IAIS Update–Public Consultation Begins on Higher Loss Absorbency Requirement for Global Systemically Important Insurers; Additional Insurance Capital Standards Information Released
Jun 30, 2015
The International Association of Insurance Supervisors (“IAIS”) announced last week, June 25, 2015, that it has begun a public consultation to help finalize development of the Higher Loss Absorbency (“HLA”) requirement for global systemically important insurers (“G-SIIs”). The IAIS is seeking feedback through August 21 on several options to further support and inform the design, development and calibration of the HLA.
In July 2013, the IAIS published its assessment methodology and policy measures for G-SIIs. These include a HLA requirement, the primary purpose of which is to help reduce the probability and impact on the financial system of the distress or failure of a G-SII. The HLA is to be delivered to the G-20 for endorsement in November 2015 and will apply to G-SIIs beginning in 2019.
As a foundation for HLA requirements, the IAIS developed the Basic Capital Requirements (“BCR”) in October 2014 to apply to all group activities of G-SIIs, including non-insurance activities. When the HLA is implemented, G-SIIs will be expected to hold qualifying regulatory capital that is not less than the sum of the required capital amounts from the BCR and HLA.
This IAIS public consultation does not focus on specific formulas for the qualifying regulatory capital, but rather seeks feedback on a structure designed to address the key objectives of risk sensitivity, robustness and simplicity.
The IAIS has also released additional information on the development of its risk-based, global insurance capital standard (“ICS”), which will apply to internationally active insurance groups (“IAIGs”) as part of the IAIS’ Common Framework for the Supervision of IAIGs, or “ComFrame.”
Specifically, the IAIS has recently agreed on detailed goals for its previously announced milestones of a Version 1.0 (for confidential reporting) and Version 2.0 (for adoption within ComFrame) of the ICS. Two of the principles for ICS development have also been updated in response to comments received during the recent public consultation.
Further, in order to allow field testing volunteers sufficient time to complete the ongoing data requests and more time for the subsequent analyses, the IAIS has adjusted the ComFrame and ICS delivery schedule. (A document setting forth the ICS’ ultimate goal, interim goals, principles for development and delivery process is available on the IAIS’ Common Framework Web page.
For more information on the HLA and details on how to submit comments, click here.
A public call on the background of the HLA will also be held on July 8 in order to describe the consultation and specific issues on which the IAIS is seeking input.
Additional IAIS Updates
The IAIS is presenting for consultation proposed revisions to the following Insurance Core Principles (“ICPs”):
- ICP 4 Licensing
- ICP 5 Suitability of Persons
- ICP 7 Corporate Governance
- ICP 8 Risk Management and Internal Controls
- ICP 23 Group-wide Supervision
- ICP 25 Supervisory Cooperation and Coordination
In addition, the IAIS is proposing revisions to some key Glossary definitions to be reflected as follows:
“For the purpose of these ICPs, the term “insurer” means insurance legal entities, insurance groups and insurance-led financial conglomerates.”
The decision to include groups in the term “insurer” has formed the basis for the drafting of the ICP revisions. Another proposal, as seen in the Glossary, is that the term “legal entities” would encompass branches of such legal entities, so as to avoid confusion about the status of branches within the ICPs and avoid additional drafting in respect of branches.
Other definitions have been introduced reflecting recent developments related to governance and risk management, group supervision and application at the head of the group. Where appropriate, definitions have also been aligned with definitions of other Standard Setting Bodies for consistency.
ICPs 4, 5, 7 and 8 are being revised following the Self-Assessment and Peer Review (“SAPR”) in 2014 of these ICPs, which found that there were areas where clarifications to these ICPs would help jurisdictions improve observance. The IAIS is addressing the findings from the SAPR report in relevant standards and guidance. The revisions to these ICPs also take into consideration the revisions to ICP 23 which revealed a need to strengthen supervisory approaches to group-wide supervision and requirements on the Head of the Group in other ICPs as well. The amendments necessary with respect to group-wide supervision are forming part of the overall proposals for revision of these ICPs.
ICP 7 and 8 have also been amended to ensure alignment with corresponding principles, standards or guidance from the Financial Stability Board and the Basel Committee on Banking Supervision, including the need to enhance the responsibilities of the insurers’ Boards with respect to the external auditors following from BCBS guidelines on external audits of banks adopted in March 2014.
Shortly after its adoption in 2011, ICP 23 underwent a SAPR, in which it was noticed that ICP 23 did not offer sufficient clarity over the expectations of how group-wide supervision should be performed. More specifically, there were instances of duplication with other ICPs and a lack of clarity among supervisors that made implementation difficult.
The revisions to ICP 23 also revealed a need to review various ICPs to strengthen supervisory approaches to group-wide supervision and requirements on the Head of the Group. ICP 25 has also been impacted as the need for greater clarity of the roles of home and host supervisors was identified.
The review impacts on several ICPs, including ICPs 4, 5, 7 and 8, which have been revised accordingly and are also part of this consultation. Any amendments related to group-wide supervision in other ICPs will be folded into the review of the respective ICPs following the SAPR of these ICPs.
Following input from Members and Stakeholders during an informal consultation in May 2015, the IAIS refined the drafting proposals accordingly.
The IAIS notes that the draft amendments to the ICPs need to be read in the context of these proposed revisions to the Introduction and key glossary terms.
Feedback on this consultative document is invited by August 17, 2015. A subsequent public discussion of the comments and proposed resolutions will be organized in early October.
To provide comments on the ICPs and Glossary Definitions, click here.
As part of its work plan, the IAIS’ Financial Inclusion Working Group (“Working Group”) developed a draft Issue Paper on the “Conduct of Business in Inclusive Insurance.” The decision to develop this paper followed the recognition that, in inclusive insurance the fair treatment of customers is very important, inasmuch as the customers in these markets are particularly vulnerable. Also, the confidence in insurance in these markets hangs in a fragile balance. Therefore, according to the Working Group, any unfair treatment by insurance providers might tip the scale and make people turn away from insurance.
The Issue Paper addresses the issue of fairness–both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied. The Paper’s objective is to promote the understanding of these particular issues among regulators, supervisors and other interested parties. Development of application guidance on proportionate regulation and supervision is possible.
This Paper is structured as follows:
The first main part (section 2) gives a description of the features of the inclusive insurance market–important inasmuch as it is essential to understand the setting in which the contractual relationship will exist and gain an appreciation of how the concept of fair treatment of the customer plays out in an inclusive insurance market.
The second main part (section 3) discusses the various elements of the inclusive insurance life cycle and present the issues that have been identified from a conduct of business perspective.
The term “life cycle” is used as reference to the specific elements of an insurance product from its development as a product, its distribution, disclosure of information, customer acceptance, premium collection, and claims settlement to the handling of complaints by the insurer.
Comments on this Paper are due by August 6. Click here for submission details.
Should you have any questions or comments, please contact Colodny Fass.
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