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IAIS update — 2018 Global Seminar
International insurance regulation to focus on emerging risks
As the finish line approaches for global projects such as a risk-based insurance capital standard, the 2018 International Association of Insurance Supervisors (IAIS) Global Seminar in Moscow came at an optimal time for stakeholders to reset and move on to the next level of regulatory changes.
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The next wave of international insurance regulation
For the past decade, regulators over the world have worked to varying degrees cooperatively at the IAIS to create a new framework—one mainly based on capital and group supervision—and the message from IAIS leadership at the 2018 annual conference was that this work is now near complete.
With the finish line in sight for projects such as a global, risk-based insurance capital standard (ICS), IAIS leadership told assembled stakeholders that it was time to move on to the next steps in the regulatory journey.
The organization will create a new five-year strategic plan to go into effect beginning in 2020, which may focus more on fintech, market conduct, the digitalization of insurance, cloud security, sustainability, and practices designed to encourage financial inclusion.
Below are six key themes coming out of the 2018 IAIS annual conference. Explore the PDF for a full recap.
The development of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) and ICS v 2.0 are on track, attendees were told by IAIS officers. The latest drafts have been approved by the IAIS Executive Committee and were scheduled to be released for a 90-day public consultation period at the end of July. Industry panelists urged flexibility and a focus on the qualitative as well as the quantitative aspects of group supervision.
A public background session on the overall ComFrame and ICS consultation document was scheduled for August. The IAIS will review comments and incorporate any necessary changes with an eye toward the second consultation in mid-2019 and adoption of ComFrame at the 2019 annual meeting.
- End of June 2019: Public consultation on further revised insurance core principles (ICPs)/ComFrame and publication of the summary of substantive comments on overall ComFrame received and resolution thereof
- November 2019: Adoption by the annual general meeting of ComFrame including ICS v 2.0 (as a stand-alone document)
Systemic risk management
The probable move from an entity-based approach to an activity-based approach for managing systemic risk was the focus on much of the discussion at the panel on "progress toward a holistic framework for mitigating systemic risk."
The first IAIS attempts to mitigate systemic risk relied on the entity-based approach, with the designation of global systemically important insurers requiring higher levels of supervision and increased capital standards. That was echoed in the US system with the creation of systemically important financial institutions. While such an approach could help address the distress or failure of a single entity, it didn't address another possible source of systemic risk: the collective activities or exposures of insurers at a sector-wide level.
In 2017, the IAIS announced plans to develop a holistic framework for mitigating systemic risk, including developing an activities-based approach. Because systemic risk was time-varying and dependent on other factors such as the state of the overall economy or the resilience of the financial markets, it could be very difficult to predetermine—meaning an appropriate monitoring system was needed. This is especially true because the activities themselves might not necessarily create systemic risk exposure, but how the activities are managed could.
The IAIS said it's seeking input on the sources of systemic risk, the design of the holistic framework and global monitoring, and the scope and proportionality in the application of policy measures.
Addressing emerging risks
How to balance flexibility and consistency was a major concern of the IAIS as it worked on the ICS. ComFrame and ICS v 2.0 are expected to be adopted by the IAIS in 2019, after which it will up to local jurisdictions across the world to implement them.
For ComFrame, the IAIS will put in place a more robust framework for the assessment of whether its own standards have been implemented. This movement from standard creation to implementation assessment is part of the planned change in the focus of the IAIS as the immediate post-crisis era recedes.
Executive committee members said that the strategic plan and financial outlook for the organization were in the development stage with input already being complete. Themes emerging from the input stage included the fact that insurance markets were evolving quickly, emerging policy issues are affecting insurance and insurance supervision in a substantive way, and finalization of agreed reforms is critically important.
The draft of the strategic plan will be available in November and the draft of the financial outlook will be available for members of the IAIS in January.
Using innovation as a regulatory tool
Many insurers are using sandboxes to foster innovation. And while a sandbox is a key part of an innovation toolbox, it might not be enough on its own. As discussed during the seminar, some organizations are using sandboxes not necessarily for new products, but to see if new ideas are good for the customer.
From a regulatory perspective, issues with innovation could include access, pricing, and discrimination. To define good innovation, one should ask if it was sustainable and if it was good for society. What’s the purpose? Are people still in control? Is there trust?
Tackling climate change
From Europe to Australia to the US West Coast, more questions are being raised about insurer response to climate change. Numerous climate changes require adaptation, ranging from the increased frequency of large-scale heat waves and record-high temperatures as well as longer fire seasons occurring now, to sea-level rises and the increased frequency of coastal storm surge inundation that’s seen as an emerging threat.
This raises various transitional risks to the global economy that would need to be mitigated by systemic shifts. The shifts could affect energy systems, transportation systems, and food systems among others. For regulators, the lack of appropriate disclosure could lead to the mispricing of risk and assets.
Insurers must also answer the question of how strategy and business planning are incorporating the impacts on infrastructure, assets, network, operations, revenue, costs, and reputation of the business, as well as how climate risks are being identified, assessed, and managed.
Looking at the cloud with concern
Cybersecurity is among the top risks for the insurance sector, both as a provider of cyber insurance and a repository of large amounts of client data.
Among the major differences impacting insurers now are the level and sophistication of computing power and the volume and materiality of what is being outsourced. Outsourcing to third parties including cloud providers could bring a number of benefits, but it could also introduce or exacerbate risks related to data security, data location and access, and information system integrity.
Some regulators require authorization for outsourcing, and a few have direct powers to supervise cloud and other IT providers. Some authorities have used targeted/thematic reviews on cloud computing, and most authorities are in the process of applying a systemic approach to monitor the cross-border dimension of cloud computing as well as the implications for financial stability.
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