In this episode of “The Standard Formula” podcast, partner Rob Chaplin reviews the International Association of Insurance Supervisors (IAIS) with European counsel George Belcher and associate Feargal Ryan from our London insurance team.They discuss how the voluntary membership organization oversees the global standard for the implementation of principles, standards and guidance. Additionally, they discuss the current focus of the IAIS, future developments and the current issues at play. 

In addition to detailing the IAIS’ three main areas of activity, they discussed how the IAIS fits in with other international bodies. They also discussed the IAIS’ report on the progress of 10 regulatory regimes’ implementation of the association’s framework.

💡 Meet Your Host 💡

Name: Robert Chaplin

Title: Partner, Insurance at Skadden

Specialty: Rob primarily focuses on transactional and advisory work in the insurance sector.  He advises on mergers and acquisitions, disposals, joint ventures and strategic reinsurances. He also counsels on regulatory issues, with an emphasis on Solvency II. 

Connect: LinkedIn  

💡 Featured Guest 💡

Name: Feargal Ryan 

What he does: Feargal advises on a wide range of insurance-related transactions, as well as regulatory issues in the insurance sector. 

Organization: Skadden

Words of wisdom: “The supervisory policy measures are designed to increase the overall resilience of the insurance sector and help prevent insurance sector vulnerabilities from developing into systemic risk.” 

Connect: LinkedIn 

💡 Featured Guest 💡

Name: George Belcher

What he does: George focuses on insurance-related public and private acquisitions and private equity investments, as well as regulatory issues in the insurance sector. He also frequently advises on matters related to Lloyd’s of London.

Organization: Skadden

Words of wisdom: “Since Solvency U.K. is not regarded as equivalent in any respect, the question then arises how the U.K. will be able to influence and shape the IAIS in the future. It's possible that the U.K. will increasingly view the IAIS as a means of escaping or perhaps shaping EU influence.”

Connect: LinkedIn 

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The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.

From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.

Welcome to the Standard Formula Podcast. I'm Rob Chaplin, one of the insurance partners at Skadden. With me today are my colleagues, George Belcher and Feargal Ryan, who are also in the Skadden insurance team here in London.

Today we're going to talk about the International Association of Insurance Supervisors or IAIS and what it means for the future of the insurance industry.

The IAIS is a voluntary membership organization of insurance supervisors and regulators for more than 200 jurisdictions covering 97% of the world's insurance premiums. It's the global standard setting body responsible for developing and assisting in the implementation of principles, standards, and guidance, as well as supporting material for the supervision of the insurance sector worldwide. In this podcast, we summarize its main activities, future developments, and some of the current issues in play.

Feargal, what are the main areas of activity for the IAIS?

Thanks, Rob. The three main areas of IAIS activity are as follows: First comes the Insurance Core Principles or ICPs. These are high level standards for supervising the insurance sector intended as a globally accepted framework for insurance supervision. The ICPs recognize that national supervisors need to tailor supervisory requirements and actions in accordance with the nature, scale, and complexity of individual insurers.

The ICPs are made up of principle statements, standards, and guidance. The ICPs encourage high supervisory standards building on the fundamental principle that a sound supervisory system is necessary for the protection of policy holders and promoting the stability of the financial system and should address the broad set of risks within and posed by the insurance sector.

The ICPs were first adopted in 2011. They've since been updated to reflect market developments, points arising from other standard setting bodies, the outcomes of IAIS implementation assessments and recommendations from the G20, as well as other developments in the global financial system relevant to the insurance sector. They were last updated in November 2019.

An example of a typical ICP is ICP 4, which relates to licensing. In summary, this ICP requires that legal entity, which intends to engage in insurance activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective and public, and be consistently applied.

The second main area of activity is the common framework for the supervision of internationally active insurance groups or ComFrame. ComFrame is a development of ICPs for the approximately 50 insurance groups that have been designated as Internationally Active Insurance Groups or IAIGs. IAIGs are both large internationally active.

ComFrame is a comprehensive and outcome-focused framework. It's aimed at facilitating effective group-wide supervision of IAIGs through qualitative and in the future quantitative supervisory minimum requirements suited to the international activity and scale of IAIGs. The IAIS adopted ComFrame in November 2019 with implementations starting in 2020.

The most interesting evolving aspect of ComFrame is the Insurance Capital Standard or ICS. The ICS will be the quantitative element of ComFrame, has being developed as a consolidated group-wide capital standard for IAIGs. It has three elements: valuation, qualifying capital resources, and a standard method for the ICS capital requirements.

The purpose of the ICS is stated to be create a common language for supervisory discussions of group solvency to enhance global convergence among group capital standards. ICS version 2.0 was agreed in November 2019 to serve as basis for five-year monitoring period and has been in effect for confidential reporting and discussion in supervisory colleges from the beginning of 2020. While during the monitoring period ICS results won't be used as a basis for triggering supervision reaction, it's proposed that following the end of the monitoring period, the ICS will be implemented as a group-wide prescribed capital requirement.

The third main area of activity is the holistic framework. Last December, the financial stability board, a body of international financial regulators endorsed the IAIS holistic framework for the assessment and mitigation of systemic risk in the insurance sector.

The holistic framework is an integrated set of supervisory policy measures, Global Monitoring Exercise, or GME and implementation assessment activities. Holistic framework supervisory material is integrated into the ICPs and ComFrame. The supervisory policy measures are designed to increase the overall resilience of the insurance sector and help prevent insurance sector vulnerabilities from developing into systemic risk.

The GME assesses global insurance developments and detects the possible buildup systemic risk in the insurance sector. This includes at insurer and sector-wide levels a discussion of potential systemic risks and appropriate supervisory responses and reporting on the outcomes.

The GME includes liquidity metrics. The IAIS publishes a Global Insurance Market Report, or GIMAR, which is an annual report on the outcomes of the GME. It's aimed at assessing global insurance market trends and developments and detecting the possible buildup to systemic risk in the global insurance sector. The IAIS also issues special topic additions of GIMAR in addition to the annual report.

A final element of the holistic framework is the assessment of the consistent implementation of holistic framework supervisory material, the enhanced supervisory policy measures and powers of intervention.

Great. Thanks, Feargal.

I perhaps should also add that as an overarching matter, the IAIS addresses climate risk. Climate change is a source of financial risk, which has effects on the resilience of individual insurers, as well as on financial stability more generally. Insurers are exposed to both transition and physical risks through their underwriting and investment activities.

Moreover, insurers can also play a key role in identifying, mitigating and managing climate risk and thereby contributing to the sustainable transition to net-zero. Therefore, climate change is a key theme within the IAIS' work.

The next logical place to go is to look at how the IAIS fits in with other international bodies and with its member states.

Over to you, George.

Thank you, Rob. The IAIS works with numerous other international bodies to help shape and monitor the resilience and stability of financial systems globally. In particular, the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the Financial Action Task Force and the Financial Stability Board. It also interfaces with numerous industry bodies such as the Geneva Association, which is a global industry association for insurers.

In April 2023, IAIS published a report on the progress of 10 regulatory regimes with implementation of its framework. These are: Canada, China, Hong Kong, France, Germany, Japan, the Netherlands, Switzerland, the UK, and US, covering 39 ICPs, as well as ComFrame. Despite some gaps, particularly around recovery and resolution, the IAIS found that continued progress is being made. Within this broad consensus however, there is debate, which is part of the purpose of the IAIS. Examples of this are as follows.

First, the IAIS and the United States. The US participates in the body by means of three organizations, the NAIC or National Association of Insurance Commissioners, which is the representative body for the individual state regulators, the Federal Reserve Board, and the Federal Insurance Office. Historically, there has been some divergence in regulatory approaches between the US and the rest of the world, and which has resulted in differences in view on policy direction. For instance, the US and certain other interested jurisdictions are developing an aggregation method or AM for a group capital calculation. This would effectively be an alternative proposal to the current IAIS' formulation. Although not part of its framework, the IAIS appreciates the significance of this development, so it has been collecting data from the US and the other jurisdictions to help with developing the AM.

The IAIS expects to begin its comparability as assessment in the third quarter of 2023 with a view to reporting its findings in 2024. The IAIS will need to demonstrate flexibility to conclude that the AM delivers an outcome equivalent approach for implementing the acquired ICP framework.

Second, the IAIS and the European Union. In general terms, Solvency II may be viewed as fully consistent with and reflective of IAIS capital insolvency standards. The Solvency II system of equivalence can then be seen as extending the ambits of this framework, noting that all of the recipients of equivalency designations are already IAIS members and are already broadly compliant with its framework. The current equivalency designations being as follows: for reinsurance group supervision and group solvency, Switzerland and Bermuda, for group solvency on a temporary basis, Australia, Brazil, Canada, Japan, Mexico, and the US, and for reinsurance on a temporary basis, Japan.

Thirdly, the IAIS and the United Kingdom. This leads to the paradox of the UK, at one time, influential within EIOPA standing for the European Insurance and Occupational Pensions Authority was as a result also influential within the IAIS. Following Brexit, the UK has left the EU regulatory ambit and the UK government has announced its proposal to liberalize the application of Solvency II in the UK referred to now as Solvency UK. Since Solvency UK is not regarded as equivalent in any respect, the question then arises how the UK will be able to influence and shape the IAIS in the future? It's possible that the UK will increasingly view the IAIS as a means of escaping or perhaps shaping EU influence.

We are also seeing other jurisdictions making adjustments to their regulatory systems. In particular, Bermuda, which has made a significant step closer to Solvency II, and in turn, IAIS standards in the form of the BMAS February 2023 consultation paper on the regulatory and supervisory regime for commercial insurers and insurance groups, and which was the subject of episode four of our Standard Formula podcast series.

Perhaps the UK is moving closer to the IAIS. Perhaps Bermuda was in part feeling the impact of the UK's absence from EIOPA and is adjusting accordingly. We will continue to monitor these developments closely.

Thank you, Feargal. Thank you, George. That concludes this episode of the Standard Formula Podcast. We do hope you join us next time.

Thank you for joining us on the Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future episodes. Additional information about Skadden can be found at skadden.com.

The Standard Formula is a podcast by Skadden Arps, Slate, Meagher & Flom LLP and Affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only, and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.