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Sean Ringsted, chief risk officer and chief actuary of Ace Group, told delegates at Insurance Risk Europe that developing an appropriate capital standard was a huge challenge. "The International Association of Insurance Supervisors (IAIS) is trying to achieve something in 12 months that the insurance industry hasn't succeeded in doing in 20 years. There's a glimmer of hope in that, because the timeframe means it will have to be pragmatic and it will have to be simple", Ringsted said.
"If it takes a simple risk-based capital approach it may not be so bad, and if you layer on top of that stress scenarios and linkages to the ORSA [Own Risk and Solvency Assessment], then I think a QCS [quantitative capital standard] will not be so bad. What would be really bad is if you had a QCS that was based on a VAR [value-added-risk] or a limited time-period calculation", he added.
The IAIS has been tasked with developing a backstop capital requirement for global systemically-important insurers in time for the G20 meeting in November 2014. A quantitative capital standard for all international active insurance groups is also being planned, a final draft of which could be ready by 2015. How these standards will be calibrated is not clear, however. It is also unclear how the QCS would link in with efforts to develop a common framework for the supervision of IAIGS, known as ComFrame.
Ringsted warned of the dangers of a global capital standard that was technically flawed. He highlighted the risk of clashes with local capital requirements, the impairment of global firms and potential higher capital costs to the industry, which would lead to higher prices for consumers.
On ComFrame, Ringsted said the framework could benefit global insurers if developed in the right way. But it was essential that the standards did not prejudice well-managed international groups. If executed in the right way, ComFrame has the opportunity to improve the supervision of international groups, Ringsted said. "It could create a global standard to make the regulatory burden much less."
The danger, he said, was that standard-setters impose precise requirements on companies. "Group supervisory process should allow insurers to demonstrate their own approach; a prescribed approach would be counter-productive. Differences between companies should be encouraged."
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