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.


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.

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