In my first post of this series about the rise of a new global regulatory architecture for insurance, I outlined how new standards could allow for more effective cross-jurisdictional regulatory supervision of international insurance groups. Now, I’d like to briefly summarize some of these new global requirements.
1. Insurance Core Principles (ICPs)
The ICPs standard and guidance apply to all insurers and insurance groups, regardless of size, international activities or systemic importance. They are structured to allow a wide range of regulatory approaches and supervisory processes to suit both the different markets and the insurance entities and groups operating within these markets.
2. Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)
ComFrame is a set of international supervisory requirements focusing on the effective group-wide supervision of internationally active insurance groups (IAIGs). ComFrame is built, and expands upon, the high-level requirements and guidance currently set out in the ICPs. This framework is not concerned with whether or not an insurance group is systemically important.
3. Global Systemically Important Insurers (G-SIIs) Package
G-SII policy measures should apply to designated G-SIIs and should be appropriate for the risks G-SIIs pose to the financial system. The International Association of Insurance Supervisors (IAIS) has outlined three key policy areas for G-SIIs:
- Enhanced supervision—specifically targeted regulations that apply immediately to all GSIIs.
- Effective resolution to help ensure that any resolution takes place without severe systemic disruption.
- Higher loss absorbency—the provision of additional capital intended to help reduce the probability and impact on the global financial system of G-SII failures.
The package for G-SIIs includes a set of qualitative requirements that insurers should pay more attention to:
- Systemic Risk Management Plan—it describes how the G-SII would manage, mitigate and reduce its systemic risk.
- Effective separation of non-traditional insurance and non-insurance activities to help reduce or mitigate systemic risks.
- Elaboration of Recovery and Resolution Plans—an ongoing process covering, at a minimum, domestically incorporated firms that could be systemically significant or critical if they fail.
Global capital standard requirements for G-SIIs include:
- Basic capital requirements to serve as a comparable prudential floor, an early warning indicator and a minimum capital standard.
- Higher loss absorbency to internalize the costs to the financial system that a G-SII would have in case of a potential failure.
- International capital standards to contribute to the stability of the financial system and the protection of consumers.
Major challenges lie ahead
The advent of this global insurance regulatory architecture poses a major challenge, both for supervisors and insurers. I’ll look more closely at strategic responses to the new standards in my concluding post in this series.