08 October 2015

IAIS develops higher loss absorbency (HLA) requirement for Global Systemically Important Insurers

The International Association of Insurance Supervisors (IAIS) announced that it has concluded initial development of the Higher Loss Absorbency (HLA) requirement for global systemically important insurers (G-SIIs) - second step in process to develop group-wide global insurance capital standards.

The total BCR and HLA required capital consists of the sum of six components. Three components – the BCR approved in 2014, an uplift to the 2014 BCR and the HLA – are each calculated for insurance and non-insurance activities. The first component, the BCR, is the same as announced in 2014. The second component, the BCR uplift, is meant to reduce the expected gap between the BCR and the ICS. As announced, an uplift of 33% will be applied to all insurance and non-insurance activities other than regulated banking non-insurance activities, the uplift for which is determined by reference to banking sector requirements. The uplift will be phased in over three years beginning in 2016.

The HLA required capital formula utilises a factor-based approach. It applies specific factors to a G-SII’s exposures based on the same components found in the BCR required capital formula. In order to reflect systemic risk sensitivity the HLA also utilises a bucketing approach that assigns G-SIIs to a Low, Mid or High bucket of systemic importance. The Mid bucket utilises factors 50% higher than the Low bucket, with the High bucket similarly utilising factors 50% higher than the Mid bucket. The IAIS anticipates that the High bucket will initially remain unpopulated and therefore act as a disincentive for G-SIIs to increase their systemic importance.

Beginning in 2016, the HLA will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of improving the HLA. The BCR has similarly been reported beginning in 2015. The IAIS plans to annually review the design and calibration of the HLA and BCR and recommend any necessary changes. It will also make any refinements necessitated by changes to the G-SII Assessment Methodology and the definitions of Non-Traditional and Non-Insurance activities, both of which will be the subject of public consultations later this year.

The development of the HLA is the second step of a long-term project to develop risk-based, group-wide global insurance capital standards. The first step was the development of BCR requirements in 2014. The third step is the development of a risk-based group-wide global Insurance Capital Standard (ICS), due to be adopted by the end of 2019.

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