the international capital standard will become a reality – and in a timeframe inside the careers of readers of this journal! The battle would appear to have decidedly moved from whether or not to have a common standard to the nature of the standard we shall have.

If the international actuarial voice is to be heard, it would seem that we have some catching up to do. The first step is to ensure a sufficiently broad awareness of developments in this area – the purpose of this humble article. In later articles in this series, we will speak to a number of actuaries involved in the process to get their view on the principal points of tension in the regulations, and where they feel the profession should be concentrating its energies.

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