Significant barriers to implementation of IAIS standards, says Fitch

Fitch Ratings has warned that significant barriers to implementation of the new International Association of Insurance Supervisors (IAIS) standards remain, noting that the development of international regulation for insurance is continuing slowly, with several consultations in progress. In a new report, International Insurance Regulation Progressing Slowly, Fitch points out that the IAIS has further developed its methodology on the designation criteria for Global Systemically Important Insurers (G-SIIs). It says the development is intended to increase transparency over the criteria for insurers’ inclusion on the list. “Existing and prospective G-SIIs will be able to request their scores from the initial assessment stage of the designation process, which could help them to modify their strategy in view of the potential implications of G-SII designation,” Fitch reports. According to the ratings agency, the potential for being added to or removed from the G-SII list could play a significant role in setting strategy for some major insurers. “Inclusion on the list means being subject to (potentially) higher regulatory capital requirements, facing closer regulatory scrutiny and having to develop recovery and resolution plans. This creates an incentive for insurers to avoid being designated systemically important and could lead to them disposing of operations that might be considered to increase systemic risk or avoiding any increase in their exposure in these areas,” states Fitch. Nevertheless, Fitch views designation of systemic importance as neutral to ratings. Fitch explains that in 2016, the IAIS reviewed its assessment of the sector’s systemic risk. This involved a review of the transmission channels (exposure to third parties and forced liquidations) as well as the assessment framework, and the non-traditional non-insurance (NTNI) designation being replaced with an assessment of macroeconomic and liquidity risk, notes Fitch, adding that the changes have so far not led to any changes to the list of designated G-SIIs. According to Fitch, one of the industry’s main concerns about the G-SII list has been that it can be unclear which factors lead to a company’s inclusion. To aid transparency, the IAIS announced that it will share detailed information and data with those that might be included on the list before the assessment process is completed. Those companies that are not considered prospective G-SIIs will also be able to request their scores from the initial assessment stage. “This is only likely to be a significant consideration for insurers that could be on the cusp of joining the list or those already on it that only have limited exposure to business lines considered to pose systemic risks,” says Fitch. The report also examines the creation of a risk-based global Insurance Capital Standard (ICS) for G-SIIs and other Internationally Active Insurance Groups (IAIGs), and Fitch believes that the IAIS still has significant work to do in this area. The IAIS's ultimate goal is a single ICS with a common methodology to achieve comparable outcomes across jurisdictions, although Fitch says that in the immediate term two valuation approaches are likely to be allowed, and as yet, no date has been set for the adoption of an ICS based on a single calculation methodology. Fitch believes it will be particularly difficult to implement because of potential uncertainty on cross-border regulation where various competing regulatory bodies could have conflicting or overlapping mandates. Finally, the report notes that the IAIS launched a consultation package in March 2017 covering potential revisions to a number of the Insurance Core Principles (ICPs) and to ComFrame, covering a variety of topics including governance, supervision and resolution planning. Adoption of ComFrame is scheduled for the end of 2019.

Significant barriers to implementation of IAIS standards, says Fitch

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