Global regulatory change for the re/insurance industry
In the wake of the global financial crisis in 2008, significant regulatory change aimed at preventing/mitigating future crises was implemented. While the US insurance regulatory framework did remarkably well in the protection of insurance consumers and companies in the US during the financial crisis it was, and will be, affected by these reforms. Today, the results are having a profound impact on companies’ balance sheets and risk management practices. Although primarily aimed at larger, global insurers, the changes are so extensive that they may impact medium and small insurers to some extent. The question that most re/insurers are asking today is how can they cope with the myriad regulatory, legislative and ratings changes, continue to maximise opportunities and maintain profitable growth.
The most profound changes in the regulatory sphere are occurring on the international front, where new solvency frameworks are evolving at the global level and capital requirements are emerging as the major factor for re/insurer consideration. Re/insurers that successfully prepare for and manage those requirements may be best positioned to pursue growth opportunities in their home markets and overseas.
The International Association of Insurance Supervisors (IAIS) has been working on the development of a risk-based global Insurance Capital Standard (ICS) for Internationally Active Insurance Groups (IAIGs) as part of their development of a Common Framework for the Supervision of IAIGs—an initiative known as ComFrame.
The IAIS has also been working on the development of Basic Capital Requirements (BCR) and Higher Loss Absorbency (HLA) requirements for Global Systemically Important Insurers (G-SIIs). The BCR, which is to initially form the basis of the HLA, was developed in October 2014, and will apply to all group activities (including non-insurance activities) of G-SIIs. In June 2015 the IAIS began a public consultation to finalise the development of the HLA requirement.
The IAIS has also decided to delay the release of the ICS from 2016 until 2017 (when the first version of the capital rules will be released) and 2019 (when the second version is to be released with the adoption of ComFrame). Members of the IAIS are currently scheduled to begin implementing ComFrame in early 2020.
In the US
The National Association of Insurance Commissioners (NAIC) has been continuously engaged in the formulation of the IAIS standards, but has expressed several concerns due to the different accounting, legal and regulatory systems that exist. The NAIC does not want the ICS, which is to be a consolidated group-wide standard, to favour one regulatory approach over another, but to represent a best outcomes approach.
While acknowledging that it is important to have adequate capital at the group level, it is the NAIC’s position that this cannot be a substitute for adequate capital at the legal entity level and would require that any global standard would be supplemental to the risk-based capital (RBC) requirements that apply at the legal entity level in the US. The NAIC is working through the ComFrame Development and Analysis Working Group (CDAWG), which was formed early last year, to provide ongoing input with respect to all developments in this regard.
In the US, the convergence of Own Risk and Solvency Assessment (ORSA) regulatory requirements, which take effect this year, and rating agency A.M. Best’s new emerging risk-based analytics have significant implications in 2015 and beyond. The rating agency is placing greater emphasis on stochastic risk-based analytics in its ratings process and will increasingly focus on management’s ability to execute its business plans and reasonably deliver on its financial projections. Insurers will need to more tightly link their business plans with both capital and earnings adequacy assessments from a risk-adjusted perspective to maintain and enhance their Best’s ratings while complying with new regulatory requirements.
Federal involvement in the oversight of the financial services industry is expanding, causing some to question whether this trend will continue and impinge upon the authority of individual states to regulate insurance. Additionally, large and small US property and casualty insurers will be expected to further develop their financial forecasting, capital modelling and risk tolerance metrics for both capital and earnings.
In Europe
European insurers are facing a more complex regulatory environment from national, regional and superregional authorities. The approaching date for implementation of Solvency II, January 1, 2016, is taking centre stage. Member states are expected to transpose the directive requirements into local requirements with equivalence decisions this year.
The upcoming Insurance Mediation Directive (IMD2), issued by the European Commission, aims to ensure professionalism and competence among insurance intermediaries with minimum professional requirements such as appropriate knowledge of markets and products, good reputation, professional indemnity insurance and sufficient financial capacities to protect customers. The overall goal at the end is the protection of customers’ interests. Insurance intermediaries need to provide clear explanations to customers on the advice given.
