United States: The Development Of Global Capital Standards For IAIGs And G-SIIs: Notes From IAIS Meeting On November 13, 2013

Backstop Capital Requirements, Higher Loss Absorption, Global Insurance Capital Standards: What Applies to Whom and When?

As made clear from Observer questions at the meeting, G-SIIs and IAIGs are looking for information and some certainty as to what their capital requirements will be in 2019, as the IAIS and others move forward in developing global capital standards, while the IAIS is seeking comments from affected insurance groups and others as an integral part of the consultation and development process.

In July 2013, the Financial Stability Board (FSB) designated nine insurance groups as global systemically important insurers (G-SIIs). Simultaneously, the International Association of Insurance Supervisors (IAIS) released its framework of policy measures for G-SIIs, which included the concept of higher loss absorption/absorbency (HLA). Increased HLA capacity is designed to reduce the probability of a G-SII failure, given the greater risks that failure would pose to the global financial system, and also make G-SIIs more resilient to low probability but high impact events. HLA requirements will be developed by the end of 2015 and implemented by January 1, 2019 after field testing and refinement.

The IAIS' immediate focus is on developing and having ready for implementation backstop capital requirements (BCRs) for G-SIIs by the end of 2014. The guiding principles for the development of BCRs include the reflection of major risk categories, comparability of outcomes across jurisdictions and resilience to stress. BCRs will be the foundation for HLA requirements for G-SIIs.

In October, the IAIS announced that it plans to develop the first-ever global insurance capital standard (ICS) for internationally active insurance groups (IAIGs) as part of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) by the end of 2016 with full implementation in 2019. The IAIS will use the capital component of the solvency assessment developed under ComFrame as a starting point, and it will be tested and refined for two years before full implementation.

IAIS Global Capital Standards

As part of this process, on November 13, 2013, in Washington, D.C., the Chairs of the IAIS Technical Committee, Financial Stability Committee and HLA Drafting Group met with a group of Observers, who had requested a meeting to discuss the proposed BCRs for G-SIIs. Elise Liebers, Acting Chair of the Financial Stability Committee, John Maroney, Chair of the HLA Drafting Group, and Michael T. McRaith, Chair of the Technical Committee, spoke.

BCRs

Unlike perhaps what some Observers had expected, Ms. Liebers stated that the Financial Stability Committee was not seeking further input on BCRs at this time. She noted that they had just finished three days of meetings on the impact of the BCRs proposal on G-SIIs, including meetings with nine G-SIIs the day before. Comments instead will be taken during the consultation period, which is to begin the week before Christmas and run until February 3, 2014.

Because BCRs are to be the foundation of the HLA requirements for G-SIIs, the HLA Drafting Group will consider comments on the BCRs proposal at their meeting in Paris on February 17, 2014. Field testing is expected to start in 2014, with the requirements ready for implementation by the end of 2014. Mr. Maroney later clarified that BCRs will be ready to apply sometime between 2015 and 2018, as determined by the group-wide supervisor.

While BCRs will apply to G-SIIs, their applicability to IAIGs will be determined in 2014, and Mr. Maroney noted that there was significant discussion in Taipei as to the application of BCRs to IAIGs.

An Observer asked whether use of internal models would be allowed under BCRs, in light of comparability of outcomes across jurisdictions as one of the substantive principles guiding the development of BCRs. Mr. McRaith stated that the IAIS had heard from many firms that internal models vary greatly, and while the answer is unclear, the IAIS is moving to a principles-based approach and will find out more in field testing. Mr. Maroney indicated that the use of internal models would not pass the simplicity factor, and Ms. Liebers said that the intent was to limit use of internal modeling in BCRs.

HLA

Mr. Maroney stated that the consultation on HLA is planned for late 2014. Field testing of HLA capacity requirements will start in 2015, with development completed by the end of 2015 and implementation by January 1, 2019. HLA requirements will apply only to G-SIIs.

ComFrame and ICS

Mr. McRaith gave an update on ComFrame, where consultation on the October 2013 draft has begun and comments are due by December 16, 2013. ComFrame field testing on Module 1 also began in October 2013, with the first initiative including identification of the potential IAIG population, scope of the group subject to supervision and identification of the group-wide supervisor.

At this point, the exact relationship between ICS and ComFrame Module 2 Element 5, capital adequacy assessment, is unclear, with Mr. McRaith stating they were likely to be complementary in some fashion. Mr. McRaith also stated that while ComFrame Module 2 Element 5 was going to be a capital adequacy assessment tool, in July the IAIS had received a suggestion from the FSB about including quantitative capital standards. His expectation is that the capital assessment tool will inform the development of ICS, but will not constitute ICS.

Mr. Maroney noted that there was a difference of opinion as to whether BCRs will continue to apply to G-SIIs after ICS are in place. An Observer encouraged the IAIS to make this decision as soon as possible and to determine what place BCRs will have if they are to be kept. HLA, while initially based on BCRs, will be based on ICS when they are developed.

Conclusion

As made clear from Observer questions at the meeting, G-SIIs and IAIGs are looking for information and some certainty as to what their capital requirements will be in 2019, as the IAIS and others move forward in developing global capital standards, while the IAIS is seeking comments from affected insurance groups and others as an integral part of the consultation and development process. Coupled with the ongoing tension among state insurance departments, the Treasury Department, the Federal Insurance Office, the FSB and the IAIS, the lack of regulatory certainty through the development process will continue to challenge corporate executives at G-SIIs and IAIGs.

If you have any questions about this Alert, please contact Elizabeth W. Powers, Alice T. Kane, K. Oliver Rust, any member of the Insurance - Corporate and Regulatory Practice Group or the attorney in the firm with whom you are regularly in contact.

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