Regulators clash over global capital standard for insurers

Regulators are locked in a dispute on a proposed global capital standard currently in discussion within the International Association of Insurance Supervisors (IAIS).

There are fundamental disagreements between regulators on how the IAIS should advance its work to develop a common framework (known as Comframe) for the supervision of internationally active insurance groups (IAIGs) and regulation of global systemically important insurers (G-Siis).

Some regulators are questioning whether a global capital standard would be an appropriate tool for encouraging greater convergence of different supervisory regimes around the world. The IAIS recently began a feasibility study into the development of such a standard.

Thomas Leonardi, insurance commissioner for the US state of Connecticut, argues that a global capital standard should not be seen as a “silver bullet” by regulators seeking to eliminate systemic risk from insurance.

“I still don’t hear the compelling reasons for why we should have a global standard. We gloss over the fact that maybe there isn’t a strong reason to have it other than it would be nice,” he said at an insurance industry conference in Rome.

“I look at AIG and I say, ‘was it a capital problem [when the company nearly collapsed in 2008]?’ No, it was a liquidity problem. The insurance operations had plenty of cash, [and] a 3% [capital] surcharge in late 2007 would not have solved that [liquidity] problem,” he added.

Yet other regulators are convinced of the merits of such a standard. Naruki Mori, vice-chairman on the executive committee of the IAIS and assistant commissioner for international affairs at the Financial Services Agency in Japan, said a fixed benchmark applicable to every company around the world would provide the foundation on which harmonised risk-based supervisory regimes can be built.

“In my view more convergence, more harmonisation, in the qualitative and quantitative requirements for insurers may be something we should achieve in light of globalisation and [the] increase in cross-border activity,” he told delegates at the conference.

“For IAIGs, there may be efficiency gains to have some common qualitative and quantitative requirements.”

European regulators also support work on a global standard. Paul Sharma, deputy head of the UK’s Prudential Regulation Authority, said the key to making this happen is to tailor the arguments for the standard so that it makes sense to regulators operating in different contexts.

“I would like a global standard, and I think that is a pretty common European view. This is not about winning a debate with the American regulators, it will happen when they are convinced it makes sense on their own terms,” said Sharma.

Existing work between separate jurisdictions on mutual recognition of supervisory regimes could be “a stepping stone towards a global standard,” added Sharma.

As mutual recognition requires local regulators to educate other regulators on the features of their supervisory system, it offers an initial level of comparability between jurisdictions that the IAIS could build on, he said.

 

This article was first published on Risk


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