04 February 2014

Responses to IAIS BCR consultation: GFIA, GIAJ, Insurance Europe

On 16 December, IAIS released for public consultation proposed options for the development of basic capital requirements for G-SIIs. Insurance Europe believes the BCR need to strike the correct balance between risk-sensitivity and complexity.

GFIA

General comments on Executive Summary:

• GFIA welcomes the opportunity to take part in this public consultation on the Basic Capital Requirement (BCR).
• GFIA aims to contribute constructively to meeting the goals and time-table but would like to emphasise that the time-table set is very ambitious and care should be taken to ensure that it does not compromise arriving at a system that works well enough in practice to achieve its aims.
• In particular it is important that any proposed capital adequacy standard, including the BCR is not overly volatile and does not create pro-cyclical behaviour.
• Given the very limited time-table and therefore the simplicity required for the BCR, GFIA believes it should be a temporary measure. This is in line with the mandate set by the FSB that the BCR is needed in the absence of a comparable global capital standard on which to set the HLA for G-SIIs.
• GFIA has based its submission on this assumption, and on the assumption that the BCR will apply only to G-SIIs. If however the BCR is intended as a long-term measure and/or to apply more widely than this could significantly alter its views, and for example, a less granular BCR may no longer be appropriate.
• Given both the limited time-table and the temporary nature, GFIA supports a factor based approach as the basis for the BCR. A key challenge will however be to find a reasonable trade-off between simplicity and accuracy in order to serve as an appropriate basis for the HLA. The reasonable level of balance to be achieved should be considered through the field testing process.
• GFIA supports the approach to assess overall BCR at single, consolidated group level.
• GFIA can support economic valuation as defined in ICP14, which recognises that this covers both the use of market valuation and amortised cost valuation. GFIA emphasises, that any valuation approach must look at assets and liabilities together, making sure that long-term and illiquid characteristics of both assets and liabilities are appropriately reflected in the measurement approach and therefore the measurement system does not introduce artificial volatility into the BCR measures.
• Although not explicitly addressed in the proposal, challenges remain on a range of valuation and capital issues.
• As a general comment, GFIA believes that it’s vital that principles of proportionality and materiality are embedded in the framework. Thus, it should be acceptable that companies apply simplifications to the methodology, such as excluding business units and/or risks that would create significant costs and have a non-material impact on the total measurement.
• The limited scope for impact testing of the BCR would suggest that a phase-in period would be appropriate, as supervisors monitor the measure’s usefulness and performance. This is important to assess whether it is sufficiently risk sensitive, and to limit the uncertainty it will impose on the markets. This also means that it would be appropriate for supervisors to have some flexibility to determine how they respond to movement that impacts a company’s ability to meet the BCR.

Comments-GFIA

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GIAJ

• Q12 Given the very short timeframe, it would be appreciated if the IAIS gave approval to some extent for each group to use the existing standards in their respective jurisdictions, instead of sticking to strict comparability. It would also be an option for the IAIS to consider revising the BCR design flexibly when other standards such as the IFRS 4 have made progress.
• Q13 Since the BCR will become the foundation for the HLA that will be applied to G-SIIs, it should be made clear that the BCR, which is calculated based on a simplified approach, will not be applied to IAIGs without any changes.
• Q16 As indicated in paragraph 55 that the role and form of the BCR will be reconsidered, revisions should be made where appropriate based on the results of field-testing, which will be conducted next year and beyond after development of the BCR design, and further input from the industry.
• Q17 By the end of the development phase of the BCR, the contents of the IFRS 4 will not have been finalised. There is a possibility that basic policies of respective G-SIIs and IAIGs as to how and whether to adopt the IFRS and develop corresponding systems will also not have been determined. Hence, if the BCR design is developed based on the re-exposure draft of the IFRS 4, the design should be reconsidered where appropriate after finalisation of the IFRS 4, so that the workload of these groups will not be doubled or trebled.
• Q19 Given the purpose of the BCR (simple and basic capital requirements) and the short timeframe, GIAJ would support the IAIS for adopting a factor-based approach.
• Q20 Given the difference in and nature of the business models of banking (that takes risks mainly on the asset side) and insurance (that takes risks mainly on the liability side), GIAJ would support the IAIS for not introducing elements of leverage ratio regulation which may not be an appropriate capital regulation for insurance.
• Q27 GIAJ thinks it is hard to say the purpose of the BCR, as shown in the draft consultation paper, has been made clear. It believes the relationship between the BCR and the ICS should be streamlined down the road.
• Q28 A sufficient amount of calibration work should be conducted appropriately, so that, at least, the BCR will not broadly deviate from the current level of capital standards in respective jurisdictions where insurance groups participating in the field test are located.
• Q30 The existing entity-based capital requirements of respective jurisdictions practically play the role of "backstops", and supervisors of these jurisdictions can implement necessary supervisory intervention. GIAJ does not believe that additional group-wide backstop capital requirements to supplement the group ICS would be necessary.
• Q33 GIAJ believes that it is not necessary to integrate the BCR into national or regional frameworks, since it is enough for the BCR to temporarily play the role of the foundation of the HLA.

Full comments-GIAJ

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Insurance Europe

The basic capital requirements (BCR) that will be developed by the International Association of Insurance Supervisors (IAIS) for global systemically important insurers (G-SIIs) need to strike the correct balance between risk-sensitivity and complexity.

On the assumption that the BCR is temporary, Insurance Europe supports a factor-based approach to its measurements. Such an approach would combine certain risk measures and factors, in order to be able to calculate the level of capital needed. The number of measures and factors required to make the BCR risk-sensitive enough to capture insurers’ risk profiles will need to be identified by the field-testing exercise that the IAIS will start next month.

Achieving both simplicity and enough accuracy to avoid any unintended consequences will be a significant challenge, particularly given the tight timetable that has been set for finalising the BCR.

“It is vital that the BCR measurement system correctly recognises the long-term nature of insurance liabilities and insurers’ ability to invest long-term, so that insurers can continue to manage their risks in the best way possible. The BCR must not create pro-cyclical behaviour", said Olav Jones, deputy director general of Insurance Europe.

“Any unintended negative effects created by the BCR on the investment behaviour of these large G-SIIs would be detrimental to the stability and health of the wider economy", Jones added.

Press release-Insurance Europe

Full response

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IAIS: Compiled Comments on Basic Capital Requirements (BCR) for Global Systemically Important Insurers (G-SIIs)

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