On March 9, the International Association of Insurance Supervisors (IAIS) announced the criteria, available here, used to assess whether the aggregation method, or AM, provides comparable results to the Insurance Capital Standard (ICS). The ICS is a key capital adequacy metric developed by the IAIS for international insurance groups (IAIGs, groups of insurers and their subsidiaries that operate internationally) and the AM is the US-based methodology (developed by the National Association of Insurance Commissioners) . , or NAIC) to determine the group capital of insurance groups. US-based IAIGs should continue to monitor this area as US regulators continue to transition to a more group-based approach to capital adequacy.
By way of background, the IAIS writes that the ICS reflects the goal of enforcing a single standard that achieves comparable results across jurisdictions for the amount of capital an insurance group should hold. In contrast, in the US, the NAIC has developed an “aggregation method” model of group capital, which adds up the capital requirements of the constituent companies within a group. This is in line with the NAIC’s most recent “Group Capital Calculation” requirement, which was incorporated into the 2020 NAIC Model Insurance Holding Company Act. Although the AM is not part of the ICS, the IAIS tries to assess whether the AM provides comparable results to the ICS. In this case, AM is considered an outcome-equivalent approach to implementing ICS as a Prescribed Capital Requirement (PCR).
The purpose of the 9 March publication of the IAIS is to set out the criteria that the IAIS will use for the comparability assessment between ICS and AM in the context of the six “High Level Principles” (HLPs) for comparability that will be adopted in 2021 become. The publication is based on public consultation and feedback from stakeholders. The criteria are summarized below.
HLP 1: AM and ICS results are significantly correlated in that they similarly change in response to changing economic and financial market conditions throughout the business cycle, not short-term market fluctuations, although the magnitude of the change may differ.
The ICS and AM results are significantly correlated and similarly change in response to changing economic and financial market conditions throughout the business cycle. When assessing whether results are significantly correlated, the correlation of results across the business cycle is analyzed. The correlation analysis is based on multiple points in time over the business cycle. 1.3. Each volunteer group in the representative sample performs sensitivity analyzes using scenarios reflecting changing risks relevant and material to the sector (life or non-life). 1.4. For the life insurance business, the IAIS relies, as far as possible, on previously submitted data, as well as on data that is planned to be submitted or that is publicly available. Three scenarios are used to inform the analysis of the correlation of the results over the business cycle: pandemic 2020, interest rate and inflation spike 2022 and global financial crisis scenario 2007-09. 1.5. For non-life business, the IAIS relies as much as possible on previously submitted data, data that is planned to be submitted or that is publicly available. Three scenarios are used to inform the analysis of the correlation of results over the business cycle: pandemic 2020, interest rate and inflation spike in 2022, and a scenario capturing specific changes in non-life insurance risks such as: B. a catastrophic event. 1.6. Volunteer Groups also provide the following information to support the analysis: (a) The AM results and a description of an economic and/or actuarial scenario that would result in the AM Capital Resources becoming less than the AM Capital Requirement at group level, as well as the corresponding impact on the ICS; (b) The ICS outcomes and a description of an economic and/or actuarial scenario that would result in the ICS capital resources becoming less than the ICS group level capital requirements and the related impact on the AM.
HLP 2: Individual elements of a group solvency approach, ie valuation, capital adequacy and capital requirement, are analysed; however, the determination of comparable results will consider the elements in their entirety.
When analyzing each element, the following is assessed:
The AM captures the same underlying risks as the ICS, although this is achieved differently within the quantitative calculation of the group capital requirement. The AM capital requirement as a whole and the ICS capital requirement provide a similar level of solvency protection.
The overall quality and eligibility of capital resources permitted in the AM are similar to those in the ICS and are assessed using the same five key principles established for ICS capital resources: loss absorbency, degree of subordination, availability for loss absorbency, permanence and absence of encumbrances, and mandatory maintenance costs.
2.1. When performing the analysis of individual elements of a group solvency approach (ie valuation, capital adequacy and capital requirements), prudence in one element may be used to offset less prudence in another element. 2.2. The AM captures the same underlying risks as the ICS. A risk analysis is performed to understand and determine how all risks covered in the ICS are captured in the AM calculation. 2.3. The analysis includes whether the overall AM, based on the underlying legal entity valuation and capital requirements, provides a similar level of solvency protection as the ICS. As part of this analysis, the proportion of non-risk based systems, as determined by the AM, accounts for less than 5% of the available capital. 2.4. The overall quality and eligibility of the capital resources allowed in the AM are similar to those in the ICS for the representative sample.
HLP 3: The AM could be more careful, but not less careful than the ICS, which is being developed as a minimum standard.
3.1. The AM triggers supervisory actions on group capital adequacy grounds under similar conditions over the economic cycle as the ICS, showing that the overall level of solvency protection of the two methods is similar (or where this is not the case, the AM could be more cautious but be no less careful than the ICS).
HLP 4: AM and ICS use the same scope of the group, consistent with that outlined in the IAIS Common Framework (ComFrame).
4.1. The scope of the group for the AM is determined using the same Insurance Core Principle (the IAIS) as the ICS. All units included in the ICS calculation are also included in the AM calculation.
HLP 5: A representative sample of volunteer groups covering a variety of business models provide both ICS and AM data under various economic and financial market conditions over the business cycle.
5.1. The sample of volunteer groups providing both AM and ICS results are representative of the business models, geography, and risks of IAIGs headquartered in the US or other interested jurisdictions. Representativeness is determined separately for life and non-life businesses, with composite groups split between their life and non-life businesses. 5.2. For purposes of determining representativeness: Significant geographic areas, as determined by entity location, of U.S. (or other interested jurisdictions) IAIGs are included in the representative sample, including, where applicable, North America, Europe and South Africa, Japan, Asia and Oceania. Specific criteria are established for volunteer groups in the life and non-life sectors. 5.3. The number of volunteer groups providing both AM and ICS data and the overall volume and quality of the information they provide are stable or increasing over the monitoring period.
HLP 6: The AM and ICS are similarly transparent, facilitating the understanding and comparability of the group’s solvency position within and across jurisdictions through disclosure and reporting to the group-wide supervisor.
6.1. Once implemented in ComFrame, IAIG capital reporting will also apply to AM. 6.2. The assessment will consider preparatory work demonstrating a commitment to meeting ComFrame disclosure and regulatory reporting requirements.