The International Association of Insurance Supervisors (IAIS) closed its second consultation on the BCR on August 8. A number of industry responses have been made publicly available, many expressing deep concerns with the proposal. Insurance Europe wrote that certain omissions could prove "fatal flaws", while the American Council of Life Insurers claimed elements of the proposal are "not practical".

 

The BCR is intended to be a simple capital requirement designed for those global systemically important insurers (G-Siis) designated by the Financial Stability Board (FSB). It is meant to provide the foundation for Higher Loss Absorption capital requirements to be applied to G-Siis from 2019. Respondents to the consultation highlighted particular concerns with the timescale for developing the BCR, the definition of qualifying capital, the valuation basis, and risk factor methodology proposed.

 

The development of the BCR has been subject to aggressive timelines handed down by the FSB, which some groups claim have forced the IAIS to adapt bank-like standards in order to expedite the process. The BCR is scheduled for completion in November 2014.

 

The IAIS's determination of qualifying capital for the BCR is seen as directly influenced by pre-existing banking regulation such as Basel III. It is proposed that G-Siis' capital be divided into ‘core' and ‘additional' tiers according to their level of loss absorbency, with restrictions placed on certain assets that opponents say do not reflect economic reality. The Geneva Association, an industry think-tank, wrote in its submission to the IAIS that capital tiering should be discouraged and that, if used, transitional provisions should be introduced to blunt their impact. Trade association Insurance Europe stated that capital tiering is "unnecessarily restrictive".

 

Tiering is of especial concern to US insurers. Many American firms issue surplus notes – deeply subordinated, unsecured debt instruments – to broaden their capital bases. These are treated as surplus under US statutory accounting principles but excluded from the IAIS's definition of core capital for the BCR. The US industry says this is unfair, as surplus note holders have no rights over an insurer's assets and supervisory approval is required prior to payment of interest and principal, making them highly loss absorbent. The same is true of debt issued by an insurer's holding company, which similarly cannot be repaid unless the domiciliary regulator explicitly allows it.

 

The valuation basis used to calculate the cost of a G-Sii's liabilities is also under scrutiny. The IAIS proposes a market-adjusted valuation basis, using the amounts reported on its audited, consolidated general purpose balance sheet, but will not allow any explicit credit to be granted for asset-liability matching, diversification, profit-sharing and non-proportional reinsurance. Insurance Europe says these could prove to be "fatal flaws" in the proposal.

 

The trade association also "strongly opposes" the addition of margin over current estimate as an additional risk buffer on top of the calculation of technical provisions. The IAIS recommends this be calculated as a specified percentage of the current estimate. Insurance Europe wrote that "this would in effect be an additional provision for the same risk that the capital requirements are intended to cover".

 

Concerns also persist around the use of a factor methodology to determine how much capital should be set aside to cater for specific risks under the BCR. The IAIS recommends G-Siis' major risk exposures be divided into specific factors and multiplied by proxy measures to determine the required capital figure for each risk. The calibration of these factors, however, "were based on a specific group of companies, at a single point in time, which... may not be enough to test the resilience of these measures," wrote Insurance Europe.

 

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