A level playing field or out in left field?

IAIS Capital Standards 2016 Field Test

A level playing field or out in left field?
Posted by David Sherwood, Matthew Clark, and Sara Veit Kaufman on September 13, 2016.

In an effort to promote global financial stability and protect policyholders through the maintenance of a fair, safe, and stable insurance market, the International Association of Insurance Supervisors (IAIS) has been developing an Insurance Capital Standard (ICS). ICS is one component of the Common Framework (ComFrame) for the Supervision of Internationally Active Insurance Groups (IAIGs), and is intended to promote effective and globally consistent supervision of the insurance industry. The IAIS’s intent is to provide comparability of outcomes across jurisdictions, but the question is how this can most effectively be attained.

While promoting financial stability is a worthy goal, developing a global capital standard that applies across different jurisdictions is no small task. The IAIS is a global organization with members from more than 140 countries, and it regulates insurance companies that sell a variety of products and adhere to different accounting standards.

The IAIS began developing the international capital standards in 2013 using a three-stage approach, with the stages largely developed in parallel. The first stage uses a factor-based methodology to calculate the Basic Capital Requirement (BCR) as a standard measure across insurance entities. The second stage, Higher Loss Absorbency (HLA), builds on the BCR and the factor-based methodology and sets a capital standard for Global Systemically Important Insurers (G-SIIs). The third stage is the development of the more risk-sensitive ICS to apply to all IAIGs, based more on shocks and modeled results.1

In order to understand the results and implications of the draft capital standards, the IAIS has conducted several Field Tests in which G-SIIs and volunteer IAIGs participate. The Field Tests are opportunities for IAIGs to calculate results under the proposed capital standards framework and provide valuable feedback and advocacy to the IAIS through written responses, workshops, and the Field Test deliverables.

One of the key elements under consideration by the IAIS is what basis to use for the capital standards. Currently two options are being considered: a Market-Adjusted Valuation (MAV) approach using a market valuation and a GAAP Plus valuation approach based on US GAAP valuation.2 These are two very different frameworks, and depending on the design of the capital standards, they could result in very different capital measures. It is important to understand how the different valuation bases compare and how a capital standard methodology would be consistently implemented under each approach. According to general industry opinion (which we share), while the GAAP Plus approach is more aligned with US accounting and business management, the MAV approach has more in common with International entities and Solvency II.

In the US, the National Association of Insurance Commissioners (NAIC) has been actively involved in the IAIS and the development of the international capital standards, along with the Federal Insurance Office and Federal Reserve Board, and has raised concerns about some aspects of the IAIS’s capital standards. The NAIC is also in the process of developing its own group-wide capital calculation to be used in conjunction with the current RBC framework.3 It remains unclear how the IAIS, Fed, and NAIC’s capital development initiatives will play out and be implemented, but it is clear that new group capital standards will emerge and could impact both international and domestic insurers.

The IAIS capital standards are still under development, with the framework and approach being refined through the feedback received during the Field Tests. Deloitte has assisted companies during the Field Tests, supporting the interpretation of the standards, execution of the quantitative results, and development of advocacy materials. We also provide insights about the potential implications of the standards as drafted, highlighting areas that differ from the current capital framework. The 2016 IAIS Field Test will take place this summer, where IAIGs will have another opportunity to help shape and evaluate these emerging regulations—please contact us if we can assist your company in efforts related to the IAIS Field Test or other capital standards initiatives.

David Sherwood is a senior manager in the Risk & Regulatory practice of Deloitte & Touche LLP, assisting clients with emerging domestic and international regulatory standards and risk & capital initiatives. David was has experience in industry, as a regulator, and as a consultant.
Matthew Clark, FSA, CFA, MAAA, is a principal in the Actuarial, Rewards, and Analytics practice of Deloitte Consulting LLP. His work experience covers a range of services including actuarial transformation, merger and acquisitions, product administration, implementation, and rationalization.
Sara Veit Kaufman, FSA, MAAA, is a manager in the Actuarial, Rewards, and Analytics practice of Deloitte Consulting LLP, where she focuses on actuarial modeling, financial reporting, and risk management.

1 http://www.iaisweb.org/page/news/press-releases-prior-to-2014//file/34073/9-october-2013-iais-commits-to-develop-by-2016-a-global-insurance-capital-standard#
2 http://www.iaisweb.org/page/supervisory-material/common-framework//file/57804/public-2015-field-testing-technical-specifications
3 Meeting minutes of the National Association of Insurance Commissioners (NAIC) Financial Condition (E) Committee, April 5, 2016.

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