Regulatory change is fundamentally re-shaping the global insurance industry, creating strategic and operational challenges for insurers.
This year’s edition of KPMG’s publication “Evolving Insurance Regulation“ provides a comprehensive overview of regulatory change worldwide. One highlight is the findings from our first global survey of Internationally Active Insurance Groups (IAIGs). Results clearly indicate that the next few years will be critical in the development of global insurance regulation, and the need for open, transparent and informed debate to achieve the most effective and efficient frameworks is paramount.
The report focuses in particular on the growing role of new policy makers, the pressure to align insurance rules to the banking model, the growing programmes to assess supervisory compliance, the growth of consumer protection laws and the latest insurance risk and accounting changes.
I have picked out below some of the most interesting parts of the report, with relevance to the Swiss market.
The international agenda for group supervision
The International Association of Insurance Supervisors (IAIS) is completing its Common Framework (ComFrame) for the Assessment of Internationally Active Insurance Groups (IAIGs) and a global insurance capital standard. Both are to be effective by 2019. The IAIS will focus much of its energy for the next three years on its field-testing project to refine these proposals. The tests will involve both quantitative and qualitative work. Around 25 insurance groups and their supervisors have volunteered to work on the project. The results will have a significant impact on global regulation as various jurisdictions are expected to apply the resulting regulations to all insurance groups they supervise and not just those deemed globally active.
The systemic debate continues
In 2013, nine insurance groups were classified as global systemically important insurers (G-SIIs). The IAIS and the US National Association of Insurance Commissioners (NAIC) have repeatedly said divestment of systemic risk (notably non-traditional, non-insurance activities) is the goal of their financial stability policy. In the publication, we look at the IAIS’s policy measures for G-SIIs based on the general framework published by the FSB. These new measures include enhanced supervision, effective resolution and higher loss absorbency. The IAIS has committed to the FSB that it will develop a basic capital requirement (BCR) for G-SIIs by the end of 2014 and Higher Loss Absorption (HLA) standards by 2019.
Measurement of international standards
For many years, international standard setters have been writing new prudential requirements, but it is only now that a significant number of countries are actually implementing those reforms. At the request of the G20, several mechanisms have been put in place to assess the level of implementation and the effectiveness and clarity of international standards. Evolving Insurance Regulation examines these oversight programmes. The report particularly explores the results of the ten IMF reviews of the new IAIS insurance core principles (ICPs) adopted in 2011 and provides an overview of the acceptance of the ICPs and difficulties in their implementation.
An increased focus on consumer protection
The focus on prudential standards initially pushed consumer protection issues at the IAIS to the side, but increasing attention has been focused on critical market place issues in the past year – both at the global standard setting level and in some countries. The IMF assessments now spend considerable time on the resourcing and supervision related to consumer protection, calling on regulators to take a more proactive approach. Regulators’ attention on product design and suitability is also growing, especially regarding investment products.
Europe – the emerging reform agenda
The report looks at preparations in Europe to finally implement Solvency II and the impact the realisation of this Directive is having on the insurance industry in the region. This work has begun already, starting with EIOPA’s preparatory guidelines in the area of own risk and solvency assessment (ORSA), internal model approval, governance, and data reporting. During 2014, implementing measures and more detailed regulations will be released for consultation.
Risk management – within the context of profitability and sustainability
The global financial crisis highlighted the weaknesses of many insurers’ risk governance and risk management frameworks. As many insurance supervisors merge with existing central bank functions, the approach to insurance regulation is likely to take on some bank centric methodology – many are understandably nervous about this trend, one which we have witnessed in Switzerland. The positive side of this may be that banking regulators have begun to place more emphasis on understanding a bank’s business model and capital needs. In the changing approach of insurance supervision, we explore how this increased focus on a bank’s business model will force insurers to demonstrate the impact of business decisions on profitability and sustainability. The forward-looking ORSA will be central to that appraisal. Regulators will be increasingly involved in monitoring the decisions of the Board of directors and how well these align with the risk appetite and risk culture of the company.
There is little doubt that 2014 will continue with significant regulatory upheaval and considerable resulting strain on insurers. By being proactive and engaged in these fast-moving and important developments, and by drawing out the differences between the banking and insurance business models, insurers can nonetheless meet such challenges and stay ahead of the game.
I hope you will find this update interesting. Should you have any questions or would like to discuss areas of the report in greater detail, please contact me.