Risk Management Framework: Insurance Capital Standard

The Risk Advisory Board's (RAB) recent input on the IAIS's Insurance Capital Standard (ICS) project marks a turning point in insurance risk management. RAB's call for reevaluation aims to realign the ICS with its original objective of establishing a global standard.

Risk Management Framework:  Insurance Capital Standard
EU Risk Management

An Overview of the Reinsurance Advisory Board's Contributions to the Risk Management Framework

Insurance Europe Keywords Solvency II Risk Management Framework

The Reinsurance Advisory Board (RAB), a specialized division of Insurance Europe, has been actively contributing its expert opinions to the International Association of Insurance Supervisors (IAIS) on shaping the Insurance Capital Standard (ICS) as a Prescribed Capital Requirement (PCR). The RAB’s deep-rooted involvement in discussions about capital requirements and risk management standards is crucial for establishing a balanced financial landscape for insurance companies that prioritizes both stability and competitiveness. This becomes even more significant when considering that the majority of Internationally Active Insurance Groups (IAIGs) are European-based with global operations, amplifying the RAB's influential role in shaping international regulations and industry standards.

Aligned with the original aim of the ICS project, the RAB has expressed its support for creating a robust, high-quality global insurance standard. Their commitment speaks to their focus on fostering a regulatory environment that encourages fair competition while maintaining stability in the global insurance market. However, the RAB has raised some concerns about the IAIS's new direction towards a “minimum standard” that employs multiple methodologies, pointing out that this deviation from the initial goal could lead to a splintering of global standards. This nuanced viewpoint underscores the necessity for clear and consistent regulatory objectives.

Adding another layer of complexity, the RAB has both praised and criticized specific elements within the ICS framework. While they appreciate the inclusion of internal models, they are opposed to the introduction of output floors and the requirement for double reporting by internal model users. Their opposition emphasizes the importance of maintaining a risk management framework that is both flexible and efficient, without added complexities that could make regulatory compliance burdensome. In addition, they have noted that the overly detailed nature of the ICS technical specifications could benefit from a material reduction in the excess prudential buffer known as the Margin Over Current Estimates (MOCE), signaling their preference for a more streamlined and practical approach.

The RAB also supports implementing the ICS through existing regulatory frameworks in the European Union, the UK, and Switzerland, namely Solvency II, Solvency UK, and Swiss Solvency Test (SST), without further modifications. This reveals their confidence in a smooth transition to the new standards within these regions and further underscores their focus on balancing stability and competitiveness. Overall, the RAB continues to be a critical voice in the ongoing dialogue to shape a risk management framework that serves the broader goals of the global insurance industry.

RAB's Shift in Risk Management Framework Sets New Course for Insurance Industry

The Risk Advisory Board's (RAB) recent feedback on the International Association of Insurance Supervisors' (IAIS) Insurance Capital Standard (ICS) project signifies a transformative moment for the landscape of risk management in the insurance industry. RAB's commentary can be viewed as a reflection of mounting concerns in several areas that are integral to the direction of risk management frameworks.

One key concern from RAB is about the evolving objectives of the ICS project. The ICS initiative originally aimed to establish a robust global standard for insurance capital. However, the focus seems to have strayed, prompting RAB to call for a critical reevaluation. The underlying cause for such a shift could be the difficulty in reconciling the divergent views of global stakeholders. Therefore, realigning the ICS project with its initial objective is not merely a reactionary move but a calculated effort to foster increased global consensus. Achieving this realignment would not only clarify the project's objectives but also promote regulatory convergence, which is essential for standardizing risk management practices worldwide.

Another influential point raised by RAB is its strong advocacy for the use of internal models without the imposition of output floors or dual reporting requirements. Current reporting complexities could deter companies from adopting best practices in risk management due to the sheer administrative burden. By easing these requirements, the IAIS could create an environment that encourages transparent and effective risk assessment. Such a streamlined approach would make it more manageable for insurance companies and regulators alike, improving the overall efficiency of risk management frameworks.

RAB also points out the excessive complexities in the ICS technical specifications. These intricacies could discourage smaller insurance entities from adopting these global standards due to the cumbersome implementation process. The call for simplification is therefore an insightful move toward making the ICS technical guidelines more approachable and practical. It would mean that smaller entities can compete on a more level playing field, and that data standards across the industry could be elevated, both of which are essential for the future of global risk management.

Additionally, RAB’s call for a reduction in the Margin Over Current Estimates (MOCE) is noteworthy. High capital requirements can act as a deterrent to risk-taking and innovative activities. By advocating for a more risk-sensitive approach to capital requirements, RAB is essentially creating room for insurance companies to be more adventurous in their investments, thereby potentially fueling economic growth and innovation. In a market that is constantly influenced by economic fluctuations, a more dynamic capital framework could be the catalyst needed for insurers to contribute to economic resilience.

Lastly, RAB's endorsement of implementing the ICS through frameworks like Solvency II, Solvency UK, and the Swiss Solvency Test (SST) sends a clear message to other jurisdictions. Adopting these recognized frameworks could bring about greater consistency in the capital standards on a global scale. This is particularly pertinent in today’s interconnected financial ecosystems, where inconsistencies can lead to regulatory arbitrage and competitive imbalances.

In summary, the RAB’s feedback on the IAIS consultation marks a potential turning point for risk management in the insurance industry. Through its critical analysis and actionable recommendations, RAB is setting the stage for more efficient, transparent, and globally harmonized risk management frameworks. These reforms could not only alleviate the reporting burdens for insurance companies but also offer a pathway for global alignment in risk management practices, promoting economic growth and innovation in the process.

Read More

International financial group finds gaps in digital euro legislative package
The Institute of International Finance has published a note on the development of legislation to regulate a potential digital euro, which is being developed simultaneously.

Insurance Capital Standard
The Insurance Capital Standard (ICS) is being developed as a consolidated group-wide capital standard for IAIGs. It consists of three components: valuation, qualifying capital resources…

Reduce your
compliance risks