16 January 2014

Risk.net: Insurer global capital standard unfairly constrains loss-absorbing capital instruments

New insurer capital standards proposed by IAIS unfairly constrain the loss-absorbing instruments that insurers can use and will clash with existing regulatory regimes, insurance industry bodies are warning.

The IAIS is currently developing the first global insurance capital standard (ICS) that will apply to all internationally active insurance groups (IAIGs) and a basic capital requirement (BCR) for global systemically important insurers (G-SIIs). But insurance industry groups have raised serious concerns with the current draft proposals in their responses to the IAIS's consultation on ComFrame, the harmonised supervisory regime of which the ICS is a core part.

Insurers are particularly troubled by the definition of qualifying capital for the new standard, which they consider is too narrowly defined and fits awkwardly with existing capital regimes. Kathrin Hoppe, Basel-based insurance regulation and supervision expert at The Geneva Association, says: "Our members are concerned that what is suggested by the IAIS is not compliant with their local regulation and would therefore set a standard that would not comply with how they manage their capital at a national level. Some of our members were particularly concerned about what counts as qualifying capital because in their local jurisdictions the definition of core capital is broader than that proposed under the ICS".

The capital requirements for IAIGs, outlined in module 2, element 5 (M2E5) of the ComFrame draft, will form the basis of the ICS. The proposed rules on qualifying capital classify capital resources into two tiers: core capital and additional capital. This is at odds with Europe's incoming Solvency II system, which will implement a three-tier capital hierarchy.

Questions are also being asked of the BCR. Originally conceived as the foundation for higher loss absorbency (HLA) for G-SIIs, the latest consultation paper from the IAIS says the testing of this standard will inform the process of the ICS, suggesting some crossover between the G-Sii and IAIG work streams.

It remains unclear whether the BCR will be discarded once the ICS is inaugurated, or retained as a backstop requirement to complement the ICS. The BCR is scheduled to be field-tested in early 2014, and the ICS in 2015. The BCR will apply to G-SIIs as a base on which to develop the HLA in 2015. The ICS and ComFrame will apply to IAIGs from 2019.

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