Analysis

Changing insurance capital standards

How can international and US insurers respond?

Insurance regulation is changing in a multitude of ways and insurers may want to prepare now to respond effectively. This report digs into the details of planned macroprudential regulation and insurance capital standards and provides next steps for insurers. Taking the right action may help drive success in this dynamic landscape.

Plan effectively for regulatory changes

To say insurance regulation is changing is to mouth a cliché, but given the various ways in which regulation seems to be changing, insurers would do well to prepare contingency plans. Political uncertainty may cloud the future of global regulation, but insurance regulators have continued working together to create a supervisory structure that shifts from the previous legal-entity-centric, policyholder-protection-focused paradigm to one where financial stability and the reduction of systemic risk has equal prominence.

For regulators, this has meant a widening of perspective to include group oversight, and work to create enhanced capital and other prudential standards. Though work is ongoing on the specific contours of these developments, the outlines have achieved sufficient clarity for effective planning.

Download the report to plan effectively.

Exploring macroprudential regulation

While only larger and international insurers may be most immediately affected by the proposed changes, recent history is that measures such as the Own Risk and Solvency Assessment (ORSA) and the NAIC’s enhanced capital governance models—directly related to the international push for more accurate, contemporary regulation—already affect almost all US insurers.

It is true that, given its size, the US insurance industry may still be able to build a wall and prosper behind it, but walls serve as much to contain what is within as to restrain what is without.

To grow, given the constraints of a relatively mature home market, US insurers may need to not only to maintain their footholds in the developed markets of Europe, but also to look to developing markets in Asia, Latin America, and Africa. Such expansion may require the building of bridges, not walls, and those bridges may be based in part on acceptance of regulatory measures widely accepted by the international community.

Download the report for recommendations on the way forward.

Examining international capital standards

Since the financial crisis, the economic and fiscal governors of the world’s major economies have worked through the G-20 to develop a global capital standard for organizations determined to be SIFIs.

A key challenge for the IAIS at the outset was that there was no global capital standard that was consistent in its approach for the insurance sector. Developing a global capital standard is a complex process and clearly one that has evoked a great deal of interest from the insurance industry and wider stakeholders.

There are many questions yet to be answered in the development of a global capital standard. In fact, a recent IAIS consultation document listed many of the primary unanswered questions.

In addition, for US insurance companies the issue is further complicated by both the Federal Reserve Board and the NAIC working on their own versions of a group capital standard or calculation.

Download the report for more insight on capital standards development.

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