Other parts of this series:
- North American insurers face international capital standards
- Several tough challenges for too-big-to-fail insurers
- Potential changes in capital standards could affect largest, international carriers
- Some capital standards deadlines missed, others are ambitious
- How insurers should respond to international capital standards
Some provisions of the draft international standards on capital adequacy for insurers that I have been examining in this blog series likely will be modified before carriers in North America and the rest of the world will have to comply with them in coming years. One of the likely notable changes would affect the world’s small group of too-big-to-fail carriers, as well as most internationally active insurers.
As Accenture notes in its report, The Rise of Global Standards and How Insurers Can Comply, we expect the International Association of Insurance Supervisors (IAIS) to adjust its calculation methodology for the Basic Capital Requirement (BCR). The BCR is part of the foundation for the Higher Loss-Absorption (HLA) calculation for determining the additional capital that nine Global Systemically Important Insurers (G-SIIs) must retain to mitigate their systemic risk to the global financial system if they fail.
The BCR, recalibrated just this fall, is calculated using first a “bucket” and then a “factor-based” approach consisting of 15 risk measures. It is arrived at by dividing an insurance group’s total qualifying capital resources–for both its BCR and HLA—by the group’s required capital—again for both its BCR and HLA. This should reflect the risks derived from the group’s traditional life and non-life insurance activities, non-traditional activities, assets and its non-insurance activities. But this calculation will be refined when it is implemented, which was scheduled to begin earlier this year and run through 2019.
Additionally, during that period, the process likely will influence other capital adequacy standards that the IAIS plans, including the International Capital Standard (ICS). The world’s 40-plus Internationally Active Insurance Groups (IAIGs), as well as G-SIIs, will be subject to the ICS. The IAIS had planned to develop the ICS by year-end 2016 for implementation in 2019, but these targets were postponed last June to “a date yet to be determined.”
Ultimately, the ICS could replace the BCR. We believe that the key technical challenge with that will be developing a normalized balance sheet and capital model that makes sense for all G-SIIs and IAIGs. This is particularly true regarding insurance liabilities, for which a lack of consensus between US and EU negotiators resulted in an undetermined extension of the ICS development timeline. An internal model approach is being considered, but we doubt that would be feasible for many reasons: the limited timeframe, the number and diversity of affected companies, and our Solvency II experience. A factor-based capital charge approach would be more likely.
We await with great interest to see the impact of the ICS capital charge, including the message it sends to national regulators whose home solvency capital regulations end up being inadequate for their IAIGs. Until then, we believe the best approach would be to leave calibration until the final stages.
To learn more about the study, read “The Rise of Global Standards and How Insurers Can Comply.”
Next time: Ambitious and uncertain deadlines.