The Insurance Capital Standard: The home straight?

Authored by John Bowers, Actuarial Product Director, RNA Analytics

After over a decade in development, 2024 is expected to be a defining year for The Insurance Capital Standard, with adoption anticipated in December.

After many years in the making, the International Association of Insurance Supervisors expect 2024 to be a “defining year” for the global Insurance Capital Standard (ICS), with its adoption as a prescribed capital requirement (PCR) for global systemically important insurers (G-SIIs) and Internationally Active Insurance Groups (IAIGs) set for December.

Having gone through a number of iterations over its almost thirteen years in development, from ICS, to ICS 2.0, a candidate ICS as a PCR has now been shaped.

Secretary General of the IAIS, Jonathan Dixon, said in January that the ICS is already “one of the most empirically tested and widely consulted global regulatory standards” – and one which will create once adopted “a common language for the supervisory discussion of the solvency positions of IAIGs”.

Instigated in 2013 in response to the Great Financial Crisis of 2007–09, the ultimate goal of the ICS has long been to establish a single standard for internationally active insurance groups, which includes a common methodology that better aligns capital standards to achieve comparable outcomes across jurisdictions, with an objective to “enhance global convergence among group capital standards”. After more than a decade in development, however, views on how to achieve this, as well as implementation approaches, have come to vary across global markets.

Mirroring the view of the IAIS, Fitch recently pointed to the finalisation of the ICS as likely the most significant regulatory development for global insurers this year, whilst at the same time noting the challenges of creating a global standard on which all jurisdictions can agree.

The ratings agency observed that, while many jurisdictions have adopted Solvency II-like frameworks (which the ICS broadly mirrors) the US is taking a different approach – using the Aggregation Method (AM) to calculate insurance group capital – an approach whose suitability as an outcome-equivalent approach to the ICS the IAIS was said to be evaluating.

In Europe, EU financial regulator, the European Insurance and Occupational Pensions Authority (EIOPA), has meanwhile welcomed the candidate ICS as a PCR, which, it believes “goes in the right direction of implementing sound risk-based supervisory frameworks globally and is consistent with the main features of Solvency II”. In particular, it welcomed the acknowledgement of internal models as part of the candidate ICS, allowing the recognition of the specificities in the risk profiles of large, sophisticated groups. In its September comment to European think-tank Eurofi, the regulator also pointed to the importance of the comparability exercise of the ICS with the AM developed by the US, believing the criteria employed to assess whether the AM provides comparable outcomes to the ICS are “sufficiently robust” – albeit not necessarily guaranteeing the comparability of outcomes.

In its response to the IAIS consultation, European insurance and reinsurance federation, Insurance Europe, reiterated its support of the initial objective of the ICS project to create a high-quality and robust global insurance standard that promotes a sound and level global regulatory playing field. Whilst recognising the efforts of the IAIS in developing the same, the federation raised concerns over the “diversity of views” at the organisation on how to deliver this outcome.

“The objective of the ICS has evolved over time to now only provide what the IAIS calls a “minimum standard” to be achieved through various methodologies, using the ICS as a reference or the Aggregation Method (AM) as an outcome equivalent,” its September consultation response read. “In that sense, the achievability of the initial objective is significantly put into question by the evolution of the nature of the ICS project.”

The organisation was particularly enthusiastic about the inclusion of internal and partial internal models in the candidate ICS, its view being that for an effective, efficient and robust capital standard, the inclusion of internal models should remain, provided that they are calibrated to a consistent confidence level, and they should be an inherent component of the core ICS standard rather than merely an implemented version of it. Internal models are a proven risk management framework in Europe (including Switzerland and the UK) where, currently, the majority of GSIIs and IIAGs are based. The drawn-out nature of the new standard’s development and various testing phases has also raised concerns that the technical specifications of the final candidate ICS are overly detailed and prescriptive – with the margin over current estimates (MOCE) being one of the key areas of contention. Amongst Insurance Europe’s views is that the MOCE should have been based on a cost of capital approach, and that the MOCE calibrations in the consultation create “an unjustified and excessive prudential buffer [which] underestimates the available capital, reducing risk-taking capacity for insurers and adversely impacting customer choice, products or prices”.

Ahead of finalisation in December, a number of contentious issues remain unresolved, leaving insurers concerned about the potential impact of the ICS on capital requirements, risk management practices, and operational processes. Beyond finalisation, the implementation timeline for the new ICS varies depending on regulatory bodies and jurisdictions, with a phased, gradual rollout anticipated over the coming years.

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