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Erscheinung:05.09.2018 | Topic Liquidity requirements Global capital standard: Insights on the International Capital Standard for internationally active insurance groups

A global capital standard, the International Capital Standard (ICS), is currently being developed for large, internationally active insurance groups (IAIGs). At the end of July, the International Association of Insurance Supervisors (IAIS) launched a comprehensive consultation on the subject.

The ICS is intended to become part of the common framework (ComFrame) for these insurance groups, for which a major consultation was recently also started. Under the current definition, this presently affects three insurers in Germany and approximately 70 IAIGs worldwide.1

This article explains the steps to be taken in the coming years and explains numerous individual aspects of the ICS and ComFrame.

Definition:Internationally active insurance groups (IAIGs)

As defined by the International Association of Insurance Supervisors (IAIS), an insurance group is a large, internationally active insurance group if

a) premiums are written in three or more jurisdictions and gross written premiums outside of home jurisdiction are at least 10% of the group's total gross written premium income and,

b) based on a three-year rolling average, total assets are at least USD 50 billion or gross written premiums are at least USD 10 billion.

ICS timetable

As part of developing the ICS, the IAIS has been carrying out annual field testing exercises in which German companies have also participated from the very beginning (see also expert article Milestone achieved: extended field testing of global capital standard). The penultimate field testing began in May 2018 and will run through the end of August, and thus at the same time as the current consultation, which is open until 30 October. Both the feedback obtained from the consultation and the results of the field testing will be included in the technical specifications for the final field test, which is expected to start in April 2019. In November 2019, the IAIS will adopt what will be for the time being the final ICS, ICS Version 2.0.

In 2020, the five-year monitoring period (see chart "Timetable for ICS Version 2.0") will begin – the first of two stages for implementing the ICS. During the monitoring period, the IAIGs will calculate the ICS capital requirement on the basis of the standard method and report to the group supervisors. However, the ICS is not yet intended for supervisory purposes. Initially, the focus is solely on collecting information on how the undertakings apply the ICS worldwide. It is also planned that the supervisory colleges will examine the ICS, for instance, for the purpose of comparing the ICS and national capital requirements. The lessons learnt from the analysis and the discussions will then be shared with the IAIS, its members and other supervisory authorities of IAIGs. The IAIS intends to establish a forum to this end. The objective is to leverage the lessons learnt in order to further develop the ICS and to identify and remedy any weaknesses or discrepancies.

Currently, it is planned that the higher loss absorbency (HLA) requirements for global systemically important insurers, adopted by the IAIS in 2015, will come into force in 2022. However, the IAIS will reassess the situation in light of the work related to developing the ICS, which is to form the basis for the HLA, and the activities-based approach (ABA), in the context of which the assessment of systemic risks is also under discussion.

The monitoring period will be followed by the second stage: the formal implementation of ICS Version 2.0, the world's first binding minimum capital standard for IAIGs. For Europe, this means that the European Insurance and Occupational Pensions Authority (EIOPA), the EU Commission and the Member States will be able to use the monitoring period until the end of 2024 to evaluate whether any changes to the Solvency II Directive will become necessary as a result of the global ICS.

Timetable for ICS Version 2.0

Timetable for ICS Version 2.0 Figure: Timetable for ICS Version 2.0; © BaFin Timetable for ICS Version 2.0

Objectives of the ICS

As a globally uniform minimum standard for the calculation of capital requirements and own funds, the ICS is intended to contribute to making these more comparable for large, internationally active insurance groups. It represents the first international agreement on a risk-sensitive capital standard. For more information, please visit the IAIS website.

As this is a minimum standard, the individual jurisdictions may also implement more stringent requirements. In Europe, Solvency II will need to be compared with the final ICS in order to assess whether any changes will be needed.

Reporting obligation

To date, participating in IAIS field testing was voluntary. However, after completion of the 2019 Field Testing, the national supervisory authorities must ensure, in accordance with their voluntary undertaking, that the IAIGs under their supervision calculate and report ICS Version 2.0 in addition to their local capital standard.

Until the start of the monitoring period, the IAIS will develop and communicate appropriate mechanisms together with its members, which will also ensure that the IAIS remains involved in the process. The topics of discussion include the organisation of data delivery, the content of the data queries and the integration into the undertakings' reporting calendars.

Standard method

As is the case with Solvency II, the ICS also has a standard method for all IAIGs that governs the calculation methods for determining capital requirements. ICS capital requirement is calibrated using a confidence level of 99.5% for the Value-at-Risk (VaR) risk measure. The various modules are combined using correlation matrices specified by the IAIS. Both approaches are also applied in Solvency II.

Simplifications

As part of the field testing, the IAIS tried to accommodate the voluntary participants by providing simplifications. For instance, the participants were able to approximate certain values.

This should continue to be the case going forward. However, less simplifications should be used as the end of the monitoring period approaches. To this end, the IAIS, group supervisors and IAIGs will work to further improve the results.

Valuation basis

ICS Version 2.0 uses a market-adjusted valuation (MAV) approach. As under Solvency II, assets are measured at fair value and liabilities at best estimate. Also similar to Solvency II, the IAIS uses a risk-free yield curve for discounting cash flows, which consists of three segments and can be modified by adjusting spreads.

The IAIS has not yet reached a final agreement on the structure of the yield curve. However, the work focuses on a few remaining options that are being examined for their suitability in the field testing.

Internal models

Internal models are part of the current ICS field testing, but are designated "other methods" in the monitoring period. This means that all IAIGs must use the standard method, but the supervisory authorities can also allow internal models. The IAIS will define parameters that must be met before an internal model can be applied. BaFin supports the inclusion of internal models in the ICS.

In the course of the monitoring period, internal models are to be tested to see whether they achieve reliable results that are compatible with the ICS objectives. The IAIS will define the precise criteria for this before the end of the monitoring period.

GAAP Plus and aggregation method

Generally accepted accounting principles with adjustments (GAAP Plus) and the aggregation method are two alternative approaches for calculating the capital requirement that are also being discussed internationally. GAAP Plus is based on the respective national accounting standards and adjusts these in a targeted manner in order to simulate a market-adjusted valuation. Under the aggregation method, the calculation of a group capital requirement is based on the respective national requirements, which are then aggregated with corrections and adjustments using scaling factors. While GAAP Plus is also categorised as an "other method" in the field testing, data for the aggregation method are collected in parallel and are not part of the actual field testing.

BaFin has decided against field testing either method in Germany. It is not yet clear whether they will be incorporated into ICS Version 2.0. Here, too, a review is slated for the monitoring period, based on criteria which have not yet been defined.

Use of data

It is envisaged that the group supervisors will forward the data received to the IAIS. The details are currently being discussed and will be communicated upon completion.
Based on the data and the discussions in the colleges, the IAIS would like to work on further improving ICS Version 2.0 before the implementation phase begins in 2025.

ComFrame

The IAIS Insurance Core Principles (ICPs) contain requirements for the supervisory authorities of all insurers and insurance groups, irrespective of their size and internationality. In ComFrame, the IAIS is developing a framework specifically for the supervision of IAIGs. The focus here is on effective group supervision. ComFrame builds and expands on the ICPs.

As is the case with the ICPs, ComFrame covers a wide range of regulatory issues, from group identification to risk management and governance to supervisory cooperation. BaFin is helping to develop the ComFrame and strives to making Solvency II as consistent as possible with ComFrame and ICS. Ideally, Solvency II should represent the global minimum standard ICS.

ComFrame will also be revised after the current consultation, which, like the ICS consultation, runs until 30 October. Final adoption is scheduled for the fourth quarter of 2019. ComFrame then enters the implementation phase, but initially until the end of the monitoring period without the ICS. The IAIS intends to monitor implementation in an ongoing process, if this is not already done as part of the Financial Sector Assessment Programme (FSAP), the comprehensive assessment of national financial sectors by the International Monetary Fund (IMF) (see also BaFinJournal July 2016, only available in German).

Authors

Dr Michael Popp
Dr Hung Viet Quoc Lai
Meta Zähres
BaFin Insurance and Pension Funds Supervision Division, International Department

Please note

This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.

Footnotes:

  1. 1 The calculation is based on the consolidated financial statements for 2016 prepared in accordance with International Financial Reporting Standards (IFRSs).

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