On 5 October 2015, the International Association of Insurance Supervisors (IAIS) released its first full version of the HLA requirement for Global Systemically Important Insurers (G-SIIs). Following its June consultation, the IAIS acknowledges that the design and calibration of the HLA may need to be revised before implementation of the insurance capital standard (ICS) and HLA in 2019, when a second version of the HLA will be introduced. The paper is expected to be formally adopted by the IAIS in November, ahead of its endorsement at the G20 summit.
This update provides an overview of the proposed HLA as well as some key implications and challenges that are expected to arise over the coming years.
The primary purpose of the HLA is to reduce the systemic risk posed by G-SIIs by requiring them to hold additional capital compared to other insurance groups. The design initially uses the Basic Capital Requirement (BCR) as the foundation, although this will become the ICS in 2019.
In order to approximate the ICS, the BCR needs to be uplifted by 33%, subject to a cap on regulated banking activities to ensure the overall BCR plus uplift does not exceed Basel III capital ratio requirements. This uplift will be phased in over three years starting from 2016 (11% each year).
Together, the HLA and ‘uplifted BCR’ will form the basis of the minimum regulatory group-wide capital requirements applying to all G-SIIs.
The HLA is not specifically targeting non-traditional, non-insurance (NTNI) activities, but is applied to all insurance group activities.
The HLA requirement will be calculated through a factor-based approach applied to the ‘uplifted BCR’ components. The factors vary by area of the group’s business, ranging from 6% in the lowest bucket for traditional insurance and assets to 27% for non-traditional insurance and non-banking other activities in the highest bucket. Each bucket has factors approximately 50% higher than the previous bucket.
A key influencer of the overall HLA requirement will therefore be the ‘bucket’ applied, which will be based on the G-SII’s designation score. Until the G-SII assessment methodology is revised, it is not clear which G-SIIs will fall into each ‘bucket’ and it is hoped that this will be made transparent at a later date.
The IAIS expects that, on average, the HLA will be 10% of the uplifted BCR.
Overall, the capital requirements are not expected to be burdensome on G-SIIs on average, with the IAIS reporting an average BCR and HLA coverage ratio of 260%. However, there could potentially be a wide range of individual HLA requirements. The HLA is expected to be supported by the highest quality capital and qualifying additional capital cannot exceed 50% of the ‘uplifted BCR’.
G-SIIs will want understand their relative G-SII designation score compared to their peers and the drivers of their own assessment in order to determine their options to reduce the size of their HLA charge. A critical consideration will be what would be required to move down a bucket (or whether the actions of others could effectively result in a move up a bucket).
Of greater concern though is the need for groups to determine how they will manage their business under both jurisdictional and the IAIS’s group requirements.
As the HLA and ICS develop over the next few years, there will be a need to consider more fully the interaction with jurisdictional group requirements to reduce (or eliminate) multiple solvency measures and reporting requirements.
Other concerns amongst industry participants which will need to be addressed, including the following:
Concerns about the volatility of the HLA capital charge.