FINANCIAL STABILITY AND REGULATION
The Geneva Association remains focused on its efforts to ensure that new policy measures are appropriate, that they target the real underlying risk and are developed with due attention to the insurance business model.
New and evolving regulatory initiatives are being closely followed by the secretariat of The Geneva Association. During 2017 the Association responded to several consultations, often in collaboration with the Institute of International Finance (IIF).
Revised Insurance Core Principles (ICPs) and ComFrame
In the spring of 2017, the IAIS started an ambitious revision of the Insurance Core Principles (ICPs), seeking to integrate and streamline the ICPs with the common framework (ComFrame) for the supervision of internationally active insurance groups. ICPs form a globally accepted framework for the supervision of the insurance sector.
In March 2017, a public consultation was launched to overhaul the ICPs related to suitability of persons, corporate governance, risk management and internal controls, supervisory review and reporting, preventive and corrective measures, winding-up and exiting from the market, and supervisory cooperation and coordination.
The Geneva Association responded jointly with the IIF. The joint response stressed the importance of proportionate application and implementation of the ICPs and the ComFrame material across jurisdictions, while adopting a consistent treatment of corporate governance. Another important element was the request for recovery planning to be discretionary and subject to the principle of proportionality. The IAIS standard setting should leverage the Financial Stability Board (FSB) guidance on resolution-related matters for insurers.
The IAIS launched a separate consultation on the ICP concerning macroprudential surveillance and insurance supervision. In a response letter to Victoria Saporta, Chair of the IAIS Executive Committee, The Geneva Association indicated that the revised draft ICP pre-empts the work on the activities-based approach to Systemic Risk (ABA); hence, it was recommended to wait with the revision of this particular ICP until the IAIS has concluded its work on the ABA.
Activities-Based Approach to Systemic Risk (ABA)
The IAIS started the development of the ABA in mid-December 2017 with the publication of an interim consultative document in which the IAIS requested input on the development of the ABA as well as feedback on the proposed steps and definitions.
The Geneva Association engaged its Financial Stability working group to assist in drafting the response to this document. The response gave broad support to the approach taken, but it also highlighted that the insurance business model makes it unlikely that systemic risk issues would pose a big problem for insurance. In defining activities that contribute to systemic risk, the IAIS looks at liquidity risk and macroeconomic exposure in particular. Liquidity risk management plans (LRMPs) were mentioned as a potential policy measure, and The Geneva Association considered it a sound step forward even though potentially too broad in scope. With regard to macroeconomic exposure, the response included advice to further improve this topic. Further clarification is also needed in relation to vulnerabilities and amplifying factors.
Although no concrete policy measures were proposed at this stage, The Geneva Association stressed in its response that the forthcoming Insurance Capital Standard (ICS) is seen as a potential policy measure, hence a strong argument was brought forward to ensure the ICS does not include features that might incentivise procyclical behaviour. The Geneva Association presented a summary of these points at a stakeholder session, held in February 2018 at the Bank of England, during which broad support was given for the approach taken. A second public consultation, including final proposals, is expected by the end of 2018; this would include specific policy measures to address systemically risky activities, as well as a review of the G-SII methodology (known as entity-based approach ). It remains unclear whether the ABA would replace the entity-based approach, known as the G-SII designation.
Insurance Capital Standard (ICS) 2.0
At the IAIS Annual Conference in November 2017 in Malaysia, the ‘Kuala Lumpur agreement’ was announced. It was decided by the IAIS Executive Committee that the implementation of the ICS 2.0 will be conducted in two phases.
The first phase consists of a five-year monitoring period, during which the ICS will not be used as a prescribed capital requirement, followed by the implementation phase. The monitoring phase will help stakeholders to gather first-hand experience and will allow supervisors to discuss and assess the ICS in comparison to the existing group capital standards or calculations currently in development (such as the U.S. aggregation approach). It is important to note that the five-year monitoring period will be different from the field testing that has taken place so far. The adoption of ComFrame, including ICS 2.0 by the IAIS in 2019, will signal approval of the design. The IAIS indicated, however, that this does not mean no corrections or refinements will be made. The process of how it will be done will be part of the public consultation later in 2018.
During the monitoring period, all IAIGs will be subject to mandatory confidential reporting of a reference ICS based on market-adjusted valuation, as well as additional reporting at the discretion of the group-wide supervisor. As part of the ‘Kuala Lumpur agreement’, the IAIS has agreed to collect data from relevant jurisdictions throughout the development period. By doing so, the IAIS intends to be in a position to assess whether the U.S. aggregation method provides comparable outcomes to the ICS. If so, it will be considered an outcome-equivalent approach to the ICS by the end of the monitoring period.
Throughout the year, The Geneva Association held several stakeholder sessions with the IAIS on the ICS (for example, in Kuala Lumpur, Basel and Nashville). These activities led to the development by IAIS of a Q&A document on the ICS 2.0, which partly addressed our inquiries. The year ahead will see another field testing exercise as well as a public consultation on the full common framework for the supervision of internationally active insurance groups (ComFrame).
FSB public consultation on key attributes assessment methodology for the insurance sector
In December 2017, the FSB launched a consultative document on the methodology for assessing the implementation of the key attributes of effective resolution regimes for insurers. The document included `essential criteria´ and explanatory notes for the assessment of existing resolution regimes performed by authorities as well as peer reviews of resolution regimes that implement the key attributes.
The Geneva Association responded jointly with the IIF. The joint response was supportive but also included messages that urged the FSB to continue to work with the IAIS to refine the underlying framework for resolution in insurance regarding both key attributes and the ICPs. It was stressed that guidance should be proportionate and tailored to the specificities of the insurance business model, and also acknowledged that failures in the insurance industry are rare, and if they do happen, they are unlikely to have systemic implications.
IAIS public consultation on revised ICPs 8, 15 and 16 and related ComFrame material
The document was published in mid-November and included revisions to ICP 8 (risk management and internal controls), ICP 15 (investments) and ICP 16 (enterprise risk management for solvency purposes). As ICP 8 was consulted on earlier in 2017, the only element that was consulted on this time was the insertion of ComFrame material. ICPs 15 and 16 saw not only ComFrame material inserted but also revisions to existing ICP provisions.
The Geneva Association issued a joint response with the IIF. An overarching comment in our joint response letter included the urge for consistency across IAIS standards and policy frameworks. Furthermore, we pointed to the fact that a holistic and proportionate approach should be taken into account, particularly in regard to ComFrame, where we sensed increased prescriptiveness of requirements. On the investment side, we highlighted the need for the recognition of differences between bank and insurance liabilities.
The ‘Low for Long’ Challenge
In November 2017, The Geneva Association published The ‘Low for Long’ Challenge: Socio-economic implications and the life insurance industry’s response. The report considered the impact of low interest rates on life insurers and their customers. The broader content centred on the question of whether an extended period of low interest rates could impair the socio-economic role life insurers have played for so many years.
The question is even more important in light of the fact that the world’s population is ageing rapidly. The financial risks associated with longevity rank at the top of social, economic and political issues that will need solutions over the coming decades. Low interest rates exacerbate the problem. They penalise individual retirement savings. And they induce insurers to withdraw certain product offerings, which customers had relied upon in the past, but which can no longer be adequately priced in the current macro-financial environment. At the same time, there is an increasing likelihood that governments will eventually cut retirement benefits that were granted in the past.
This puts the socio-economic role of life insurers at centre stage. Their ability to pool longevity risks and absorb financial market fluctuations in a long-term Asset Liability Management framework enables life insurers to offer retirement solutions that cannot be matched by other financial service providers. The report’s message is cautiously optimistic. The industry is in the midst of adapting to a difficult macro-financial environment, and its leaders are convinced that life insurance will continue to play an important socio-economic role in the future.
Federation of Afro-Asian Insurers & Reinsurers (FAIR)
Secretary General Anna Maria D’Hulster delivered the international address, and Kai-Uwe Schanz, Special Advisor to The Geneva Association, chaired the plenary session Regulatory Dynamics in FAIR-Land at the 25th FAIR Conference, which took place in October 2017 in Bahrein.
Another plenary session, Digital Strategy for Insurance—Product Innovation and Practical Solutions was chaired by Ronald Klein, Director, Global Ageing.
The event brought together regulators from several African and Asian countries as well as a representative of the Asian Development Bank. Topics discussed included risk-based solvency regimes; the use of technology and regulation, policyholder protection and market conduct, as well as market growth and access to insurance in the context of policyholder protection and financial stability.
Anna Maria D’Hulster gives the international address at
the 25th FAIR Conference
34th Regulation and Supervision (PROGRES) Seminar
The 34th PROGRES seminar took place in Zurich, and topics included global geopolitics; the role of the IAIS in times of turbulence; systemic risk and insurance; and insurance regulation in a digitised environment.
Jonathan Dixon, Secretary General, IAIS, gives the introductory address
Gabriel Bernadino, Chairman, EIOPA, chairs the CEO panel on insurance in a changing world
CEO panel - Inga Beale, CEO, Lloyd’s
Philippe Donnet, Group CEO, Generali
Alexander R. Wynaendts, CEO, Aegon