The IAIS wants to prevent another one of these--the AIG global regulatory crevasseImage, Courtesy AP

The International Association of Insurance Supervisors (IAIS) today proposed a draft of the Common Framework (ComFrame) for the Supervision of Internationally Active Insurance Groups (IAIG), marking the completion of the second step in its three-year development phase.

In the new draft, the IAIS has identified criteria by which IAIGs will be selected.

First, to be an IAIG, premiums must be written in not less than three jurisdictions/countries and the percentage of gross premiums written outside the home jurisdiction is not less than 10% of the group’s total gross written premium.

The size criteria is not a surprise. It mirrors other thresholds for systemically important financial institutions (SIFIs) developed by U.S. regulators under the Financial Stability Oversight Council (FSOC). The threshold for IAIGs total assets of $50 billion –and gross written premiums of $10 billion.

Prudential Insurance Co., for example, is a prime contender. It did not comment, nor did MetLife.

IAIS also said there would be “constrained supervisory discretion” to allow groups that do not meet this criteria to still be IAIGs and ones who do to be excluded.

Under the proposed criteria, there are about 50 groups that could be considered IAIGs, according to Dr. Monica Mächler, Swiss financial regulator–vice chair of the board of directors of FINMA– and chair of the Technical Committee of the IAIS.

The Technical Committee is the central standard-setting body for the IAIS. Mächler spoke with National Underwriter Life & Health today from Zurich.                       

ComFrame does not address systemic risks, as does the IAIS work on potential Global Systemically Important Insurers (G-SIIs) done under the guidance of the G-20sFinancial Standards Board. The proposed criteria for the IAIS G-SII Package was released on May 31. Total assets are an assessment criteria, but the amount is not identified.

The IAIS does not intend to develop a definitive list of IAIGs–it will provide criteria that IAIS members will apply to assess whether a particular insurance group or financial conglomerate should be supervised according to ComFrame.

Mächler said though none G-SIIs have yet been identified, there is a “great likelihood that, if there are any G-SIIs, these G-SIIs are also IAIGs.” 

IAIS, Basel, Switzerland, is working to prevent financial and policyholder calamity on a global scale in the wake of supervisory shortfalls and gaps in oversight revealed by the 2008 financial crisis.

The goal is to identify potential or developing material risks in IAIGs, which potentially could have an adverse impact on the IAIG and individual insurers and its policyholders and address those risks though certain supervisory actions.

The IAIS began work on ComFrame on July 1, 2010, as part of a three-year development phase ending July 1, 2013, and followed by impact assessments to work out some of the calibrations and parameters necessary for certain requirements.

More work will be done in the following year to finalize the draft. In the current draft, “we are very, very general” about the methodology for capital standards. “This needs to be elaborated yet,” Mächler said.

IAIS is striving to create an international “ partiallyharmonized approach to capital assessment,” and lis ooking at the various risks of a group, she said, so that the assessment methodology can be commonly understood. She emphasized flexibility and also a system with providing clarity among the involved  countries and supervisors.

ComFrame does not address systemic risks, as does the IAIS work on potential Global Systemically Important Insurers (G-SIIs). The criteria for the IAIS G-SII Package was released on May 31. Total assets are an assessment criteria, but the amount is not identified.

There won’t be uniform global standards but a series of elements that work together, a common approach that allows for different options –but they will need to be reconcilable and commonly understood, Mächler noted.

The IAIS said does not intend to develop a definitive list of IAIGs–it will provide criteria that IAIS members will apply to assess whether a particular insurance group or financial conglomerate should be supervised according to ComFrame. The intention is that at least those groups which meet the criteria to be an IAIG will be supervised according to ComFrame.

“In our increasingly globally interconnected financial marketplace, supervisors need the ability to efficiently coordinate and cooperate across multiple borders,” said Peter Braumüller, Chair of the IAIS Executive Committee. “ComFrame will provide the foundation needed to effectively work together in supervising complex cross-border insurance groups and, in addition to contributing to global financial stability, will help protect the individual policyholder.”

ComFrame’s draft says that the approach to supervisory analysis “should not be prescriptive but should focus on substance. The group-wide supervisor must undertake supervisory analysis at the group level but work with other involved supervisors in doing so.” U.S. and other insurers want to make sure ComFrame sticks to its principles-based stated approach, but is not sure it has done so.

The draft contains many parameters on group capital assessments methodologies and tries to define sufficient levels of capital required to protect policyholders by scoping out target criteria.

The draft states that the company will need to maintain capital resources above solvency control levels. This is a Prescribed Capital Requirement (PCR).

If the IAIG goes below its PCR, or its set of PCRs, then the group-wide supervisor, in cooperation with other involved supervisors, will initiate a ‘ladder of intervention’– the supervisor will determine what supervisory actions should be taken, in what timescale, in which entity, in order to ensure that the IAIG is able to get back to, and maintain, appropriate capital resources.

Enterprise Risk Management (ERM) and the Total Balance Sheet approach would form the common foundation for development of the capital component of solvency assessment.

However, some say it goes too far and has unintended consequences.

The American Insurance Association is concerned, for example, among other things, about the prescriptive approach in Module Two of the Comframe release which, in essence creases a new insurance regime for IAIG companies different than their domestic competitors who are not singled out as IAIGs.

AIA also has issues with the new criteria establishing the IAIGs, but wants to focus on the unlevel playing field created by the language, according to Dave Snyder, AIA vice president and associate general counsel, Washington.

Module 2, titled IAIG [Module 1 is Scope, Module 3 is The Supervisors, Module 4 is Implementation] prescribes common basic standards for an Enterprise Risk Management (ERM) framework of IAIGs, board formation and responsibilities, and sets limits on the nature and total value of participations and investments between various entities within the IAIG, for example. AIA thinks it goes too far in prescribing duties, roles and approaches.

This is important because ComFrame has the ERM and the total balance sheet approach form the foundation for development of the capital component of solvency assessment, although ComFrame does point out it does not impose a global capital standard, “but a partly harmonized approach to capital requirements.”

Snyder of AIA also said that there is too much duplication among regulators under the draft of Module 3, The Supervisors. There can be literally dozens of regulators from different countries involved, and “we feel they have not yet achieved that right balance in Module 3,” he said.

The new draft had reorganizes the structure of ComFrame into what it hopes are more clear modules.

“We very much appreciate the transparency and the opportunity to comment that IAIS is affording us and we much want IAIS to succeed in its efforts to create a regulatory system that can succeed and fills all the [regulatory] gaps,” Snyder said.

But, he said, the IAIS must engage with likely companies to make sure the final product will be “workable in the real world,” Snyder said, not wait until after July 2013 when the draft is completed and the impact study begins, but much earlier, starting at the end of this year. He is asking IAIS to start talking to executives and risk managers “to do some intensive field testing.”

The National Association of Insurance Commissioners responded, in part, that “state insurance regulators and NAIC staff have been involved in the drafting process and will be reviewing this 2012 draft and coming up with comments during the consultation period. The latest draft of ComFrame will follow the usual NAIC process to review and comment on IAIS work; this involves the relevant group(s) under the NAIC committee structure and consideration of input from interested parties.”

While some NAIC staff are said to be concerned about the prescriptive language, some regulators are looking at their budgets to see if this layer of regulation is workable.

“A lot of us our working on very limited budgets at the state insurance departments, but looking at ComFrame, if you just had one internationally active company in your state-, even one, there would be no resources in my department to do it under the current draft,” said Pennsylvania Deputy Insurance Commissioner Steve Johnson to fellow regulators and interested parties at the NAIC meeting last fall. He noted he couldn’t even hire people he would need. “There are implementation risks on many of these [international] items,“ Johnson previously warned.

Comments are due Aug. 31.

The four main benefits of ComFrame, as Mächler has spelled out, are:

1. Customization of supervisory requirements and processes. IAIGs are the largest, most

complex insurance entities and, as such, require customized supervisory requirements and

supervisory processes.

2. Convergence fostering. ComFrame is designed to create more commonality and comparability

among supervisory approaches without being rules-based, with the aim of achieving as much

consistency as possible.

3. Complexity reduction. ComFrame will coordinate supervisory activities and information about

IAIGs at the group-wide level and between group-wide and host supervisors, thereby reducing

duplication of supervisory efforts and consequently reducing demands on IAIGs.

4. Coordination and cooperation enhancements. Supervision is more effective when supervisors work together to understand how IAIGs operate and how they can most efficiently be supervised. ComFrame will result in streamlining of supervisory processes and reduce multiple

uncoordinated regulatory processes for IAIGs.