The International Association of Insurance Supervisors (IAIS) has issued its second consultation document on the global Basic Capital Requirement (BCR), the first capital underpinning for global insurers, beginning with the Global Systemically Important Insurers (G-SIIs), which include in the U.S., AIG, Prudential Financial and MetLife.
Many insurance company representatives and executives who initially railed against the intrusion of global capital standards have accepted it as a foregone conclusion once the G-20 came resolutely to the table, although many insurance interests still push Congress to examine the need for them, how it will be devised and wonder who or what will implement them in the United States.
Some in the House –and insurance trade organizations — are casting a cold eye on these and other developments.
Just recently, the leadership of the House Committee on Appropriations,attached a report (113–508) to appropriations legislation (H.R. 5016) requiring the Inspector General to submit a report to the House and Senate Committee on Appropriations, the House Financial Services Committee, and the Senate Banking Committee on federal agency progress in developing a consensus with the state insurance commissioners on such international insurance standards. The IG’s office would also, under this report, keep track of Federal agency representation at international insurance supervisory organizations such as the IAIS to make sure it conforms with state consensus views. This would likely mean the views of the National Association of Insurance Commissioners (NAIC) leadership or a “consensus” of state insurance commissioners.
Under the IAIS proposal, BCR required capital will be calculated on a consolidated group-wide basis.
The BCR will determined using a ‘factor-based’ approach with 15 factors applying to defined segments within the main categories of insurance activity.
The BCR Ratio will be the qualifying capital resources divided by the required capital components.
Required capital will be calculated with three components: insurance, banking, and non-insurance financial and material non-financial activities not currently subject to regulatory capital requirements. The insurance component will include non-traditional insurance activities (variable annuities, GICs & synthetic GICs, mortgage insurance, political risk insurance, surety and trade credit) and the banking component will apply the Basel III requirements.
IAIS field testing indicated that the volunteer insurers had material exposures to regulated banking activities.
The IAIS states that significant progress has been made in developing the BCR since the last consultation document and the BCR proposal which will be delivered to the G20 summit in November 2014.The first public Consultation Document on the BCR was issued Dec.16, 2013 with the close of the comment period on Feb. 3.
The development of the BCR, which acts kind of like a temporary capital assessment backbone, is the first step in developing group-wide global capital standards, an initiative pushed by the G-20’s Financial Stability Board. The second step is the development of Higher Loss Absorbency (HLA) requirements to apply to G-SIIs, due to be completed by the end of 2015. The HLA will build on the BCR and address additional capital requirements for G- SIIs reflecting their systemic importance in the international financial system.
The third step, news of which almost knocked some insurers off their feet when first proposed, is the development of a risk based group-wide global insurance capital standard (ICS), due to be completed by the end of 2016, and to be applied to Internationally Active Insurance Groups (IAIGs) from 2019 after refinement and final calibration in 2017 and 2018.
The ICS will then replace the BCR in its role as the foundation for HLA.
The IAIS states that the exact timing of the transition of the foundation from BCR to ICS will depend upon the adoption date of the ICS by the body and upon the time required for jurisdictions to develop and implement the necessary legislative frameworks for implementation of the ICS. That’s a wide-open timetable and question in the U.S., of course.
The scheduled ICS adoption date is October 2018 so calibration of HLA may need to be revised once the ICS has been adopted.
The field testing exercise to collect data to inform BCR development began March 21 with 33 volunteer insurance groups, covering a wide range of products and geographical markets. Eight of the nine G-SIIs submitted sufficient data in early May.
The data collected by early June were assessed as sufficient to inform the proposed BCR design, specific factors and calibration level, despite the need to analyze data more thoroughly in certain areas, including non- traditional insurance exposures and non-insurance exposures, according to the IAIS. The Organization said that data coverage and quality will be improved during the consultation process and will be used to inform the final BCR design, specific factors and calibration level.
The IAIS consultation document contains analysis and tables to better understand key drivers of the proposed BCR formula.
Insurance groups who just received the documents today and will likely wait until the deadline to submit comments.
Earlier comments submitted by the previous February 2014 deadline on the first iteration of the BCR expressed gratitude that the association distinguished between the characteristics of the BCR from the role and characteristics of the banking leverage ratio in the banking world and for inclusion in the process. Insurers however had comments on timing, period of field testing, confidentiality of data between companies and regulators, risk-sensitivity gauges and risk-weighting.
For example, Northwestern Mutual stated that asset/liability management is an important risk mitigation activity of any major insurance company and then proposed that a factor determined by the degree of sensitivity to interest rate risk could be developed.
The Global Federation of Insurance Association suggested that the BCR framework should acknowledge the risk mitigating features of certain products, like adjustable products and participating policies, as well as reinsurance.
MetLife, in its early February comments on the BCR, stated it agreed there is a natural trade-off between risk sensitivity and simplicity for the formula but added that while “fewer factors may appear simpler,” more factors may make the BCR more risk sensitive, easier to calibrate and better able to promote appropriate management of risk.