IAIS 2023 annual conference update

No shortage of gaps

From Seattle to Tokyo in 2023, IAIS supervisors as well as attendees were clear that stakeholders in the public and private sectors have a role to play in addressing climate risks and natural catastrophes.

IAIS meeting participants also underscored the message that recovery from natural disasters is stronger if there is a strong insurance market, but with reservations from the industry that by itself it does not have enough capacity to ensure recovery.

Participants and supervisors welcomed the approach by IAIS to identify protection gaps and work more with consumer group representatives to identify issues such as consumer vulnerabilities, rights, protections, and the role of disclosures and market conduct, stirring up conversations on climate, demographic risks and health, and financial protection gaps.

In Seattle, then-NAIC President Chlora Lindley-Myers, director of the Missouri Department of Commerce and Insurance, opened the meeting by raising a thought-provoking question on whether every person who needs insurance can obtain it at a fair and reasonable price regardless of race, gender, or other unique characteristics. Noting that efforts toward eliminating gaps in coverage can reach far beyond the industry and consumers, it was realized that informed consumers make better decisions about preparation mitigation and recovery and, therefore, communication being put forth in easy-to-understand formats is essential.

Climate change gaps—and a bevy of climate-related papers

In Tokyo, Daniel Wang, chair of the IAIS Climate Risk Steering Group (CRSG) and executive director of the insurance department for Monetary Authority of Singapore, continued to stress the importance of considering climate-related risks in a forward-looking manner pointing to insurers having become more climate resilient. He also noted the role of the IAIS and that it is refining its climate data views even as its members and their insurers improve their reporting frameworks and their climate disclosures.

Referring to a recent report from November titled, “A call to action: The role of insurance supervisors in addressing natural catastrophe protection gaps,” Wang spoke about five major areas of supervisory activity to address natcat protection gaps:

1. Assessing insurance protection gaps

2. Improving consumer financial literacy and risk awareness

3. Incentivizing risk prevention

4. Creating a regulatory environment to support the availability of insurance

5. Advising government and industry on public-private partnerships (PPPs) or insurance schemes

Advancing the discussion, Wang chose the topic of the potential of parametric or index-based insurance as a solution and opening up the reinsurance market to natcat protection gaps. The IAIS report also addresses the risks involved, stating that parametric insurance should be understood by policyholders with knowledge on what kind of event would actually result in a payout.

The IAIS is actively considering climate-related risks in a forward-looking manner, supervisors having already set risk-based capital requirements on natcat risks to ensure that capital resources are properly allocated to cover these risks. It was pointed out by participants and panelists that when a natural catastrophe occurs, the most important element is the people working together toward disaster recovery, it being quicker with a strong insurance market. A public-private partnership to address climate risk is necessary because private industry doesn’t have enough capacity on its own, said one executive on the panel, who added that the situation “is not just an insurance problem.”

Based on natcat data from several individual insurers, the IAIS estimates that following a one-in-200-years event, insurers’ capital coverage ratios could decline on average by approximately one-third, highlighting the urgency of taking action.

Tracing back to the theme of collaboration, Yoshihiro Kawai, chair of the Organisation for Economic Co-operation and Development (OECD) Insurance and Private Pension Committee; chair, Global Asia Insurance Partnership; and former IAIS secretary general, suggested its importance in reduction, prevention, literacy, and facilitation issues surrounding climate change issues.

Ricardo Lara, commissioner of the California Department of Insurance, raised the need to focus on new and innovative products to help consumers, noting California’s study on insured and uninsured losses around extreme heat, with implications for building materials and how structures are built—and communicating risks of certain materials to consumers and guiding them on mitigating the risk. He added that insurance “can no longer be an afterthought,” further lamenting that consumers are seeing coverage rates “skyrocket” and want quick answers to really difficult problems.

Lara also indicated that while collaboration is key, being bold in prevention is also essential, pointing toward insurance products deployed to protect natural infrastructure, such as coral reefs in Puerto Rico and Hawaii, and acknowledging that California is looking to follow this lead with innovations in natural protection products.

A word to the wise

A consulting firm executive told IAIS annual meeting attendees in Tokyo that the next challenge is not to just simply supply quantitative information but to give sufficient information to supervisors so they can evaluate an insurer’s resilience to climate change and avoid boilerplate disclosures. “Everyone’s got a plan till he gets punched in the face,” he said, noting he was paraphrasing legendary boxer Mike Tyson. “Climate change will be that punch in the face for humanity,” the executive said. The plans of insurers need to be resilient to overcome any unforeseen events, and insurers need to be able to bob and weave and survive no matter what climate throws at us. Insurance companies need organizational structures that are capable of responding to an event, he said.

Climate disclosure exercises and compliance also got their moment in the spotlight in the land of the rising sun. Participants discussed combatting greenwashing, enhanced disclosures, and forms that encourage companies to identify risks. One global insurer noted that to minimize greenwashing, corporate managers should stay accountable, adding that disclosure of information needs to be aligned with the strategy of the company. This international insurance executive expressed concern as to whether insurers feel they have sufficiently granular data on physical risks to understand their exposures on both sides of the balance sheet and what to do if they don’t. If the data isn’t good, what can insurers do, this executive asked.

He noted that at this moment in time, scope 3 greenhouse gas (GHG) emissions data is “very rough” and “very premature” to disclose with any precision. The US Environmental Protection Agency (EPA) defines scope 3 emissions as the result of activities from assets not owned or controlled by a company but that the organization indirectly affects in its value chain. The EPA notes that scope 3 emissions often represent the majority of an organization’s total GHG emissions. Participants agreed that it’s important to disclose what you can as an insurer, with the understanding that all actors will need to bring their emissions down to net-zero by 2050.

“If we wait until the data becomes more reliable or credible, then nothing’s going to happen … the goal now is to enhance disclosure, not accuracy,” said the insurance executive during the Tokyo panel on evolving supervisory practices to tackle climate risk. IAIS CRSG Chair Daniel Wang agreed. “Do not let perfection be the enemy of the good,” he said, referring to imperfect climate disclosures.

There are three things supervisors can do, Wang told attendees.

1. Consistent climate data reporting material to achieve comparative data: Insurance supervisors can collect climate-related data through exercises such as climate modeling and risk scenarios to improve data collection and disclosures.

2. Provide global baseline standards and provide time for insurers to build capacity with a phased-in approach: Fostering convergence to a common baseline will create greater harmonization for insurers.

3. Capacity-building efforts through the creation of training and support for insurers: “We can lean into the pool of green expertise” at the public and private level through brainstorming and other means, Wang said.

Consumer education and financial literacy are important

Through a polling question during a panel discussion on embedding customer-centric outcomes in the insurance sector moderated by NAIC President Elect Andrew Mais in Tokyo, it was found that consumer education and increased financial knowledge can best support better consumer outcomes for those buying insurance and dealing with claims.

Karen Cox, CEO of Financial Rights Legal Centre, added that disclosure is not enough, and that people don’t often understand policies even if they read them, many requiring verbal information as well.

Mark White, chair of the IAIS Market Conduct Working Group and CEO of the Financial Service Regulatory Authority of Ontario, said that his office usually keeps track of marketplace trends, it being important for supervisors to be situational and approach issues in a proportional way. If there are patterns of high lapse rates, regulators can step in to investigate the reasons and consumer purchase and behavioral trends.

White also discussed that IAIS Insurance Core Principle (ICP) 19 on business conduct requires insurers and intermediaries to treat customers fairly, before and throughout the contract entered into until all obligations are satisfied.

During the meeting in June, attendees were informed that market conduct issues with regard to protection gaps in the industry will be a focus of supervisory efforts in the future. By November, the IAIS had released a draft application paper supporting supervisors in identification of instances of potential unfair treatment of consumers in relation to sustainability-focused or natcat protection products. They also released an application paper on climate-related scenario analysis to understand the financial risks to the insurance sector and how analysis exercises can best be employed to assess macro- and micro-prudential risks.

Risks that supervisors are scrutinizing

Panelists outlined current and emerging risks affecting the insurance sector beyond climate. In Seattle, topics included interest rate risk, with issues on duration matching for some insurers, the risk of collateral calls and policy surrenders, credit risk, and cybersecurity.

“We are living in a multi-crisis world,” noted one insurance supervisor in June, mentioning supply chain issues, global conflict, interest rate pressures, and the US banking crisis in the first months of 2023. IAIS officials agreed that the insurance sector has remained resilient due to sound liability matching, taking into account liquidity and concentration risk with the exception of a few areas.

The discussion also advanced to liquidity risk with the accompanying need for regulators to monitor and measure liquidity risk profiles.

In Tokyo, Dieter Hendrickx, chair of the IAIS Macroprudential Committee, discussed the structural shifts in the life insurance sector, noting that the sector has been challenged by a decade of low interest rates, leading to structural changes in the life insurance market. One notable trend is the increasing investment in alternative assets across the globe, typically associated with high liquidity risk and complexity.

It was pointed out that in the current environment of increasing interest rates, insurers need to understand the new risks that can emerge and how investments in alternative assets could interact with those.

Another important point was the increased use of asset-intensive reinsurers, which can raise concerns due to their complexity and jurisdictional authority, according to Hendrickx, emphasizing the need for supervisors to understand these transactions and trends, and suggesting the use of external data sources and information exchange between supervisors to achieve this.

The ICS is coming, the ICS is coming!

By the annual meeting in Tokyo, the ICS was beginning to come more into focus. Paolo Cadoni, vice chair of the IAIS Policy and Development Committee and head of the Insurance Policy Division at Bank of England, mentioned that 2024 will be the final year of the monitoring period, anticipating adjustments to be made to the ICS.

Saporta emphasized the need for adjustments, thorough evaluation, and the importance of the assessment team in ensuring credibility.

When asked by Yoshi Kawai in Tokyo about her past eight years on ExCo and her most memorable moment, Saporta pointed to the November 2019 IAIS meeting in Abu Dhabi where an agreement was forged by the IAIS’s ExCo on the way forward for the ICS to serve as a common language to supervise internationally active insurance groups.

At the annual meeting in Tokyo, Ariizumi, Japan’s FSA and the new chair of IAIS ExCo, emphasized the need for thorough planning and coordination to achieve a comprehensive ICS package by the end of 2024. The “last mile is not always the easiest mile,” said Ariizumi. He added that there remains a need to frontload some of the work and coordinate all the exercises to have a comprehensive package by the end of next year to have the ICS as a Prescribed Capital Requirement (PCR), an appropriate economic impact assessment, and a proper comparability assessment between the ICS and the US Aggregation Method (AM).

Overall, the Tokyo annual meeting underscored the importance of data to inform the development and finalization of the ICS, with 2024 being a crucial year for ICS adoption and adjustments.