The International Association of Insurance Supervisors hastold the insurance world it will be developing afirst-ever risk-based global insurance capital standard by2016.

“It is undeniable that the business of insurance is global, andglobal issues demand global responses,” said PeterBraumüller, chair of the IAIS Executive Committee.

Full implementation will begin in 2019 after two years oftesting, and it will be included as part of ComFrame, applying tointernationally active insurance groups (IAIGs)–both property andlife insurers–although some in the industry worry about a bleedover effect into all manner of insurers.

“From the financial crisis, we learned that our global financialregulatory regime should be more robust and comprehensive in scope,and jurisdictions should share a commitment to global standards,”stated Michael T. McRaith, chair of the IAIS Technical Committeeand director of the Federal Insurance Office under the U.S.Treasury.

“The IAIS–with its mission to promote effective and globallyconsistent supervision of the insurance industry and to contributeto global financial stability–has an essential role in fulfillingthese objectives,” McRaith adds.

Such a directive was anticipated, but it was not clear whetherit would be developed within the ComFrame project or not.The ComFrame project, begun in 2010, applies toIAIGs.

The IAIS was instructed in a broad insurance supervisorypolicy directive by the G-20's Financial Stability Board(FSB) to develop “a work plan to develop a comprehensive,group-wide supervisory and regulatory framework for InternationallyActive Insurance Groups (IAIGs), including a quantitativecapital standard” by the end of the year.

The IAIS release today did not mention the word“quantitative.”

The standard is not necessarily a feared high-levelcapital requirement and leaves open room for jurisdictions toallow insurers to develop their own solvency management systems andmodels governing under certain rules, possibly with some minimumcapital floor.

However, the process will be fortified by discussions ofthe requirements for insurers and reinsures that have been orwill be deemed to be systemically important globally.

Dave Snyder, international supervisory vice president with theProperty Casualty Insurers Association of America questioned thevery foundation of this project. He said there no evidence thatthis direction is needed, and no benefit to consumers has beenshown.

Snyder said if the wrong standards are implemented, they couldlead to systemic risk within the industry “that does not now existwithin our sector,” by creating one model that does away with the“diversity of our regulation and diversity of our business models,”which acts to spread risk.

NAIC CEO Ben Nelson, adds, “Although U.S. state insuranceregulators continue to have serious concerns about the timing,necessity, and complexity of developing a global capital standardgiven regulatory differences around the globe, we intend to remainfully engaged in the process to ensure that any developmentaugments the strong legal entity capital standards in the U.S. thathave provided proven and tested security for U.S. policyholders andstable insurance markets for consumers and industry.”

In addition, starting in 2014, the IAIS will also developbackstop capital requirements to apply by the end of that yearfor global systemically important insurers(G-SIIs), whose designees include AIG, MetLife andPrudential Financial domestically, and Axa, Allianz, Aviva,Prudential plc in the U.K., Ping and Assicurazioni GeneraliS.p.A.

These backstop requirements would serve as the foundation forhigher loss absorbency requirements, coming in 2019, for theG-SIIs. The IAIS anticipates this development and testing will alsobe used for development of the capital standards for theIAIGs.

An IAIG, according to the IAIS, is not quite a G-SII. Theinsurer must have premiums written in not fewer than threejurisdictions, with not less than 10% of the group's total grosswritten premium in foreign countries and must have totalassets of not less than$50 billion of gross written premiums of $10billion. The IAIS expects that approximately 50 IAIGs will beidentified by supervisory colleges.

The IAIS says IAIGs need tailored and more coordinatedsupervision across jurisdictions due to their complexity andinternational activity. This requires a specific framework andcoordination of supervisory activities under the aegis of agroup-wide supervisor, the IAS has said.

Fundamentally, ComFrame is intended to be a comprehensive, wellbalanced framework that focuses equally on both quantitative andqualitative elements, and the IAIS emphasized in its originaldocuments that “ComFrame is not intended to be a collectionof overly prescriptive, narrowly defined approaches. On thecontrary, ComFrame will be outcome-focused and, whilst it will notbe rules-based, its requirements will be accompanied with specificparameters and specifications.”

The IAIS says ComFrame has always included a capitalcomponent within its solvency assessment. This component, which isbeing finalized in concept, will be used as a starting point fordevelopment of the capital standard.

U.S. states can adopt these standards state by state. The FIO,NAIC, the Federal Reserve as it gains IAIS membership, and IAISobservers, are all expected to work together on thesestandards.

Stef Zielezienski, general counsel for the American InsuranceAssociation, said the development of a global insurance capitalstandard should “take a well-reasoned and risk-focusedapproach to capital assessment that can be applied consistently tointernationally active groups without compromising their ability tocompete. We will be anxious to see how an insurance capitalstandard evolves and how it aligns (or does not align) with [otherComFrame ] workstreams and different jurisdictional regulatorystructures.”

NAIC staffer Elise Liebers now heads the IAIS FinancialStability Committee and stated that “a risk based capital standardfor global insurance groups has been established as a priority forthe IAIS as part of its work to promote financial stability.” TheNAIC has railed against FSB directives recently, worryingit is guiding the IAIS into a banking supervisory realm. Twostate insurance commissioners–Kevin McCarty of Florida and TomLeonardi of Connecticut–are on the IAIS executivecommittee.

A spokesman for the Federal Reserve Board in Washington said theagency had no comment on the IAIS initiative at thistime.

A spokesman for Rep. Randy Neugebauer, R-Texas, chairman of theHousing and Insurance Subcommittee of the House Financial ServicesCommittee, reiterated comments Neugebauer made at ahearing on the issue in June. Then, Neugebauersaid a bank-like model for insurance regulation favored by theIAIS “could disproportionately impact U.S. insurance policyholdersand insurers.”

“Given the uniqueness of our regulatory model, this proposal hasa potential to increase the cost for U.S. insurers which would beborne by the policyholders themselves,” Neugebauer said.

John H. Fitzpatrick, secretary general of The Geneva Associationand an AIG board member stated that while the association ofglobal insurers remain committed to working with standardsetters such as the IAIS on important initiatives, “it is clearthat there will be significant challenges to the creation of aglobal capital standard for insurers, particularly within thetimeframe proposed. We acknowledge that the IAIS may need to takeincremental steps towards achieving this overall goal.”