UK: Insurance Capital Standard (ICS) – Was Any Meaningful Progress Made In Kuala Lumpur?

In our recent blog, we took stock of efforts to establish a global capital standard for insurers ahead of the IAIS annual conference in Kuala Lumpur1 . This follow-up assesses what, if any, progress was in the event made on the ICS against the three key issues that we highlighted in our last blog as being the most important for the IAIS to resolve, and hence "assays" of the degree of progress achieved, namely:

  • a single valuation basis;
  • the incorporation of internal models into the ICS framework; and
  • a satisfactory approach to the MOCE (the margin over current estimate, equivalent to the risk margin in Solvency II).

The main announcement coming out of Kuala Lumpur was the "unified path to convergence," a firmer timetable for how the IAIS envisions the ICS will be implemented across jurisdictions from 2019. The IAIS agreed that the future ICS version 2.0 will be implemented in two phases:

Phase 1 - mandatory confidential reporting

For the first five years, the ICS will be used for confidential reporting to the group supervisor and for discussions in supervisory colleges. It will be calculated using market-adjusted valuation (MAV), a standard method for capital requirements, and converged criteria for qualifying capital resources. GAAP Plus valuation and internal model-based capital requirements can also be reported at the option of the group supervisor.

The IAIS intends to consider whether alternative approaches, including GAAP Plus and internal models, should be incorporated into the ICS by the end of the monitoring period. The IAIS will also examine whether the developing US aggregation valuation method for group capital should be recognised as an "outcomes-equivalent" approach for implementation of the ICS.

For the majority of internationally-active insurance groups (IAIGs) which are now participating in field testing this phase broadly amounts to "more of the same", albeit with some narrowing down of the multiple approaches currently being tested.

Phase 2 – implementation as a "Prescribed Capital Requirement"

At the end of the five year monitoring period, and along with any agreed alternative and outcomes-equivalent approaches, the ICS will be implemented as a "Prescribed Capital Requirement" (PCR).

A PCR is theoretically a suitable basis for triggering supervisory action, though it remains to be seen how the ICS will interact with, or sit alongside, existing capital standards, such as Solvency II. The ICS will, in any case, first require implementation in each national jurisdiction. It is possible that these questions will become academic for the United States regulatory regime should the IAIS take forward its proposal to recognise it as an outcomes-equivalent approach. Whether Solvency II (or indeed any other jurisdictional regime) may also be recognised as outcomes-equivalent is a logical next question.

Our overall assessment: "some progress towards making progress"

Agreement on an implementation timeline and approach for the ICS is a significant achievement for the IAIS given the scale and complexity of the variations in different jurisdictional approaches to insurance capital and, in some cases, the diametrically opposed viewpoints among principal stakeholders on fundamental issues of valuation and methodology. However, the IAIS's agreed approach does not solve some of the most controversial issues, and what has emerged from Kuala Lumpur appears, in sum, to be less than what the strongest advocates of the ICS would have been pressing for prior to the conference.  It remains the case that many difficult decisions will need to be taken or approaches discounted during the monitoring period. Our overall view, therefore, is that, measured against the key unresolved issues or "assays" set out in our last blog – valuation, internal models, and risk margin – the IAIS has achieved some limited, objective progress within an agreement that overall bears hallmarks of deferral and compromise.

By agreeing to use the MAV approach as a reference benchmark, the IAIS has taken some steps towards arguably the most difficult issue to resolve, that of the valuation approach on which to base the ICS. The MAV is conceptually similar to Solvency II and many accounting frameworks, which should allow many IAIGs, particularly in Europe, to leverage their existing financial and regulatory reporting data. However, the IAIS has yet to determine some important components of the MAV basis, in particular the curves used for discounting. Meantime, divergence from Solvency II or accounting approaches will increase the cost and burden to IAIGs of implementing the MAV approach, notwithstanding their existing market-based reporting.

In addition, the IAIS still needs to grapple with building consensus on alternative and outcomes-equivalent approaches during the monitoring period, which defers rather than answers questions on whether, or how, these approaches will feature in the ICS framework. While variations in approach could lessen regulatory duplication and the implementation burden for firms, to the extent that they are not reconcilable, or an appropriate reflection of national specificities, they risk compromising the comparability of the ICS. At the same time, for those who have generally been opposed to a market consistency-based version of the ICS, there will now be a concern that reporting on the standard ICS basis could become entrenched and even "institutionalised" during the monitoring period as implementation cost and effort are increasingly expended and as supervisors grow increasingly accustomed to receiving the new information.

On internal models and the risk margin, limited progress was announced in Kuala Lumpur. Decisions on internal model approaches are now scheduled to be made beyond 2019. For the risk margin, the IAIS will need to reach conclusions from the next round of field testing on the broad range of approaches still being evaluated, alongside the many other important outstanding questions on the standard approaches to valuation, the calculation of the capital requirement, and the determination of capital resources.

The path ahead

All-in-all, the IAIS still faces a formidable task to produce an ICS that achieves its objectives and can practically be implemented in a way that delivers a meaningful, comparable standard across jurisdictions.  The success of the project therefore still appears very much in the balance and certainly not a foregone conclusion. That said, the unified path to convergence provides the IAIS with a firm, if much extended timeline to finalise the development phase of the ICS project. The next round of field testing will be crucial to conclude on the majority of the outstanding points in the standard ICS approach, in order to provide an appropriate basis for the subsequent confidential reporting phase.

Footnotes

1 A full readout of the key decisions made on the capital standard at the conference can be found in this IAIS update prepared by Deloitte"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions