Our annual survey Evolving Insurance Regulation once again highlights the increasingly global nature of insurance regulation and the ever greater focus on convergence.
- Supervisors are increasingly looking beyond the boundary of the regulated insurer to the wider group and holding company operations. New governance, reporting and capital requirements will be enacted around global requirements.
- Systemic concerns are not abating and additional ‘Global Systemically Important Insurers’ are likely to be named and subject to increasingly intrusive requirements. Expansion of the requirements to domestically significant insurance operations is likely to follow.
- Boards must be able to demonstrate that their risk governance procedures, especially in regards to risk culture, permeate all levels of operations, sales and management.
- Conduct regulation will continue to increase and will be expanded to product design, marketing and incentive policies.
The global insurance capital standard (ICS)
The release in December 2014 of the International Association of Insurance Supervisors (IAIS) consultation paper on a risk-based ICS marks a significant milestone in the journey towards consistency in the assessment of global insurance groups. The ICS would form part of the quantitative capital requirements that will apply on a group-wide, consolidated basis to around 50 of the largest international insurance groups. It remains to be seen the extent to which the ICS becomes a de facto standard in all markets – applied to all companies from large groups down to small mutuals.
The practical application of ICS by supervisors will be as important as the requirements themselves. The relationship between the ICS at group level and local regulatory requirements at solo level will be critical. Since the ICS will not apply at a legal entity level, groups will face additional challenges in managing both solo and group requirements. Further, the fact that the standards set a minimum standard will mean that local supervisors must demonstrate that their own groups regime is at least as strong as the ICS or locally headquartered groups will face an additional layer of reporting requirements, coupled with confusion as to which is the binding requirement. This overlap raises the prospect of inconsistent application of the ICS and divergent group capital standards across geographies, running counter to the IAIS’s aim of promoting global convergence, consistency and reduction of capital arbitrage. Such an outcome would be most unfortunate.
Much work needs to be done before we have an international capital standard – all of the major topics are up for debate: the valuation of assets and liabilities (not aided by the accountants’ inability to agree on an international standard), the confidence level and the methods for calculating risk.
Hence the ultimate form of the ICS remains worryingly unclear. While the ICS should move the industry one step closer to achieving convergence and establishing clear standards for capital and risk management, it is very likely that further regulatory reform may be required to ensure that it is consistent and results in a framework that can be effectively implemented.
One interesting part of our survey is the comparison of the results of the global reviews of countries’ regulatory regimes (conducted under the IMF and World Bank Financial Sector Assessment Program). Switzerland scores highly on all counts (higher overall than the US for instance), with the exception of supervision of intermediaries, conduct of business and disclosure. The former two areas are of course within the scope of the FIDLEG draft legislation and the last is covered by the revised Insurance Supervision Ordinance which will become effective on 1 July 2015.
No one can dismiss the massive impact that global regulation and global organizations are having on the shape of local supervision. Entities such as the G-20, the Financial Stability Board, the OECD, the IAIS, the IMF and the World Bank are all driving change in local regulation. Whether those changes will result in a single capital standard is not clear, but all other aspects of insurance regulation are converging from solvency and governance requirements to risk management and conduct issues.
In the next year the sector will see more focus on the operational issues of companies including structure, compensation, marketing, and products themselves. Much of the reform in insurance since the crisis has been driven by banking regulation, but in the future we are likely to see marketing, disclosure and compensation requirements emanating from securities regulation instead. What is clear is that these proposals herald significant change and will usher in a new era of global supervision.
- Survey: Evolving Insurance Regulation 2015: The journey begins
- Services for insurance companies at KPMG