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IAIS Eyes Group Capital Minimums

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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.

The IAIS also should explore “designing a common methodology for calculating an insurance group’s capital requirement and resources at a group level,” the IAIS subcommittee members write.

A group “prudential capital requirement” would set a level “above which no supervisory intervention for capital reasons would be deemed necessary or appropriate,” the subcommitte members write.

A group “minimum capital requirement” would set a level above which supervisors would not have to apply their “strongest actions.”

“Because group members are separate legal entities, legal sanctions are likely to apply to them separately in adverse financial conditions, making it necessary to monitor the capital positions of group members in relation to their individual MCRs as well as ensuring that the group capital is greater than the group MCR,” the subcommittee members write.

The paper includes an appendix that compares insurance capital requirements in Australia, Canada, Japan, Switzerland, the European Union and the United States.

In the United States, for example, the National Association of Insurance Commissioners, Washington, uses a factor-based approach to addressing liability risks, while Canada and Switzerland require stochastic modeling — a type of statistical forecasting.

Japan requires stochastic modeling for variable annuities, and the EU Solvency II system also will require stochastic modeling, the IAIS subcommittee members write.

The authors of the IAIS paper also provide cross-jurisdiction translations of a number of insurance terms.

When the NAIC uses the term “mandatory control level” in connection with life insurers, for example, an Australia regulator would use the term “solvency requirements,” and a Japanese insurer would say “Category C,” the IAIS subcommittee members report.

A copy of the IAIS paper is available here.