Insurance Europe has responded to a consultation conducted by the International Association of Insurance Supervisors (IAIS) on draft criteria to assess whether the Aggregation Method (AM) provides comparable outcomes to the Insurance Capital Standard (ICS).
Insurance Europe supports the ICS’s objective to create a high-quality and robust global insurance standard that promotes a sound and level global regulatory playing field. While Insurance Europe supports the aim to take a quantitative approach to the comparability assessment, a number of key elements must be changed or clarified before the criteria are finalised and the comparability assessment begins.
Insurance Europe supports the objective of the ICS project to create a high-quality and robust global insurance standard that promotes a sound and level global regulatory playing field.
Insurance Europe recognises that the IAIS is developing the ICS with the aim of “creating a common language for supervisory discussions” with the “ultimate goal of a single ICS that includes a common methodology by which one ICS achieves comparable – ie similar but not identical – outcomes across jurisdictions” and that its objective is “to enhance global convergence among group capital standards”.
Insurance Europe supports the aim of the proposed High-Level Principles and associated draft assessment criteria to take a quantitative approach to the comparability assessment.
A rigorous, quantitative and robust assessment is essential, as those jurisdictions that implement the ICS will have to abide by the standard developed by the IAIS, while the outcome of the AM will be dependent on the underlying solvency regimes, which may not be under the governance or direct control of the IAIS and its members.
So, a double standard in supervision is potentially already created simply by considering the AM comparability.
It may have significant consequences on, for example, any future assessments under the financial sector assessment program (FSAP) with the jurisdictions that ultimately implement the ICS being under a much more strenuous set-up and held to much higher standards than those implementing the AM. The risk of having a de facto double standard in the implementation phase needs to be averted by a robust, quantitatively substantiated comparability assessment.
These include:
- The fact that the AM can only be considered to produce comparable outcomes if any group’s prescribed capital requirement (PCR) under the AM would be breached at similar points in time as its PCR under the ICS, leading to much the same supervisory outcomes.
- All criteria must be considered essential and all should be sufficiently met to achieve comparability.
- The fact that short-term market fluctuations cannot be excluded from the assessment.
- It is vital to compare outcomes under a suitable range of scenarios.
- A suitable sample of real company data should be included in the study. In addition, it may be necessary to also apply scenarios to model companies.
- It is essential to clarify in advance which factors will guide the IAIS when drawing a final conclusion, particularly with regards to the definition and interpretation of certain terms.
- The fact that the ICS is not yet final and must evolve after the monitoring period ends in 2024. Therefore, the comparability assessment will need to be updated using the improved ICS.
- If the AM is found to be comparable following this assessment, Insurance Europe takes the view that the assessment would need to be updated on a regular basis to provide assurance over time (model drift) and capture evolutions in the ICS and the AM frameworks.
It is also worth noting that other aspects of the ICS project remain under development and consideration by the IAIS. Insurance Europe’s key high-level views on these aspects, therefore, also remain relevant.
The exclusion of short-term market fluctuations does not appear to make sense. Analysis under scenarios with short-term fluctuations (for example of the type seen during the 2007-2013 financial crisis) seems in fact to be one of the key areas for comparison as it might lead to different triggers for supervisory action.
The IAIS needs to clarify what is meant by business cycle. At present, this is not clear. For example, it could mean that scenarios representing the full range of economic situations and claims events should be covered by the analysis. Or it could imply some averaging of the outcomes that would not be appropriate.
Scenario analysis should include as many scenarios as needed and be based on essential data gathered from volunteer companies. Beyond this, using simplified modelled companies to make ancillary analysis can be considered beneficial to the robustness of the assessment.