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Insurance Capital Standard (ICS)

Last Updated 1/15/2021

Issue: At the end of 2019, the International Association of Insurance Supervisors (IAIS) adopted its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) that aims to improve group supervision and provide better insights to supervisors on how internationally active insurance groups (IAIGs) operate and the risks they face. As part of ComFrame, the IAIS is developing a risk-based global insurance capital standard (ICS) for IAIGs.

In October 2013 the IAIS announced the development of the ICS, which aims to provide a comparable measure of capital across jurisdictions that will help allow for a common understanding of IAIG capital adequacy, enhancing cooperation and coordination among supervisors. The ICS is being developed as a group-wide, consolidated insurance capital standard; it does not replace existing requirements for insurance legal entity supervision in any jurisdiction.

Once adopted, the ICS will apply to IAIGs as part of ComFrame. In November 2017, the IAIS announced details on how ICS Version 2.0 will be implemented. The first phase consists of a 5-year monitoring period during which a reference ICS will be used for confidential reporting to group-wide supervisors and discussion in supervisory colleges, and additional reporting collected at the option of the group-wide supervisor, including ICS based on a GAAP Plus valuation approach and/or an internal model-based capital requirement calculation. The second phase will be implementation of the ICS as a group-wide prescribed capital requirement (PCR).

As part of this ongoing work, the IAIS has recognized the U.S. work on an aggregation approach and will assess by the end of the monitoring period whether such an approach reaches comparable outcomes to the ICS. During the monitoring period, the IAIS will continue to collect data from interested jurisdictions relevant to the development of the Aggregation Method (AM). In November 2019, the IAIS established a timeline and workplan for assessing comparable outcomes as well as work related to improvement of the ICS.

Status: While the NAIC is actively involved in the development of and attentive to international standards, in some cases, they may be ineffective or inconsistent with current U.S. policy or the U.S. state-based system of insurance regulation. International standards are non-binding, but their potential implementation could impact the competitiveness of the U.S. insurance sector. The risks inherent in insurance products, even for the same business line, can be very different jurisdiction to jurisdiction. A single risk charge for that business line may well lead to incorrect assessments of the relative capital strength of IAIGs. As such, it is important that any international standard implemented appropriately reflect the risk characteristics of the underlying business and not undermine legal entity capital requirements in the U.S. Thus, the development of the AM which is intended to provide comparable outcomes to the ICS.

Within the IAIS work is underway to develop the criteria to assess whether the AM provides comparable outcomes to the ICS, which is to be done in a manner that neither precludes the AM at the outset as an outcome equivalent approach to the ICS for measuring group capital, nor gives it a free pass. Also worth noting, finalization of the NAIC’s Group Capital Calculation (GCC) should help contribute to understanding of how aggregation approaches work and the broader discussion on comparability. While influenced by the GCC and calculated in a similar manner, the AM will be more jurisdictional agnostic, and therefore perhaps simpler, than the GCC.

The NAIC and U.S. state insurance regulators are actively engaged in the monitoring period and appreciate the participation of U.S. insurance groups who participate in the annual data collection. In addition to comparability, efforts continue to seek improvements to the ICS as part of the overall monitoring period process as there is interest in ensuring the ICS itself appropriately measures group capital adequacy and reflects risks.