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IAIS shows its hand on FSB, extends ComFrame debate

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If the International Association of Insurance Supervisors (IAIS) does not make its own decision, given its insurance expertise, on which companies are global systemically important insurers, or G-SIIs, then the global Financial Stability Board (FSB) will decide for it, said Yoshi Kawai, secretary general of the IAIS. 

“If we at the IAIS have consensus among ourselves, I assume the FSB will respect our decision. We have the expertise to demonstrate to the FSB, but if we don’t, the FSB will take over,” Kawai said.

Kawai was answering a question from Missouri Insurance Director John Huff, the NAIC’s representative on the U.S. Treasury-led Financial Stability Oversight Council (FSOC) on the concern that some state regulators have on the relationship between the IAIS and the FSB. 

Both spoke April 6 at the NAIC Spring National Meeting at an NAIC industry liaison meeting in Houston.

The policy measures and a study of impact issues will take place at the end of the year and into next year. 

The three areas which G-SIIs will be subject to under the policy measures are:

  • Enhanced supervision;
  • Effective resolution; and
  • Higher loss absorption (HLA) capacity.

G-SIIs can choose to reduce their systemically risky activities and exit their G-SII status if indeed there are any G-SIIs.

Kawai said in another meeting later in the day on international issues that although the Geneva Association’s recent Cross-Industry Benchmarking report, a systemic risk indicator-based analysis, claims to show that the biggest, most interconnected insurers aren’t as big or risky as even the middle-tiered global banks. The Association’s data is based on publicly-based information, not confidential information that supervisors have but sometimes cannot share amongst themselves. Thus, he suggested, its results are flawed.

Geneva Association’s Secretary General John Fitzpatrick responded by noting that where the insurers did not disclose the data item publicly, it obtained the data by signing confidentiality agreements with a number of insurers.

“The data was nonpublic precisely because it was immaterial to the company and therefore not required to be disclosed,” Fitzpatrick said Sunday in its defense of the report, adding that the Association has support from experts that the study reflects 95 percent of the systemic risk insurers pose to the world.

“Saying that the study is flawed because it uses public information is to say that the fundamental foundation of the world’s system of public disclosure is flawed,” Fitzpatrick stated. 

Some members of the FSB will do their own analysis in June using private information and share it to the extent possible due to the proprietary information, Kawai said. These members have privately criticized the Geneva report cross-industry analysis for the reasons Kawai described, believing they have access to more detailed, nonpublic information, according to an IAIS observer source.

The Geneva Association sought to quantify and compare the systemic risk of banks versus insurers using comparable criteria required by the IAIS data calls, it said.

Kawai is a member among the bank-supervisor heavy FSB, which operates under the G-20 to promote global financial stability. 

It is not known if the IAIS will recommend any insurers for G-SIIs. Kawai’s statement suggested there was not complete agreement among members. 

One insurance executive privately lamented the fact that the same issues that may have made it a G-SII last year no longer apply this year, and the IAIS is asking for outdated information in its data calls.

Meanwhile, a new guidance memo on the IAIS ComFrame project allows for more time and discussion on some of its visions and is allowing for more time before the next draft as the industry pummeled the IAIS on confidentiality concerns. 

The NAIC Model Holding Company Act has weakened confidentiality, said a representative from the National Association of Mutual Insurance Companies (NAMIC). NAMIC wants a signed agreement between the NAIC and those states for sharing of information, its representative said.

We need a “higher standard of confidentiality — a higher standard of protection,” said Kelly Ireland of the American Council of Life Insurers (ACLI). 

The next public consultation on the draft for ComFrame, or the Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs), is now expected to begin in the third quarter of this year, or by the end of September – pushed back from July to incorporate recent changes, according to an IAIS official.

“Where existing regulation and supervisory processes limit comparability, ComFrame is intended to foster commonality,” the IAIS stated in a Q & A memo April 4.

For example, the technical committee only recently decided how to deal with references to the ICPs and cross-references within ComFrame, and to delete Module 4. 

The ICPs apply to all entities and groups but the qualitative and quantitative requirements for IAIGs build on the ICPs in many areas, such as balance sheet valuation, governance, risk management, strategy and solvency requirements.

There has been much comprehensive discussion on the decision on how to establish the relationship between the ICPs and ComFrame, and members of the NAIC/Industry Liaison meeting tried to push for more information on the ICP for group supervision.

“Many of us are concerned that ICPs should be given time to be incorporated before set into ComFrame,” said one industry representative at the meeting. 

ICPs consist of essential principles that need to be in place for a supervisory system to be effective. 

Module 4 set out the jurisdictional requirements to implement ComFrame, including prerequisites for all supervisors.

ComFrame will necessarily be more specific than the ICPs but is not intended to be a highly prescriptive set of rules, the IAIS said. 

The IAIS still expects the development phase of ComFrame to end in 2013 and for field testing to begin in 2014. The industry requested observers be included in the ComFrame task force process and is concerned about what is actually involved in field testing.

The IAIS is currently scheduled to formally adopt ComFrame in 2018, with its members to begin implementing ComFrame thereafter.

ComFrame is a “process,” Kawai said at the Saturday morning meeting. “In my personal view, 2018 is the first step in the long journey. It is a process, a continuum.”

The IAIS has also begun to explore whether to pursue a global capital standard, including the feasibility and practical challenges of implementing such a standard, which is a different work stream than the ComFrame project, Kawai explained after a meeting.

Even if IAIS members did develop a global capital standard, it would not affect our work product now, Kawai said in the International Insurance Relations Committee later in the afternoon. It is still “a very chaotic discussion,” Kawai said, adding it is not yet a concrete discussion, just “brainstorming.”

NAIC members like Kevin McCarty, immediate past president of the NAIC and Florida commissioner and Commissioner Tom Leonardi of Connecticut and chair of the International Insurance Relations Committee, have repeatedly spoken out against a global capital standard, including at the meeting today, and abroad.

There was some push-back from the Property Casualty Insurers Association of America (PCI), which also offered a paper on group supervision in the U.S. that asked, “What more, if anything, is needed?”

The supervision issue is not just an international issue but a domestic issue, PCI said.

The goal should be to look for and address gaps in supervision and make sure there are not overlaps, and avoid the easy approach, which is the uniform standard, PCI’s Dave Snyder said. 

“Your companies are more and more global, we need a global approach – that is very simple,” Kawai responded, in speaking for the need for a global language, of sorts, or a standard(s). We have to reach, we have to communicate, we have to understand each other,” Kawai said.

The industry is united in that it does not want another layer of regulation and restrictions, but more a targeted approach where supervision needs to be applied. 

“ComFrame should not seek to apply new global regulatory requirements to groups. If a primary aim of ComFrame is to promote regulatory understanding of the risks and business components of a group, and there is cooperation among the supervisors and with the group, then there should be little need for new layers of regulation,” stated Stef Zielezienski, general counsel of the American Insurance Association.

During a March 20th ComFrame forum, many of the individual company panelists emphasized that a group’s business mix, risk appetite and management structure are unique and not conducive to a one-size-fits-all regulatory approach, Zielezienski noted.