Regulators should consider calculating capital requirements for entire insurance groups, not just for individual insurance companies.
Members of an actuarial issues subcommittee and an insurance groups subcommittee at the International Association of Insurance Supervisors, Basel, Switzerland, have included that suggestion in a paper on insurance group solvency supervision.
The IAIS will be using the paper as grist for “work on the development of a comprehensive suite of supervisory papers on group-wide solvency assessment and supervision,” the group says.
Insurance companies that belong to corporate groups can benefit from access to better sources of capital, better sources of technical expertise and more opportunities to pool risk, but a group also exposes each member company to the weaknesses of other member companies, IAIS subcommittee members write.
Complicated group structures can make the groups hard for group managers to manage and hard for insurance regulators to supervise, the IAIS subcommittee members write.
In some cases, an insurance company may be a relatively small part of a large group but critical to its market. “The group management may lack sensitivity to these local issues,” the IAIS subcommittee members write.
When one regulator is supervising one insurance company member of a group, it may have a difficult time knowing what is happening at the group level, and, in times of stress, it “may lack the authority to compel the group to support the individual insurer,” the IAIS subcommittee members write. “The group may, based on the limited liability of each entity within the group, decide to withdraw support from a member in financial difficulty.”
Another challenge is assessing group-level risk concentrations, and still another is the concern that groups may seek the jurisdictions with the loosest regulations and the loosest regulators, the IAIS subcommittee members write.
In addition, “while asset transfer may work well under normal conditions, as soon as one or more entities in the group are in financial difficulty, the transferrability of the assets reflecting the capital resources may be hindered by legal restrictions or otherwise,” the IAIS subcommittee members write.
One step the IAIS should consider is looking into the possibility of giving insurance company regulators “express powers” to get information from holding companies, even if the holding companies are not regulated as insurers.