Holistic Framework

Last Updated: 8/25/2023

Overview: While the insurance industry was not the root cause for of the 2008 global financial crisis, insurance markets have become increasingly global and interconnected, and activities they engage in have become increasingly tied to the financial markets. As part of the international response to the financial crisis, in 2011 the Financial Stability Board (FSB) asked the International Association of Insurance Supervisors (IAIS) to set up a process to assess insurers' systemic risk and to recommend policy measures designed to prevent catastrophic failure in the sector.

As a result, the IAIS created a methodology for the identification of and policy measures for global systemically important insurers (G-SIIs). In July 2013, the FSB identified an initial list of nine multinational insurance groups it considered to be G-SIIs, with the belief that should one of them become insolvent and fail in a disorderly manner, it could have negative impacts on the stability of the global financial system. However, as the G-SII framework was being developed and implemented, questions arose as to whether an entities-based approach (EBA) was appropriate for the insurance sector.

The IAIS began work on looking at other ways risk may impact or arise from the insurance sector and, in November 2018, released a consultation document on a proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector. The holistic framework moves away from being solely an EBA and incorporates an activities-based approach (ABA), recognizing that systemic risk may arise not only from the distress or disorderly failure of an individual insurer, but also from the collective exposures and activities of insurers at a sector-wide level.

Adopted by the IAIS in November 2019, the holistic framework consists of three key elements:

1. Supervisory material: an enhanced set of supervisory policy measures for macroprudential purposes, designed to increase the overall resilience of the insurance sector and help prevent insurance sector vulnerabilities and exposures from developing into systemic risk. When a potential systemic risk is detected, supervisory powers of intervention enable a prompt and appropriate response.
2. Global monitoring exercise: monitoring at an individual insurer and sector-wide level designed to assess global insurance market trends and developments and detect the possible build-up of systemic risk in the global insurance sector. This process includes a collective discussion at the IAIS on the assessment of potential systemic risks and appropriate supervisory responses and reporting to the FSB on the outcomes of the exercise. In 2021, the first full GME was completed since adoption of Holistic Framework. Key outcomes of the GME focused on (1) low yield environment and the related trend of increased private equity ownership of insurers, (2) credit risk and (3) cyber risk.
3. Implementation assessment: IAIS process to assess the consistent implementation by jurisdictions of enhanced supervisory policy measures and powers of intervention.

Implementation of the holistic framework by IAIS members began in 2020. The goal is that an appropriately implemented holistic framework will provide an enhanced basis for mitigating systemic risk in the insurance sector. In November 2017, the FSB, in consultation with the IAIS and national authorities announced its decision to not publish a new list of G-SIIs for 2017, given work being undertaken by the IAIS on its holistic framework, and subsequently once the holistic framework was adopted, the FSB decided to suspend G-SII identification as of the beginning of 2020. In November 2022, based on an assessment of the initial years of implementation of the holistic framework, the FSB will review the need to discontinue or re-establish an annual identification of G- SIIs. Accordingly, the IAIS is undertaking a two-phase process to help inform the FSB’s review consisting of a baseline assessment and a targeted jurisdictional assessment.

The NAIC and its representatives at the IAIS are active participants in the global monitoring exercise, including providing data from a U.S. perspective to the sector-wide monitoring and contributing to the process of assessing the implementation of the holistic framework. As part of its mission, the NAIC Financial Stability (E) Task Force will be considering issues concerning domestic or global financial stability as they pertain to the role of state insurance regulators. This involves managing the macroprudential supervisory component of the NAIC financial solvency framework and monitoring and responding to U.S. and international macroprudential policy issues as appropriate.