On 19 July 2016, the International Association of Insurance Supervisors (IAIS) issued its latest consultation document on a risk-based insurance capital standard (ICS), with a consultation deadline of 19 October.
The paper was released together with the technical specifications that participant firms have been using for the 2016 Field Testing exercise. The ICS will apply to all internationally active insurance groups (IAIGs) identified by their local regulator.
The consultation paper is a hefty document which includes 235 questions. Notwithstanding its size, there are a number of issues that the paper does not address, including alternatives to the standardized approach to the determination of capital requirements, transition from local regulatory regimes to reporting under the ICS, fungibility of capital, interaction between local solo regimes and the group ICS, and whether an equivalence process should be developed to assess comparability of existing group requirements, such as under Solvency II.
It is clear from the consultation document that a number of these outstanding areas will not be addressed until after the confidential reporting starts in 2017. A further consultation on ICS version 2.0 is planned for mid-2018. This lack of certainty will leave European IAIGs unclear regarding how the Solvency II group requirements will dovetail with the eventual ICS.
Most European IAIGs are likely to have a group internal model approved to determine their group solvency capital requirement (SCR) under Solvency II. The lack of an internal model option currently under the ICS will likely mean that the group position reported under Solvency II and the ICS could differ, potentially significantly. While the ICS will initially be reported only privately to regulators, analysts are likely to want to understand how the ICS Ratio (qualifying capital resources/ICS capital requirement) compares with the published Solvency II group SCR Ratio (eligible capital resources/SCR) in advance of the ICS Ratio becoming publically available. Given both ratios will ultimately be in the public domain, European IAIGs will need to determine which set of metrics should take priority where the underlying rules diverge, especially if management actions being considered have differing impacts under the two group regimes.
As the IAIS will not be addressing public, consumer and investor education until late in 2019, IAIGs will need to consider whether and when to initiate their own investor education program to prevent any misleading communications.