Global capital standard for insurers moves a step closer, but KPMG warns there is much still to do

• Insurance groups need to respond to the International Association of Insurance Supervisors (IAIS) consultation, as there may be significant differences between the proposed standard and existing local regimes
• Minimum standards could leave potential for regulatory arbitrage
• Significant challenges to agree a globally-consistent methodology for assessing capital and valuation basis

The release by the International Association of Insurance Supervisors (IAIS) of its consultation paper on a risk-based global insurance capital standard (ICS) is the latest instalment in a multi-year program towards developing a global insurance capital standard. While this is one step closer to having a clear standard that global insurers can adopt, further regulatory reform may be required to ensure that it is consistent. ICS will apply on a group-wide, consolidated basis to around 50 of the largest international insurance groups (IAIGs) from 2018, with confidential reporting to supervisors starting in 2017. Key areas covered by the consultation paper relate to valuation, qualifying capital resources and potential approaches for determining capital requirements. Gary Reader, Global Head of Insurance, KPMG International, comments: “We have long supported the IAIS endeavors to develop a global capital standard. However, the practical application by supervisors will be equally as important as the requirements themselves. In this regard, the interplay between the ICS and local regulatory requirements will be critical. “In addition, as the ICS will not apply at a legal entity level, groups will face additional challenges in managing both solo and group requirements. The minimum standard nature of the proposals will mean that local jurisdiction supervisors must demonstrate that their own regime is at least as strong as the ICS, or groups headquartered there will face an additional layer of reporting requirements, with confusion as to which becomes their binding requirement. This raises the very real prospect of inconsistent application of the ICS and different capital standards applying across geographies, running somewhat counter to the IAIS’s aim of promoting greater global convergence, consistency and avoidance of possible capital arbitrage.” Global insurers need to take note of the changes and respond to the consultation, especially if there are any significant challenges when the ICS is compared with existing, or forthcoming local regimes. Rob Curtis, Global Insurance Regulatory Lead, KPMG International, adds: “Insurance groups will want to ensure that inefficiencies and duplication are not inadvertently built into the new requirements. Further consideration among regulators concerning important issues, such as capital target criteria, time horizon and measurement basis, will be required. Similarly, it will be critically important that the ICS incorporates consistent valuation principles for assets and liabilities and a consistent approach to the definition of qualifying capital resources that are comparable and meaningful across different markets and which do not create undue balance sheet volatility. “If the IAIS is to achieve its goals, further regulatory reform to introduce or refine group-wide supervision may be required in some markets. For example, there are significant differences between the US ‘windows and walls’ approach and the European group supervisory approach under Solvency II. A global ICS will require greater consistency in approaches to group supervision. Within Europe, the ICS developments also present an opportunity for a wider debate on EIOPA’s role in relation to the group-wide supervision of any IAIGs headquartered within Europe. Given these considerations and the experience of Solvency II development in Europe, the deadline for finalization of the ICS by December 2016 appears overly optimistic - especially if detailed and thorough industry participation and involvement is expected.”