Risk.net: IAIS valuation methodology for basic capital requirement flawed
14 February 2014
Insurers could experience extreme balance sheet volatility under the valuation basis proposed for the new basic capital requirement, industry groups are warning.
The International Association of Insurance Supervisors (IAIS) last week published responses to its first public consultation on the BCR, which will apply to global systemically important insurers (G-SIIs). It will be finalised in November 2014.
Trade associations and think-tanks have come out strongly against the IAIS's proposal for assets to be valued on a market-consistent basis without taking into account the long-term nature of insurers' businesses.
A market-consistent value, respondents argued, would disregard how insurers match assets to liabilities and make the BCR incompatible with existing regulatory regimes such as Solvency II.
Olav Jones, deputy director-general of Insurance Europe in Brussels, says: "At present the IAIS is proposing to separate assets and liabilities in the valuation process. This would mean the fundamental link within an insurance company between its own assets and liabilities would be ignored." "This would represent a move away from both IFRS valuation, which allows a ‘top down' approach taking into account the actual assets, and the Solvency II approach, which includes a matching adjustment that recognises the connection between assets and liabilities", Jones says.
If the IAIS were to use an inappropriate valuation basis, Jones adds, it could have ramifications far beyond the BCR. The IAIS has made clear its work on the BCR will inform the development of the insurance capital standard (ICS), which will apply to all internationally active insurance groups (IAIGs) from 2019.
The BCR was originally intended to form a foundation for the so-called higher loss-absorption (HLA) capital requirements for G-SIIs, but has grown in significance since the IAIS admitted work on the standard would inform the development of the ICS.
Respondents, including Insurance Europe, also expressed fears that the BCR would conflict with Solvency II.
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