New insurance solvency reforms established this October are expected to modernise and bring uniformity to the disparate supervisory frameworks that currently oversee global insurance companies and will mean major step changes to their business models. Although the transition in some jurisdictions may be costly, the likely long-term cost savings to the industry are estimated at between US$15 and $25 billion, according to a report from KPMG International.
KPMG’s report, Evolving Insurance Regulation – on the Move, provides interpretation and insight on the International Association of Insurance Supervisors’ (IAIS) Insurance Core Principles (ICPs), a global framework for the regulation and supervision of the insurance sector. The creation of a new supervisory framework, known as ComFrame (the common framework for internationally active insurance groups (IAIGs)) now under development by the IAIS, will herald a significant new change in the way such insurance groups are supervised.
In October, new ICPs – particularly concerning solvency – provided under ComFrame, will drive uniformity and harmonization in the supervision of capital and solvency management among global insurance firms. This is expected to positively impact the entire value chains of insurance regulatory regimes around the world over the next five to 10 years.
The change will help refocus new business models based more on products and services and building competitive advantage rather than on the costly administration of operating under multiple regulatory regimes.
“While there is a price to implementing the new reforms, the cost of disparate regulations is even higher - posing a detriment to shareholder value, creates competitive distortions and causes inefficiencies,” says Frank Ellenbüerger, KPMG Global Head of Insurance.
The regulatory changes set to take place across the industry in the coming years represent an unprecedented and fundamental change in the approach to regulation. The impact will extend beyond mere compliance and will strike at the heart of the business agenda. Ultimately, these reforms could mean a reduction in the overall cost of insurance regulation.”
Global Business Implications of new ICPs
Starting in October, adoption of new risk-based approaches will become effective. This will have a significant impact on such areas as capital requirements, enterprise risk management (ERM), the valuation of assets and liabilities and investments.
The ICPs, which requires regulators to implement these requirements into their existing jurisdictional frameworks will be enforceable under the International Monetary Fund (IMF) and World Bank’s Financial Sector Assessment Program. The ICPs will apply at solo and group level (unless otherwise stated).
One of the biggest challenges insurance companies will face in implementing the ICPs is in risk management. Under the ERM ICP, insurers must have a risk management policy that specifies risk categories and how the insurer is effectively managing and monitoring various forms of risk.
The Own Risk and Solvency Assessment (ORSA) is a mandated self-assessment tool insurers will need to use to analyze risk and submit such assessments to their regulator. It will be required under Solvency II and there are current proposals to introduce the ORSA into the U.S. as part of the Solvency Modernization Initiative (SMI).
“A key question for insurance companies when it comes to ORSA is whether the organization is able to bring together all aspects of the business it undertakes so that risk, capital and governance implications can be assessed in aggregate,” says Ellenbüerger. “Identification of key resources and specific skill sets across all relevant business models will be required to ensure successful delivery.”
Another considerable change likely to affect the structure of insurers will come with the IAIS standard on capital adequacy. This principle will, for the first time, mandate that regulators establish different intervention levels regarding insurer capital levels which, if breached, will result in intervention by supervisors.
The capital adequacy standard also calls for supervisors to allow insurers to establish internal economic models for determining regulatory capital requirements, where able. Development of internal models is expected to be more prevalent in Asia and Europe.
“It’s very important that the Board and senior management are focused on the regulatory landscape to sufficiently maximize competitive advantage,” says Giles Williams, head of KPMG’s Financial Services Risk and Regulatory Center of Excellence for Europe, Middle East and Africa (EMEA) and a partner in the UK firm. “Utilizing advanced risk and capital management techniques are going to determine how successful insurance companies will be in this new environment.”
A third significant step change the ICPs will drive in the sector is around investment and liquidity requirements. Insurance companies can expect increased scrutiny from supervisors concerning group-level investments and activities, cash-flow positions, use of stress and scenario, including reverse stress testing and potential exposure to non-regulated entities and off-balance sheet activities.
“Insurance groups that fail to adequately show that investments at a group level can support capital or liquidity requirements in stress conditions, will find supervisors increasingly likely to question the group’s overall financial resources and capital requirements,” comments Williams.
MORE ARTICLES ON INSURANCE