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The consensus view among insurers, based on an IAIS feedback report issued on March 21, is that the basic capital requirement (BCR) for global systemically important insurers (G-Siis) will be replaced by the insurance capital standard (ICS) for internationally active insurance groups (IAIGs) when the latter comes into force.
Questions have been raised by the industry during a public consultation that closed in February over how entwined the creation of the two standards will be following IAIS statements saying the BCR would be used to "inform development" of the ICS.
The ICS is intended to function as a risk-based global capital standard for international insurance groups within the IAIS's ComFrame project. The ComFrame requirements are designed to help supervisors in the regulation of international insurers. The framework will be field tested this year and is due to be implemented from 2018.
The BCR meanwhile, was originally conceived as a simple backstop for G-Siis to serve as a reference for higher loss absorption (HLA) capital requirements. These are requirements to apply to designated G-Siis as part of the IAIS's work on systemic risk under the leadership of the Financial Stability Board and the G-20. The BCR is scheduled to be ready for implementation by G-Siis from November 2014. The HLA will be enforced from 2019.
Many in the industry are now working on the assumption that the two processes will be harmonised after the IAIS said in the March 21 report that the current field test of the BCR will be used to gather data for the ICS as well.
Philip Carson, associate general counsel at trade body the American Insurance Association (AIA) in Washington, DC, says: "Most people are assuming internally that the processes are united. The IAIS has not been clear about the intent of the BCR, but the BCR field testing is being used to gather data to inform the development of the ICS too. There is a clear melding together of the concept of systemic risk supervision with the concept of group supervision".
The BCR has already undergone several iterations since its formal inclusion in the G-Sii process in October 2013. Now defined as a "basic" rather than "backstop" capital requirement, the IAIS admitted in a December consultation paper that it will decide in 2014 whether the BCR will also apply to IAIGs.
Several industry stakeholders have spoken against the merging of the ICS and BCR field tests. The Association of British Insurers, in their response to an IAIS consultation in February, said that combining the field tests would risk "insufficient focus being afforded to the development of the BCR". This view was shared by US G-Sii MetLife, which said a dedicated field test was necessary to produce "a meaningful and relevant BCR".
Other stakeholders, such as the Institute of International Finance and insurance think-tank the Geneva Association, argue that the challenging timeframe for completion of the BCR makes it essential the field test has "a strong focus" on the BCR so that G-Siis have sufficient time to assess its quantitative impact before implementation.
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