17 October 2013

Fitch: Global Insurance Capital Standard adds uncertainty

The proposed standard would apply to about 50 internationally-active insurance groups (IAIGs), with full implementation planned for 2019. Size will be an important criterion for insurers to be treated as an IAIG - specifically, total assets of more than $50 billion or gross written premiums of more than $10 billion.

The standard could ultimately be positive for insurers from a comparability and consistency perspective, in terms of how they are viewed by global investors. However, it comes at a time when there are already other important related initiatives under development and adds to existing uncertainties. Moreover, in practice, the impact will depend on the exact nature and details of what's proposed. 

With all else being equal, higher capital requirements would be positive for ratings if they lead to higher capital resources being held by companies. But Fitch notes that most of the major insurers likely to be affected by the new standard are already well capitalised and relatively highly rated. Ratings for those companies are also generally constrained not by capital but by other factors, so we would not expect widespread rating actions as a consequence of the standard.

Any positive effects as a result of increased capital could be partly offset by negatives from the cost of higher capital and its impact on pricing and competitive position. Fitch believes the impact will also depend on how consistently individual national regulators interpret and apply any eventual standard that emerges, as well as the degree of effective coordination between the various different national regulators responsible for any given IAIG. 

The development of this global capital standard falls within the IAIS' existing work, which started in 2010, to develop a comprehensive framework for the supervision of IAIGs (referred to as ComFrame). The IAIS is also currently working on developing backstop capital requirements for globally systemically important insurers (G-SIIs), which it plans to have ready for implementation in late 2014. 

Earlier this year, nine insurers were designated by the IAIS as globally systemically important. In mid-2014, it expects to announce which reinsurers will be added to this list. Although the IAIS has said that the development of the capital standard will be "informed" by its G-SII work, it is not clear at this stage how the G-SII requirements and the global capital standard will interact. 

It also remains unclear how the global standard will interact with other regulatory standards, and in particular Solvency II, which is now supposed to be come into effect in the EU from 2016, some three years earlier than the proposed IAIS standard.

The IAIS have given themselves three years to develop the standard, followed by two years of testing and refinement. However, we believe this five-year timeframe is still ambitious, and delays would not be a surprise based on experience with other comparable projects.

The experience with Solvency II underscores the challenge in developing a single standard to apply across a number of different countries with diverse insurance markets. This has been difficult enough within the EU, and the challenges are likely to be even greater with a global standard. For instance, the US National Association of Insurance Commissioners (NAIC) has already expressed serious concerns about the development of this standard. Other industry bodies have also expressed concerns or highlighted the challenges; the Geneva Association (an international insurance industry think tank) highlighted "significant challenges to the creation of a global capital standard for insurers, particularly within the timeframe proposed".

Press release

The FSB's influence in the development of a global insurance capital standard (ICS) is fuelling concerns that the standard may be inappropriate for the insurance industry.

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© Fitch, Inc.