New IAIS global capital requirements unlikely to cause problems for traditional insurers: Fitch

The IAIS announced last Friday that it has concluded its development of the first ever global insurance capital standard BCR for G-Slls. Endorsed by the Financial Stability Board (FSB), the BCR applies to group activities, including non-insurance operations, of G-SIIs.

The BCR are the first step in a process to develop global capital standards for G-SIIs. From 2019, these insurers will have to hold capital of at least the BCR, plus a higher-loss-absorption (HLA) requirement.

The IAIS has set the BCR at a relatively low level, said Fitch, equivalent to 75% of the average capital requirement for G-SIIs under existing rules in their home market. But the HLA will not be finalised until late 2015, so the final overall impact remains uncertain, said the ratings agency.

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“We expect the HLA to focus more on risk than just size, potentially imposing tougher standards on things like credit default protection, variable annuities and newer product lines with shorter pricing and performance track records…Even if the BCR and HLA combined do significantly increase the total minimum capital requirement for some G-SIIs, we do not expect any insurers to breach the requirements or to have to raise fresh capital, due to the long time they will have to prepare and their strong existing capital levels, which are substantially above current minimum requirements,” explained Fitch.

From 2015 the BCR will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for refinement purposes. During this reporting period, the IAIS will review the suitability of the BCR to ensure it remains fit for purpose.

“With design of the BCR now complete the IAIS has concluded the first of several steps in its process to develop group-wide global insurance capital standards,” said Peter Braumüller, Chair of the IAIS Executive Committee. “This achievement demonstrates the commitment of our members to our mission to promote globally consistent supervision of the insurance industry and contribute to global financial stability.”

The development of the BCR is the first step of a long-term project to develop risk-based, group-wide global insurance capital standards. The second step-the development of HLA requirements-is due to be completed by the end of 2015. The final step is the development of a risk-based group-wide global insurance capital standard (ICS), due to be completed by the end of 2016 and applied to Internationally Active Insurance Groups (IAIGs) from 2019.

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