In this article, first published in the May 2014 issue of Finance Dublin, James Maher, Head of Insurance and Actuarial Services at EY Financial Services Ireland, discusses the development of the Common Framework for the coordinated supervision of Internationally Active Insurance Groups by the International Association of Insurance Supervisors, which has been in train since 2010 but witnessed increasing acceleration in the past six months.
On 23 May 2014, the Omnibus II directive was published in the Official Journal of the European Union, bringing into effect the primary legislation for Solvency II. With the European Insurance industry on final approach to full implementation in 2016, it would be reasonable to assume the path of travel and evolution of prudential regulation for Insurers was set and that the benefits of the cost and efforts of this protracted process could now be realised. In the case of larger, international insurance groups the answer is unfortunately: not yet!
Since 2010 the International Association of Insurance Supervisors (IAIS) has been incubating and developing a Common Framework (ComFrame) for the coordinated supervision of Internationally Active Insurance Groups (IAIGs).
The pace of development of ComFrame has accelerated over the last 6 months, with the 3rd public consultation on a Draft Common Framework during late 2013 and the initiation of field testing during Q2 of 2014 to establish a common basis for measurement of balance sheets and capital as an initial step towards creation of an Insurance Capital Standard (ICS) for IAIGs.
The primary aims of the IAIS in driving forward with ComFrame are to establish a set of international supervisory requirements to efficiently and effectively coordinate the group-wide supervision of internationally active insurance groups.
Based on the current draft consultation from October 2013, the IAIS will develop ComFrame along 3 modules, supported by the ICS.
Module 1: The Scope of ComFrame
The first module defines IAIGs as Insurance groups meeting the following criteria:
This module also addresses how supervisors should determine which entities are within the perimeter of ComFrame supervision and how to identify the appropriate group-wide supervisor.
Module 2: The IAIGs
The second module sets forth standards that IAIGs must comply with, including the development and implementation of enterprise risk management, the process for assessing capital adequacy (see ICS below), and reporting and disclosure requirements.
Furthermore, this module addresses requirements for legal and management structures and the group governance framework.
Module 3: The Supervisors
The third module describes the process supervisors will undertake in assessing whether IAIGs meet the standards identified in Module 2. The group-wide supervisory process, the requirement for supervisory colleges, and the need for collaboration among group-wide and involved supervisors are also presented.
Finally, measurements for addressing crisis management and resolution are addressed.
ComFrame, including the ICS, is due to be formally adopted by the IAIS by end of 2018 with implementation by member regulators during 2019. This is an ambitious timetable with a considerable volume of specification, testing, consultation and negotiation required between now and the proposed full implementation date. The current IAIS timetable is as follows:
The core information requirements being collected currently through the First Field Test Quantitative Exercise (FTQE1) include the following, using 31 December 2013 as the reporting date:
I. Current Statutory Approach (the current basis for prudential supervision)
II. GAAP Valuation Approach (the current basis for public audited statements)
III. Market Adjusted Valuation Approach (a newly specified basis free from prudential margins)
IV. Economic Valuation Approach (an own group measurement basis)
The FTQE comprises a quantitative template to be completed as supported by a comprehensive questionnaire. The requirements extend beyond balance sheet measurement information and include additional exposure and balance sheet sensitivity information to be used in calibration of a related exercise for Global Systemically Important Insurers.
The field test is underway with submission of information on the first three measurement bases having already taken place on 31 May 2014, with the remainder due by end of August 2014.
Interaction with other frameworks
ComFrame is expected to work alongside existing national and regional frameworks and with the requirements of the Financial Stability Board (FSB) implementation of regulation for Globally Systemically Important Insurers (GSIIs).
This co-existence of frameworks as a minimum will lead to additional costs of compliance and there is as yet no clarity on how the ICS will interact with other capital measurement bases.
Thus for European IAIGs this means the new system of regulation under ComFrame will sit alongside the soon to be implemented Solvency II requirements.
Issues and considerations
Notwithstanding the aims and aspiration of the IAIS to harmonise the supervision of insurance groups on a global basis, thus improving the efficiency and effectiveness of the supervision of insurance groups there is a growing concern by Insurance groups over the form of implementation.
In particular, given the scope and remit for ComFrame, the timeline for implementation of this regime is ambitious and the impact of the implementation on IAIGs is not yet clear. This initiative comes on top of significant evolution and cost in underlying regional and national supervisory regime overhaul which is only now moving towards implementation.
Achieving a global consensus on both ComFrame and the ICS will be a challenge for all involved in the process. In particular, implementing a system that can coexist with current regional and national regimes without creating undue cost, conflicting standards and unintended consequences for cost of capital and supply of insurance industry capital supply to the wider economy.