As I’ve noted in earlier posts about this topic, we are witnessing the rise of a global framework that aims to define an insurance capital standard which could be applied to the entire global insurance industry. The new standards, which I outlined in the second post in this series, have already proven contentious among global insurance carriers.
Some insurers argue that these new measures should be aligned with other regimes (Solvency II in the EU) that have required hard, extensive work to stabilize. In addition, they say that these requirements may have a negative impact on the insurer’s business model, by requiring additional capital charges at a time when insurers are already facing difficult market conditions.
We believe that even if the new capital regime is not yet stabilized, some aspects of the policy measures should be highlighted—in particular those that complement the Solvency II regime in the EU. These include the implementation of the enhanced supervision and effective resolution packages for Global Systemically Important Insurers (G-SIIs).
As a first step, insurers should think about their ability to identify their non-traditional insurance and non-insurance (NTNI) activities, assess their alignment with their risk strategy, and enhance their enterprise risk management capabilities. Insurers should not underestimate the amount of work needed to implement these measures.
This, we believe, could put even more pressure on actuarial, finance and risk resources, and increase the need to foster cooperation between internal departments and the regulatory supervisor. What’s more, the new capital measures may require additional capital adequacy field tests, scenario analysis and a comparison with other regimes (particularly the valuation question, maintaining market consistency versus Generally Accepted Accounting Principles and expected adjustments to regulations).
These new sets of requirements could, in our view, change the playing field and create new opportunities for the formation of subsidiaries, mergers and acquisitions, and for the development of new financial and asset liability management strategies, among the most-discussed areas.
The sooner insurers review these different requirements, the more able they would be to anticipate potential higher capital charges and adjust their business models accordingly. Insurers should keep a close eye on the wide package of IAIS measures. The development of this comprehensive framework of reforms involves more than just capital; it is underway and may affect each insurer in the world.