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Key Initiative
Insurance Capital Standard (ICS)

Last Updated 3/06/2019

Issue: The International Association of Insurance Supervisors (IAIS) is the principal international organization of insurance supervisors, engaged in creating international standards and guidance on insurance supervision and assessing their implementation. It represents insurance supervisors of more than 200 jurisdictions, constituting 97% of the world's insurance premiums. While the IAIS has no regulatory or legal authority, it influences national and regional insurance regulators by publishing supervisory material, offering training and support, and advancing the latest developments in insurance supervision.

The IAIS is working on its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame 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 early 2014, the NAIC formed the ComFrame Development and Analysis (G) Working Group to provide ongoing review and expedited technical and strategic input on ComFrame and the international group capital developments. The Working Group and NAIC representatives at the IAIS collaborate on IAIS group capital deliberations with the U.S. Treasury (Federal Insurance Office), Federal Reserve Board and other key stakeholders, as appropriate. Communication among all parties is dynamic, occurs frequently and helps to inform state insurance regulatory views.

Additionally, the NAIC's Group Capital Calculation (E) Working Group is developing a group capital calculation (GCC) for use in group solvency monitoring activities. The calculation is intended to complement the U.S.'s current holding company analysis and includes significant collaboration with the Federal Reserve and industry representatives. It is anticipated the GCC will be field-tested in 2019. The goal is for the GCC to inform our work on an Aggregation Method at the IAIS that will be considered "outcome equivalent" to the ICS.

Status: While the NAIC is 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.

Additionally, any group capital requirements need to recognize limitations on the flow of capital out of an insurance legal entity and should be supplemental to jurisdictional capital requirements. For the U.S., it will be supplemental to the U.S. Risk-Based Capital (RBC) that applies at the legal entity level. Given the variances between jurisdictions, a one-size-fits-all approach is not conducive. Furthermore, there are stabilizing benefits to retaining diversity in regulatory approaches, even as greater convergence is pursued. For this reason, there should be mutual recognition of each other's supervisory frameworks.1

U.S. state insurance regulators continue to seek improvements to the ICS while pursuing a comparable Aggregation Method more in line with U.S. regulation. The IAIS has been conducting annual field testing of ComFrame and the ICS to help evaluate needed modifications. ICS version 2.0 is anticipated to be fully adopted at the end of 2019, with implementation beginning in 2020. Implementation will start with a five-year monitoring period. Again, whether and to what degree state regulators consider the ICS or Aggregation Method will depend on its utility for the U.S. market and state regulatory needs. Finally, under a recently enacted federal law, the Treasury Department and the Federal Reserve are required to complete a study regarding the ICS before they can support or consent to its adoption.

1 https://www.naic.org/documents/committees_g_capital_position_statements.pdf, accessed February 28, 2019

 

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