IAIS approves new global standard for capital requirements

The world’s financial regulators have approved new global rules for how big insurers calculate their capital requirements, but which analysts said could increase reporting costs, The Financial Times has reported. 

The new standard was approved yesterday by 200 regulators, who are members of the International Association of Insurance Supervisors, at its annual meeting ina South Africa. The Bermuda Monetary Authority is a member of the IAIS. 

A key step in reaching the agreement last month was a commitment by US insurance supervisors to bring their framework in line with the new global standard in the next two years.

The new rules, which apply to the 58 biggest and most systemically important insurers, will provide a common risk-based capital framework to make it easier to compare the industry and assess financial strength across borders. 

Bermuda companies listed by the IAIS as being internationally active insurance groups (IAIGs) are Aegon, Arch Capital, Athora and Resolution Life. Several other companies with large Bermuda operations are also listed. 

The new insurance standard will not raise capital requirements for the sector.

“I think this is a huge success,” said Shigeru Ariizumi, chair of the IAIS. “On aggregate it won’t have an impact on the capital positions of insurers. But we didn’t set out to do that. It is more about having a common language for insurance regulation and capital standards.”

The new standard is unlikely to hit insurers’ credit ratings in Europe but it could increase their costs as they may have extra reporting requirements, according to Volker Kudszus, European insurance sector lead at S&P Global Ratings.

European insurers may now need to report on both their existing Solvency II insurance regulation and the IAIS’s new international capital standard, Kudszus told The FT.

“We think the standard will help with comparability, though implementation will mean extra costs for insurers if they run the solvency and insurance capital standard in parallel, which are likely to be picked up by policyholders,” he said.

The IAIS said the new standard would make the insurance sector “more resilient” and protect policyholders, adding that the existence of big and complex insurers operating across borders “amplifies the importance of having a common language for solvency supervision”.

While Europe’s Solvency II framework is already largely in line with the new international standard, the IAIS found the US was an outlier on complying with the new “international capital standard” in its treatment of interest rate risk and the timing of supervisory action. 

The US divergence stems from the way its insurers are regulated on a state-by-state level, rather than a federal level, under a system known as the aggregation method. 

“The impact will differ across jurisdictions depending on their starting point,” said Ariizumi. “The US provides a basis to produce comparability and it has committed to implement its final aggregated model in a fully convergent way before our implementation assessment starts in 2027.”

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