The International Association of Insurance Supervisors (IAIS) will decide as early as 2014 whether to extend coverage of the so-called basic capital requirement (BCR), it revealed in a consultation paper published this week.
The BCR is intended to provide a foundation for higher loss absorbency (HLA) requirements for G-SII, the capital add-on to be imposed on insurers whose collapse would pose a threat to financial stability. The requirement will form the basis of an insurance capital standard (ICS) to be applied after 2019 to all internationally active insurance groups (IAIGs). Until now, there was no indication that a minimum capital backstop for non-G-SIIs was on the cards.
The IAIS proposes a factor-based approach to calculating the BCR, and expects to achieve a trade-off between simplicity and sensitivity to diverse risks. It ruled out using a Basel III-style leveraged ratio, which would apply a single factor to the whole balance sheet, as well as a proposal to scale the existing capital requirements across jurisdictions.
The 30-page consultation document published on December 16 identifies insurance liabilities as the primary source of risk, ahead of exposure to variations in the value of investments. So-called non-traditional and non-insurance activities is the other risk category under analysis.
The IAIS proposes to calibrate between five and 10 risk factors for each risk category. The sum of the capital for each will be the required capital, which will in turn be gauged against a firm's qualifying capital resources.
Experts warn this approach needs to ensure it appropriately captures the risk on an insurer's balance sheet. A second challenge the IAIS will have to overcome is the divergence of accounting standards, which could make a comparison of capital standards impossible. If no harmonised accounting standards can be used, the IAIS will have to define how liabilities and assets should be valued.
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