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International developments
The financial turmoil of the last years demonstrated to us an urgent need for an integrated network of supervisory authorities, for a close cooperation and information exchange between supervisors as well as consistent supervisory practices. At the European level, steps in this direction have been made with the creation of the European System of Financial Supervision (ESFS) and EIOPA being part of this system. But the high level of integration of financial markets does not allow anymore to think only in a European dimension. Many European insurance groups already have a significant presence worldwide, with businesses in a number of emerging markets.
EIOPA’s work on equivalence assessment will certainly help to facilitate the implementation of Global Capital Standards in the future, but this is not sufficient. It is fundamental to achieve more comparability and a truly level playing field between the main competitors in the world insurance market. This can only be done if we work at the worldwide level in developing a more convergent global regulation and supervision. This is not only the understanding of EIOPA; the Financial Stability Board (FSB) has recently called for the development of a global capital standard and we welcome this call.
Benefits of a global capital standard
The crisis exposed shortcomings in the areas of cooperation, coordination, consistent application of supervisory measures and trust between supervisors. Global capital standards will be beneficial for everybody.
The introduction of global capital standards should help prevent regulatory arbitrage, increase financial stability, guarantee a level playing field and strengthen international supervisory coordination, for the benefit of the economy at large, including financial institutions, consumers and employees. Another important advantage of global capital standards is that they will reinforce the supervisory network by providing competent authorities with a common system.
The development of global supervisory standards is a highly ambitious project and in order to deliver it, we need to have a clear understanding of the objectives and who is going to drive it, what and how is it going to be done and when it will be there.
Who
The key role in this very challenging piece of work is given to the International Association of Insurance Supervisors (IAIS) and this is absolutely right.
What and how
In my opinion, the BCR should be kept simple and straightforward in its presentation, therefore relying on a factor-based approach. However, I believe it is inappropriate to use a single factor solution, similar to the banking sector Leverage Ratio. Insurance balance sheets are far more complex than banking ones.
In the development of the BCR, we should avoid too much granularity, complexity and risk sensitivity, but it is fundamental to use as a basis the best estimate of liabilities and the market-based valuation of assets and other liabilities. The “devil is in the detail”, as we know from Solvency II, but this is the only way to build consistency worldwide for solvency purposes. In terms of calibration, I see the BCR being somewhere between the MCR and the SCR in Solvency II.
The future role of the BCR, if any, needs to be seen in the context of the future development of the Insurance Capital Standard (ICS), which should be applied by all IAIG’s. As for the development of the ICS, I believe in an evolutionary approach. There is a need for more consistent qualitative and quantitative frameworks that will ensure comparability and ensure a level playing field. The road to build these new international frameworks will be a difficult one, but it is the right thing to do and I am sure it will happen!
I am convinced that the appropriate way to do it is to accept a step-by-step approach that will progressively create more commonality. This will facilitate the efficiency of supervision and increase financial stability and consumer protection. This approach should provide jurisdictions with sufficient time to prepare the necessary changes without causing significant disruptions in the markets. And, of course, this should be done in close consultation with the different stakeholders.
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I am convinced that the basic sound principles of Solvency II will be applied internationally. This means that the international capital standards should incorporate the fundamental principles underlying Solvency II: a total balance sheet approach, clear and transparent target criteria for calibration of capital requirements, explicit recognition of risk diversification and consideration in capital requirements of all the material risks to which the group is exposed. The objective should be to foster global convergence and consistency of supervisory practices, through the implementation of a sound risk-based supervisory framework, allowing Solvency II to be one of the practical implementations of the international standard.
That does not mean that the global capital standards will mimic Solvency II. I do not think that the global capital standards will need to be as granular as Solvency II. Nevertheless, going forward we should be open to make adjustments to our system if that is needed. Companies should be subject to only one capital regime.
When
The IAIS has committed to a challenging timeline for the development of a set of global insurance capital standards: by the end of 2014 to develop Basic Capital Requirements, as the foundation for Higher Loss Absorbency; in the course of 2014, to decide whether the Basic Capital Requirements will also apply to Internationally Active Insurance Groups and, if so, when. By end of 2015, IAIS plans to develop the Higher Loss Absorbency for Globally Systemic Insurance Institutions (to apply from 2019). By the end of 2016, IAIS intends to develop the Insurance Capital Standard for Internationally Active Insurance Groups (which include all Globally Systemic Insurance Institutions) – these are also to apply from 2019.
When the Insurance Capital Standard is developed, the IAIS will consider the need for backstop measures for all Internationally Active Insurance Groups and review the construction of the Higher Loss Absorbency in light of the development of the Insurance Capital Standard.