Enhanced Insurance Prudential Standards and Global Capital

Enhanced insurance prudential standards and global capital regimes Change on the horizon? Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

From Babylon to Basel: How and why we got to macroprudential regulation...... 2

Prudential requirements for insurance companies...... 5

Insurance capital standards...... 7

Looking ahead...... 11

2 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Executive summary

To say insurance regulation is changing is to mouth a cliché, but given the various ways in which regulation seems to be changing, insurers—including those not directly or apparently affected—would do well to prepare contingency plans.

Even as political uncertainty may cloud the future of global regulation, insurance regulators have continued working together to create a supervisory structure that shifts from the previous legal-entity-centric, policyholder- protection-focused paradigm to one where financial stability and the reduction of systemic risk has equal prominence.

For regulators, this has thus far meant a widening of perspective to include group oversight and work to create enhanced capital and other prudential standards. Though work is ongoing on the specific contours of these developments, the outlines—as detailed in this paper— have achieved sufficient clarity for effective planning.

1 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

From Babylon to Basel: How and why we got to macroprudential regulation

The history of insurance is inextricably Massachusetts passed the first set of laws systemic threat posed by insurers. linked to the development of trade and requiring reserves. In 1851, New Hampshire Victoria Saporta, chair of the executive the economic progress of modern man. appointed the first commissioner of committee of the IAIS, discussed The development of customs and, later, insurance. In 1871, confusion over “Macroprudential policies for Insurers” in a laws, that allowed for clear contracts and differences in state insurance regulation speech to the Association of British Insurers trust among participants enabled the led the New York commissioner to invite his Annual Conference in November 2016. progress of insurance. peers to that state. Eighteen states met that Explaining current thinking, Saporta said, year for the first meeting of what became “[A] stress-based microprudential capital The first “written” insurance policies are the National Association of Insurance adequacy framework focused on protecting found in the ancient set of laws called the Commissioners (NAIC).1 the soundness of the sector as a whole Code of Hammurabi from about 1772 BCE. from macro-stresses and from liquidity This early form of credit insurance, referred In 1945, the US Congress passed into mismatches while avoiding excessive to as bottomry, allowed the borrower to law the McCarran-Ferguson Act, widely balance sheet volatility is a necessary use his ship as collateral for his loan for the described as reserving to the states condition to delivering macroprudential voyage. What turned a collateralized loan responsibility for regulation of the business stability. But it is not a sufficient condition. into insurance was a premium included with of insurance. Since then, this Jeffersonian Macroprudential overlays are needed the loan meant it only had to be paid off if concept of insurance regulation has largely to deal with macroprudential risks the ship returned safely. held, evolving in practice in response to such as interconnections with systemic various economic changes and sometimes counterparties and lack of substitutability.”2 Maritime insurance became more of an scandal, but underpinned in principle by the investment beginning in the 1200s CE unifying concept of insurance regulation as Despite the objections of many in the with the creation of maritime insurance microprudential, focused on the legal entity, industry, including thought leaders at policies to cover losses by merchants going and with the primary goal of policyholder The Geneva Association, it is clear that through foreign lands, enabling them to protection. transnational policymaking organizations share the risk of trade. The insurance itself such as the FSB consider some insurers could be shared among various investors, The financial crisis caused some to question to pose a systemic risk, and supervisory not just directly linked between voyager the ongoing validity of that premise. The standard setters such as the IAIS have been and financier. In the 1680s Edward Lloyd threat to the world economic system led tasked to respond by developing various opened his famous coffeehouse—and what many regulators and legislators to question measures to mitigate this risk. is considered the modern marine insurance the adequacy of current regulation. Among market was born. them was the International Association Broadly speaking, among the measures of Insurance Supervisors (IAIS), established identified have been increased capital and Underpinning that market was its own in 1994 and housed at the NAIC in its enhanced prudential requirements, as set of regulations—the Lex Mercatoria, early days. well as a broader view of what constitutes or merchant’s law—which reflected the an insurer and the risk of an insurer—a needs and customs of merchants and was The IAIS, with membership representing view more likely to be holistic, examining eventually adopted into British common law. approximately 97 percent of the world’s insurance groups as a whole and attempting insurance premiums, was tasked by the to create metrics for comparability The current US insurance regulatory Group of 20 (G-20)’s Financial Stability Board across jurisdictions. system began in the 19th century. In 1837, (FSB) with evaluating and mitigating the

2 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

The group standards and capital emphasis The next level of heightened standards Still, recent history is that measures such seem to be more consistent with the including the insurance capital standards as the Own Risk and Solvency Assessment recently developed Solvency II regime in (ICS) will apply to those insurers deemed to (ORSA) and the NAIC’s enhanced capital some European countries than with the be internationally active insurance groups governance models—directly related to Solvency Modernization Initiative (SMI) of (IAIGs). There are expected to be about 50 the international push for more accurate, US regulation. That may seem to imply that of those worldwide. contemporary regulation—already affect US-based insurers operating in external almost all US insurers. markets may have more adjustments to So if those affected are so few, why should make than their Solvency II counterparts. the vast majority of insurers care? There Even where US insurance regulators are are some technical reasons. ICPs will both opposed to a regulatory concept, the It is important to keep in mind the idea of inform and be informed by these changes, execution sometimes seems to come close scale here. The IAIS develops the insurance for example. But there is another clearer, to the spirit of international standards. The core principles (ICPs) that govern insurance though less predictable answer. NAIC refused to adopt a US group capital regulation. Supervisory regimes are standard, for example, but is working evaluated by the International Monetary Water flows downhill. While nothing is ever diligently on a group capital calculation. Fund (IMF) during its periodic Financial certain, one could understand insurance Sector Assessment Programs (FSAPs) on supervisors, having agreed that enhanced There is a second reason not to assume adherence to the ICPs and thus they affect prudential and capital measures were a the US industry will be isolated and every insurer and regulator. By contrast, positive for the regulation of one subset insulated from new international regulatory the direct effect of currently developed IAIS of insurers, deciding that all insurers developments. While it is true that, given measures—except for ICP revisions—is felt should be subject to similar measures. In its size, the US insurance industry can still by relatively few insurers because the focus that sense, the set of measures not now build a wall and prosper behind it, walls is on a few important or internationally directly affecting some insurers might serve as much to contain what is within as active entities. be considered by those insurers if not a to restrain what is without. memento mori, a vanitas still life. The highest level of international scrutiny— To grow, US insurers may need not only to and concomitant macroprudential There is a possible contrary argument. maintain their footholds in the developed measures—is reserved for global Proportionality is an important principle in markets of Europe, but also to look to systemically important insurers (G-SIIs). A regulation and, as we saw in the banking developing markets in Asia, Latin America, total of 10 have been named worldwide— industry, well-intentioned application of and Africa. Such expansion may require nine the first year and one the second more stringent regulations to all market the building of bridges, not walls, and year (replacing an organization deleted participants may prompt pushback. As those bridges may be based in part on from the list as no longer systemically Federal Reserve Board of Governors Chair acceptance of regulatory measures widely important)—with only three from the Janet Yellen said in congressional testimony, accepted by the international community. US. The highest level of US scrutiny is for “When it comes to bank regulation and systemically important financial institutions supervision, one size does not fit all.”3 She In the next sections, we review the (SIFIs). Only three US insurers have been noted the Fed had worked to “identify ways current status of the enhanced prudential so designated—the same three that were to reduce regulatory burden, particularly measures, followed by a look at the designated G-SIIs—with one of those for smaller or less complex banks that pose insurance capital standards. designations at least temporarily reversed less risk to the US financial system.”4 by the courts. No reinsurers have yet been named G-SIIs or SIFIs.

3 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Prudential requirements for insurance companies

Established in 1994 and based at the Bank for insurers that often receives the most Effective resolution for International Settlements (BIS) in Basel, industry attention, G-SIIs should pay equally Following the application of recovery and Switzerland, the IAIS was called upon to close attention to regulatory progress on resolution planning requirements to G-SIIs, consider SIFIs within the context of the other prudential requirements. the FSB updated its 2011 guidance on Key global insurance industry. Together with Attributes of Effective Resolution Regimes for the FSB, the IAIS determined a subcategory Specifically, in addition to new capital Financial Institutions to include a new annex of SIFIs: G-SIIs. Subsequently the IAIS has requirements, the IAIS framework of specifying how the guidance should be been working to bring about enhanced policy measures for G-SIIs5 sets forth applied to G-SIIs.6 supervision of those determined to requirements regarding (1) effective be G-SIIs. resolution, including the establishment Companies designated as G-SIIs must of Crisis Management Groups (CMGs), the establish their CMG within six months of The 2016 IAIS annual conference focused submission of recovery and resolution this designation, develop a recovery plan on risk-based supervision to promote plans, and the development of institution- within one year, develop a resolution plan a safe and stable insurance industry, specific cross-border cooperation based on a resolution strategy and review reinforcing the importance of insurance agreements, and (2) enhanced within the CMG within 18 months, agree companies—and especially G-SIIs— supervision, including the development to an institution-specific cross-border continuing to monitor and analyze key of a Systemic Risk Management Plan cooperation agreement within 18 months, regulatory developments that may affect (SRMP), enhanced liquidity planning and and conduct a resolvability assessment their business models and operations. management, and the ability for the group- within the CMG within two years.7 wide supervisor to have direct authority The building blocks of these enhanced over holding companies to ensure that a In June 2016, the FSB released final supervisory standards were the existing direct approach to consolidated and group- guidance to complement its updated ICPs as adopted by the IAIS members wide supervision can be applied. insurance-specificKey Attributes guidance. (currently comprising more than 200 Specifically, it finalized a paper8 on jurisdictions in nearly 140 countries). While there currently is no legal framework developing effective resolution strategies Guided by FSB recommendations, the in place for US regulation of G-SIIs, there and plans for G-SIIs, which is intended to IAIS has sought to develop enhanced have been important developments in both assist authorities in meeting the recovery supervisory measures. of these areas over the past several years, and resolution planning requirements and additional progress is expected in the under the Key Attributes and support G-SIIs’ In parallel, the IAIS has been working on near future. CMGs in their resolution-planning work. a Common Framework (ComFrame) for the Supervision for Internationally Active By more fully understanding both of The guidance sets forth considerations for Insurance Groups. While no determination these areas, including the additional determining a preferred resolution strategy has yet been made of an insurer’s work completed at the international based on an analysis of insurers’ business categorization as an IAIG, it is expected level and the implementation of these models, the criticality of insurers’ functions, that all current G-SIIs will be IAIGs. standards by national authorities, and policyholder protection arrangements. Measures for IAIGs will also apply under G-SIIs should be able to better position The guidance considers two approaches enhanced supervision. themselves to meet regulatory expectations based on entry into resolution at the level and minimize potential risks arising from of individual operating entities or at the Although the IAIS capital framework is the noncompliance or underperformance level of a nonoperating holding company, aspect of the post-crisis regulatory regime relative to their peers. noting that the preferred resolution

4 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

IAIS background

Context Operating model

•• Established in 1994, located in Basel, Switzerland within the Bank •• IAIS has a small staff and operates through the support of of International Settlements, reports to the Financial Stability regulators around the world Board •• It conducts its work through a committee system led by an •• Represents insurance regulators and supervisors of more than executive committee, supported by five committees as well as the 200 jurisdictions in nearly 140 countries supervisory forum (subcommittees and working forums can be leveraged by the five committees) •• Coverage constitutes 97 percent of the world’s insurance premiums •• Participation of US state insurance commissioners has increased dramatically over the past 10 years—it is now very common for US Mandate commissioners to travel globally to attend IAIS meetings

•• Promote effective and globally consistent supervision of the Initiatives insurance industry in order to develop and maintain fair, safe, and stable insurance markets for the benefit and protection of •• Insurance core principles policyholders and to contribute to global financial stability ––Led to US SMI developments such as ORSA and governance standards •• The international standard-setting body for the supervision ––ICPs continue to be rolled out by regulators across the world of the insurance sector, covering both prudential standards and market conduct •• Common Framework for Supervision of Internationally Active Insurance Groups ––Approximately 55 insurance groups may be designated as IAIGs

•• Global systemically important insurers ––Nine insurers worldwide, three from the United States

Group Objective Requirements

Global systemically Similar to SIFI designation by the Federal Basic Capital Requirement (BCR) important insurers Reserve, targeting regulation around the moral hazard risk of large institutions Higher Loss Absorbency (HLA)

Internationally Large groups with the goal of establishing active insurance a globally comparable consolidated Insurance capital standard group group-wide capital standard and regulatory framework

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strategy for an insurance group may to the resolution of insurers, particularly The IAIS guidance also stipulates that if a be based on either or combine both, cross-border groups,” EIOPA recommends G-SII opts to expand any of its systemically depending on the group’s characteristics. a minimum degree of harmonization that risky activities, it must explain how these In addition, the guidance identifies several aims to avoid fragmentation and facilitate activities are managed to address their elements that must be in place so that a cross-border cooperation. potential for an increased systemic impact resolution strategy can be “feasibly and on the financial system. Conversely, if a credibly implemented,” including effective Importantly, however, while EIOPA seeks G-SII opts to discontinue or reduce any of cross-border cooperation, information views on implementing a full suite of its systemically risky activities, it is required systems, and resources to absorb loss. resolution powers based on the FSB’s to submit an outline of the planned timeline Key Attributes across all European Union for such actions. G-SIIs and their CMGs should develop a jurisdictions, it stopped short of fully holistic understanding of both pieces of supporting this view given the lack of an Although the SRMPs for the originally guidance as they enhance their recovery EU-wide consensus on the need for such designated G-SIIs were required to be and resolution planning efforts. powers. It remains unclear how EIOPA completed in July 2014, the IAIS continues to will proceed, but the discussion paper assess the implementation of the SRMP. Following the FSB guidance, the European may imply that the implementation Insurance and Occupational Pensions of a harmonized resolution regime is G-SIIs should continue to refine their Authority (EIOPA) issued a discussion paper not imminent. SRMPs by considering new guidance from on the potential harmonization of recovery the IAIS, as well as leading practices across and resolution regimes for insurers.9 Noting Enhanced supervision the industry. that the “existing fragmented landscape In addition to requirements with respect of national recovery and resolution to recovery and resolution planning, G-SIIs What should covered organizations do? frameworks could cause significant barriers are subject to heightened group-wide As the IAIS, FSB, and national authorities supervision, including the development of continue to supplement existing guidance an SRMP and the development of liquidity regarding prudential requirements for For HLA and BCR purposes, the IAIS management and planning requirements G-SIIs—specifically with respect to recovery defines qualifying capital resources within one year of designation. and resolution planning and enhanced as either Core or Additional. supervision—covered organizations should In December 2013, the IAIS issued develop a holistic understanding of the •• The G-SII’s Core capital is guidance10 to group-wide supervisors on requirements in order to more effectively comprised of qualifying financial how they would direct applicable G-SIIs prepare for compliance and meet instruments and capital elements to develop SRMPs. Notably, the guidance regulatory expectations. other than financial instruments states that an SRMP should include: that contribute to financial In addition, all IAIGs should pay close strength, absorb losses both on 1. A reference to its liquidity management attention to the FSB’s G-SII list, the next a going-concern and winding-up planning in order to explain how the update to which is due in November 2017. basis and otherwise contribute G-SII intends to manage potential higher In 2015, the FSB added one insurance to survival through periods when liquidity risks; company to the list while removing another the G-SII is under stress. 2. A reference to its recovery plan and company.11 Although this move represented •• The G-SII’s Additional capital an explanation of how that plan would the first change to the G-SII population is comprised of qualifying mitigate the systemic risks in a potential since the FSB published its inaugural list in financial instruments and recovery situation; 2013, it demonstrated that the IAIS and FSB capital elements other than 3. An outline of its intra-group financial continue to evaluate IAIGs annually, and it financial instruments that transactions with respect to its effects is possible to be removed from the list after protect policyholders in winding on the overall risk and risk distribution; being previously designated. up. The key characteristics 4. A description of linkages to other of capital instruments that measures related to the plans to By understanding the IAIS and FSB’s qualify as Additional capital are manage, mitigate, or reduce systemic methodology for categorizing certain subordination and availability to risk; and insurance companies as systemically absorb losses in winding-up. 5. A brief explanation of the recovery important, IAIGs should be better prepared triggers that require reassessment of to tailor their business models to activities recovery plans. that are not seen as systemically risky.

6 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Insurance capital standards

Through the G-20, the economic and fiscal improve the ability for such events to Requirement—later renamed the Basic governors of the world’s major economies be absorbed. Capital Requirement (BCR)—and the are looking to develop a global capital development of a supervisory framework standard for organizations determined to A key challenge for the IAIS at the outset and capital standard for IAIGs. In response, be SIFIs. Following the financial downturn, was that there was no global capital in October 2013 the IAIS announced its plan in 2008 the G-20 tasked the FSB with the standard that was consistent in its to develop a risk-based global ICS. development of a package of regulatory approach for the insurance sector. Without reforms specifically focused on SIFIs. this, it was determined that it was difficult The IAIS has launched a number of to build certain aspects of enhanced consultation documents and rounds of The FSB’s framework for reducing risk supervision, such as the HLA. In November “field testing” to develop the new global to the global financial system includes 2011, the IAIS decided to leverage the work capital standards. In the short-term, the recommendations for a number of policies, being done in ComFrame to develop a BCR along with an HLA uplift will apply to which combined, are intended to enhance global capital standard. G-SIIs only and this has been subject to the level of supervision of SIFIs, including: private filing/submission through the field Global capital standard development testing process. Ultimately the BCR will 1. A more intensive and coordinated In July 2013, the FSB published its listing cease to exist and be replaced by the more supervisory approach; of the identified G-SIIs and the measures risk-based ICS. Version 1.0 of the ICS for 2. Improved mechanisms for the that applied to them. This included the confidential reporting purposes is due to be resolution limiting the impact on rapid development of a Backstop Capital agreed in London in June 2017. financial system stability and risk to the taxpayer; 3. A requirement for Higher Loss Architecture of IAIS international supervisory requirements Absorbency (HLA) capacity for SIFIs, reflecting the perceived greater risks that these companies pose to the Internationally Global active systemically financial system; and Type of entity Legal entity Group insurance important 4. Other supplementary requirements group (IAIG) insurer (G-SII) determined by national authorities. Supervisory requirements and actions The IAIS has set out its proposals for enhanced supervision and has been ICPs that apply First tier working with its members to develop only to legal ICPs that apply to legal entities and groups ICPs entities these, including:

1. G-SII determination/methodology

and criteria; Second tier ComFrame 2. Development of regulatory colleges ComFrame and coordination mechanisms for supervisors; and 3. HLA capacity with a specific focus on Third tier insurance activities determined to be G-SII package non-traditional where it is perceived G-SII package there is a greater risk of financial stability system impacts. IAIS seeks to reduce the likelihood of failure or Source: International Association of Insurance Supervisors

7 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Developing a global capital standard is a The average uplifted BCR for G-SIIs sought replace the BCR with the ICS. Following the complex process and clearly one that has to approximately match the Prescribed approval of ICS 1.0, work on ICS version 2.0 taken a great deal of interest from the Capital Requirement (PCR). The BCR and will commence. The ICS will apply to both insurance industry and wider stakeholders. HLA components under the IAIS timelines G-SIIs and IAIGs and is part of a package will apply to G-SIIs from 2019 on, when they of measures being developed under BCR will be expected to hold no less than the ComFrame, which also includes governance Finalized in October 2014 by the IAIS and total required capital (BCR+HLA). and enterprisewide risk management subsequently endorsed by both the FSB requirements. The ICS will represent the and the G-20, the BCR is the first global Next step: ICS group PCR per ICP 17.4, a solvency control capital standard for G-SIIs applying to Given its lack of sophistication and lack level above which the supervisor does not all group insurance and noninsurance of a developed risk-based approach, the intervene on capital adequacy grounds.12 activities. As a factor-based approach, the BCR was always set out to be an interim BCR itself is seen as a foundation level of solution as a capital standard for G-SIIs. The The ICS can be broken down into three capital onto which the HLA component will ICS is seen as a more sophisticated capital primary components: be added. standard. The first consultation document on the ICS was issued by the IAIS in 1. A valuation component of which two The HLA capital component is derived from December 2014. Following the consultation methods are being considered: the assessment of the G-SII itself, which, period and collective insights gained A. Market Adjusted Valuation (MAV); given its business mix, is determined to fall through field testing exercises, a second and into one of three buckets: low, mid, or high. round of consultation was held in July 2016. B. Generally Accepted Accounting That determination drives what factors Principles with adjustments are applied to the exposures within the To date, the ICS has been subject to two (GAAP+) method BCR allowing, albeit crude, a risk-based rounds of field testing, one in 2015 and 2. Capital resources; and approach to capital for G-SIIs. the second in 2016. The IAIS plans to 3. The capital requirement.

Basic Capital Requirements

BCR, BCR uplift, and HLA components (not to scale)

HLA HLA HLA Insurance + Non Insurance

BCR Uplift Uplift BCR + HLA Uplift Insurance Non Insurance Required + Capital

BCR2015 PCR Proxy

BRC BRC BCR2014 2014 2014 Insurance + Non Insurance

Source: International Association of Insurance Supervisors, IAIS BCR+HLA Fact Sheet 5 October 2015, 2015.

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ICS principles

ICS Principle 1 ICS Principle 2 ICS Principle 3 ICS Principle 4 ICS Principle 5

The ICS is a The main One of the The ICS reflects all The ICS aims at consolidated objectives of the purposes of the ICS material risks to comparability of group-wide ICS are protection is the foundation which an IAIG is outcomes across standard with of policyholders for HLA for G-SIIs. exposed. jurisdictions and a globally and to contribute therefore provides comparable risk- to financial increased mutual based measure of stability. understanding and capital adequacy greater confidence for IAIGs and in cross-border G-SIIs. analysis of IAIGs among group- wide and host supervisors.

ICS Principle 6 ICS Principle 7 ICS Principle 8 ICS Principle 9 ICS Principle 10

The ICS promotes The ICS promotes The ICS strikes The ICS is The capital sound risk prudentially an appropriate transparent, requirement in management by sound behavior balance between particularly with the ICS is based IAIGs and G-SIIs. while minimizing risk sensitivity and regard to the on appropriate inappropriate simplicity. disclosure of final target criteria, procyclical results. which underlie the behavior by calibration. supervisors and IAIGs.

Source: International Association of Insurance Supervisors, ICS Goals, Principles and Delivery Schedule, 2016.

9 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Of particular importance in determining the •• How the ICS will be used by supervisors; In addition, for US insurance companies ICS are: the issue is further complicated by both •• The transitional arrangements for the Federal Reserve Board and the NAIC implementation of the ICS; 1. The scope of the group to which the working on their own versions of a group calculation applies; •• How the key goal of comparability of capital standard. One thing seems certain 2. The discount rate applied to the ICS submissions will be achieved when at this stage: the US is expected to see valuation; discretion and judgment remain; the emergence of its first insurance group 3. What capital resources are considered capital calculation, the application and •• Whether the ICS will be included in the eligible; and impact of which remain unclear. IMF's FSAP; 4. The stresses applied to the risks that make up the capital requirement. •• The interaction of local entity capital As with Solvency II, a number of questions requirements and the ICS, as well as remain challenging. This includes how to There are many questions yet to be whether local arrangements could be address the issue of procyclicality while not answered in the development of a global considered consistent; driving inappropriate behavior through the capital standard. In fact, the recent cycle under a market consistent approach. •• How the ICS will impact enterprise risk consultation document lists many of the management practiced by insurers; and primary unanswered questions, such as: •• The practical operationalization of the ICS •• The potential use of internal models in within an insurer’s processes. version 2.0;

ICS and ComFrame timeline

IAIS 2019 General Oct 2013 Dec 2014 July 2016 Meeting IAIS announced First ICS consultation Publication of Adoption of the beginning of document (CD) second ICS DC ComFrame, the ICS project including ICS Version 2.0

May 2015 May 2016 Mid-2017 Mid-2018 Field testing of ICS began Launch of 2016 Adoption of ICS Publication of with full calculation on Quantitative Field Version 1.0 for comprehensive MAV basis (2014 field Testing – Field testing of confidential reporting ComFrame testing focused only on ICS with full calculation and launch of consultation valuation) on both MAV and confidential reporting including ICS GAAP+ basis process Version 2.0

Source: International Association of Insurance Supervisors, ICS Goals, Principles and Delivery Schedule, 2016.

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Looking ahead

While the elements of the enhanced prudential and capital regimes may change, the basic structure of the new supervisory regime is beginning to become clear. For large insurers, especially G-SIIs or potential IAIGs, this should mean an enhanced focus on and engagement with supervisors at both the international and national levels.

In the US, the NAIC has always welcomed industry involvement, and—after what might be considered some missteps—the IAIS has declared an openness to stakeholder involvement. Such engagement on industry’s part would be consistent with a holistic approach to managing regulatory change.

Such an approach could seek to achieve enterprisewide coordination across core regulatory change activities. This would include creating a coordinated response for foreseeable regulations and utilizing scenario planning techniques for the unknowns, empowering rapid response teams, and embedding a modus operandi in organizations that would translate regulatory analysis into actionable plans.

While G-SIIs and IAIGs may be on the front lines of this engagement, smaller, locally supervised insurers should not consider themselves immune from the effects of these planned changes or from the need to plan their responses.

11 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Endnotes

1. National Association of Insurance Commissioners Center for Insurance Policy and Research, State Insurance Regulation, 2011, http://www.naic.org/documents/topics_white_paper_hist_ins_reg.pdf, accessed January 3, 2017.

2. Victoria Saporta, “Macroprudential Policy for Insurers,” presented at the Association of British Insurers Annual Conference 2016, November 22, 2016.

3. Janet L. Yellen, “Supervision and Regulation,” testimony before the Committee on Financial Services, US House of Representatives, September 28, 2016.

4. Ibid.

5. International Association of Insurance Supervisors, “IAIS Releases Global Systemically Important Insurers Assessment Methodology and Policy Measures, Macroprudential Policy and Surveillance Framework,” July 18, 2013, http://www. iaisweb.org/page/news/press-releases-prior-to-2014/file/34075/18-july-2013-gsii-and-mps-press-release, accessed January 3, 2017.

6. Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions, 2014, http://www.fsb.org/wp- content/uploads/r_141015.pdf, accessed January 3, 2017.

7. Ibid.

8. Financial Stability Board, Developing Effective Resolution Strategies and Plans for Systemically Important Insurers, 2016, http:// www.fsb.org/wp-content/uploads/Final-guidance-on-insurance-resolution-strategies.pdf, accessed January 3, 2017.

9. European Insurance and Occupational Pensions Authority, Discussion Paper on Potential Harmonisation of Recovery and Resolution Frameworks for Insurers, 2016, https://eiopa.europa.eu/Publications/Consultations/EIOPA-CP-16-009%20 Discussion%20paper%20recovery%20and%20resolution%20for%20insurers.pdf, accessed January 3, 2017.

10. International Association of Insurance Supervisors, Guidance for Systemic Risk Management Plans (SRMP), 2013, http://www. iaisweb.org/page/supervisory-material/financial-stability-and-macroprudential-policy-and-surveillance/file/34255/iais- srmp-guidance-final-20-december-2013, accessed January 3, 2017.

11. Financial Stability Board, 2015 update of list of global systemically important insurers (G-SIIs), 2015, http://www.fsb.org/wp- content/uploads/FSB-communication-G-SIIs-Final-version.pdf, accessed January 3, 2017.

12. International Association of Insurance Supervisors, BCR+HLA Fact Sheet 5 October 2015, 2015, http://www.iaisweb.org/ page/supervisory-material/financial-stability-and-macroprudential-policy-and-surveillance/file/57110/bcrhla-fact-sheet- 5-october-2015, accessed January 3, 2017.

12 Enhanced insurance prudential standards and global capital regimes | Change on the horizon?

Contacts

Industry leadership Deloitte Center for Regulatory Strategy Americas Gary Shaw Vice Chairman Chris Spoth US Insurance Leader Managing Director | Deloitte Advisory Deloitte LLP Executive Director, Deloitte Center for [email protected] Regulatory Strategy Americas +1 973 602 6659 Deloitte & Touche LLP [email protected] Neal Baumann +1 202 378 5016 Principal Global Insurance Leader Authors Deloitte Consulting LLP [email protected] Alexander LePore, Jr. +1 212 618 4105 Senior Consultant | Deloitte Advisory Deloitte Center for Regulatory Strategy Howard Mills Americas Managing Director Deloitte & Touche LLP Global Insurance Regulatory Leader [email protected] Deloitte Services LP +1 571 766 7684 [email protected] +1 212 436 6752 Andrew N. Mais Senior Manager Richard Godfrey Deloitte Center for Financial Services Principal | Deloitte Advisory Deloitte Services LP US Insurance Advisory Leader [email protected] Deloitte & Touche LLP +1 203 761 3649 [email protected] +1 973 602 6270 David Sherwood Senior Manager | Deloitte Advisory Deloitte Center for Financial Services Deloitte & Touche LLP [email protected] Jim Eckenrode +1 203 423 4390 Managing Director Executive Director, Deloitte Center for Financial Services The authors gratefully acknowledge the assistance of the Deloitte Services LP following Deloitte professionals: [email protected] Andrew Bulley, partner, EMEA Centre for Regulatory Strategy, Deloitte UK +1 617 585 4877 Michelle Canaan, manager, Deloitte Services LP Coco Chen, associate, Deloitte UK Michelle Chodosh, manager, Deloitte Services LP Patricia Danielecki, senior manager, Deloitte Services LP Bethany Donato, senior specialist, Deloitte Services LP Zach Dressander, senior specialist, Deloitte Services LP Sherine El-Sayed, assistant manager, Deloitte UK Courtney Scanlin Nolan, senior manager, Deloitte Services LP

13 This report is a joint publication of the Deloitte Center for Financial Services and the Deloitte Center for Regulatory Strategy Americas.

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