Update on supervision of the global insurance sector
The International Actuarial Association (IAA) held its twice-yearly Council and Committee meetings from 18-22 November, in conjunction with the Annual Meetings of the Institute of Actuaries of Japan.
As part of that busy week, the Insurance Regulation Committee (IRC) received some important updates on supervision of the global insurance sector, as well as international actuarial developments in climate risk and fintech.
Deputy Secretary General of the International Association of Insurance Supervisors (IAIS), Romain Paserot (pictured below), gave an update on the important work of the IAIS.
The IAIS has performed a full review of the Insurance Core Principles (ICP) and subsequent updates were adopted at its 2019 Annual General Meeting.
ComFrame for IAIGs
It is expected that identification of Internationally Active Insurance Groups (IAIGs) will be completed in 2020. The Common Framework (ComFrame) wording has been stable for some time, but has merged with the Insurance Core Principles (ICPs).. The joint ICP/ComFrame document is now referred to as ‘supervisory material(s)’.
In November 2019, the IAIS adopted a Holistic Framework for the assessment and mitigation of systemic risk in the global insurance sector. The key elements of the Framework are:
- Supervisory material – Enhanced supervisory policy measures for macroprudential purposes, designed to increase the overall resilience of the insurance sector and help prevent insurance sector vulnerabilities and exposures from developing into systemic risk, through on-going supervisory requirements applied to insurers, enhanced macroprudential supervision, crisis management and planning and strengthened supervisory powers.
- Global monitoring exercise – There will be two annual data collections; one from insurance groups (this will be a transformation of the current data collection), to identify subgroups for monitoring systemic risk from a group perspective, but also adding another market-wide data collection which will rely on collection from IAIS members of risk data from their own jurisdiction
- Implementation assessment – by the IAIS.
It is expected that a more detailed document describing the Holistic Framework will be developed in 2020.
IAIS will be reporting on the outcome of the global monitoring exercise to the Financial Stability Board (FSB). This represents a shift from the current perspective in which an entity-based approach has been used.
With the adoption of this new framework, the process of designating so-called Global Systemically Important Insurers (GSIIs) will be suspended until 2022 when the process will be reviewed by IAIS in conjunction with the FSB.
Insurance Capital Standard (ICS)
The adoption of ICS 2.0 in 2019 provides a quantitative aspect to ComFrame. The first phase of ICS 2.0 is a monitoring period of five years. During this period all ICS reporting will be confidential to involved supervisors and the IAIS.
The IAIS have also recognised the need to consider regimes which provide alternate methods which deliver comparable outcomes to ICS. The US has asked if its proposed aggregation approach for group capital would be considered comparable. The IAIS are not building an equivalence regime but will be adopting a definition of “comparable outcome” and guidance on delivering high-level principles and criteria for assessing this. Next year’s plan is to consult on high-level principles of comparability and then on technical criteria of how to assess it.
Romain indicated that that there are still differing views on the design of margins over current estimates (‘MoCE’). For ICS 2.0 the IAIS have decided to add MoCE to the best estimate liabilities and not to allow any MoCE adjustment in the capital calculation (i.e. neither a credit to the requirement nor any addition to the available capital resources). The MoCE will aim for a confidence level for life insurance of 85% and for non-life of 65%. The IAIS will publish a Level 2 document on MoCE and its various parameters in 2020.
At a more fundamental level, some stakeholders remain concerned that market-based valuation is not appropriate for long-term products.
Another technical issue is the quality of data being used for ICS calculation and the importance of having good governance in place around the data. Sound data quality and speed of calculation will be very important when ICS is fully implemented.
It was commented that the template and technical specifications for ICS should be redesigned, and IAIS expect to do that.
Comments on some ICS concepts were welcomed by the IAIS (e.g. comparable outcomes, 3-bucket valuation, market-based valuation of long-term products, consolidated vs aggregated group capital etc.)
The IAIS have issued a draft Application Paper on liquidity risk management for consultation. Comments are due by January 20, 2020.
Micheline Dionne, Chair of the IAA Climate Risk Task Force (TF), provided an introduction. The TF has been set up to co-ordinate work being done, including by the IAA’s Full Members Associations (FMAs) – some of which are very active in this area.
The Statement of Intent (SoI) paper sets out a commitment to what sort of work should be considered and when and has been sent to all the FMAs who are being asked three questions: (i) Do they agree? (ii) Should the task force be doing more? (iii) Anything they should not be doing? On Thursday, the SOI was presented to IAA Council for discussion (deadline for Council feedback is 31/12/2019).
The Financial Stability Institute (FSI) Report “Turning up the heat” was discussed next. This report, forwarded to the IRC by Jeff Yong discusses the three aspects of climate risks: Physical Risks, Transition Risks (e.g. stranded assets), and Liability Risks.
According to the FSI Report, supervisors expect ORSAs to include what firms are doing about climate risks, but from supervisor reviews this isn’t always the case. It was commented that the actuarial profession could be of assistance on the topics of risk assessment, dependency of risks and non-linearity.
IAIS believes the role of the supervisor is to remind insurers they need to do this and consider climate risk in their risk assessment, without prescribing how.
Comments providing feedback on the FSI report are requested ASAP and coordinated IAA comments will likely be submitted to the FSI in Q1 2020.
IRC survey of FMA climate risk initiatives
A recent survey shows numerous but fragmented FMA activities, at a range of levels, that could be better co-ordinated. Most formal activities were apparently being undertaken by the FMAs from the UK, US, Australia and Canada. The survey is published with the Agenda papers on the IAA website.
It was suggested that actuaries should be more active in considering possible transition risks, focusing not only on downside risks but upside potential for environmentally friendly initiatives.
IRC/IAA climate risk work going forward
The IRC asked the ORSA subcommittee to make recommendations for dealing with this important matter in early 2020. It was commented that while individual risk managers have access to general papers on climate risk, they may not be well equipped with sufficient knowledge to prepare climate risk scenarios for their products nor how to properly inform their Board.
The ORSA SC will report back to IRC in early 2020 regarding ORSA references in the FSI report, including the proposed response to FSI.
FinTech and Supervisions
Mr. Hiroshi Ota, Deputy Commissioner for International Affairs at the Financial Services Agency Japan, gave a well-received presentation titled “Update on IAIS FinTech Presentation” .
The presentation concluded with a list of issues for which actuaries could be of assistance:
- Ethical use of data
- Explainable AI
- Use of Big Data Analytics in claims processing
- Outsourcing of Data Storage and Analytics
- Lack of Sufficient Experts with Data Analytic Skills and
- Effective Communication with Management and Supervisors.
These focus areas correspond well with intended future IAIS focus, and should be of interest to all actuaries in this field, around the world.
All in all, there was a very full and valuable agenda in Tokyo. Members of the Committee will be working hard to reflect the views of the actuarial profession on these globally significant developments, to the IAIS and other stakeholders.
This article is based on key points from the draft minutes of the IAA’s Insurance Regulation Committee. For more information, please see the full minutes.
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