The IAIS, Standard Setting and Implementation

1. The IAIS, Standard Setting and Implementation Rogier Derksen Senior Policy Advisor 24 May 2016

2. Overview • The IAIS and its Standard Setting Activities • Background on IAIS and its Activities • Standard Setting • Insurance and Financial Stability – Implications and Challenges for the Region • Insurance and Financial Stability • Identification of G(lobal)SIIs • R(egional)SIIs? D(omestic) SIIs? • Implementation, assessments • IAIS Implementation Activities • Different forms of assessment • Challenges in the region • Why implementation Fails – and what can we do about it?

3. The IAIS and its Standard Setting Activities

4. IAIS - a global standard setter • Mission • Promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders • Contribute to global financial stability • IAIS membership is broad and diverse: • About 200 jurisdictions in nearly 140 countries • 97% of the world's insurance premiums

5. IAIS activities

6. IAIS Standard Setting Activities • All authorised insurers (at legal entity and group level) • Insurance core principles (ICPs) • Major review underway • Internationally Active Insurance Groups (IAIGs) • Common Framework for Supervision of IAIGs – ComFrame • A global quantitative insurance capital standard (ICS) • Qualitative requirements • Global Systemically Important Insurers (G-SIIs) • Qualitative and Quanatative Aspects • Emphasis on enhanced supervision and recovery, monetizing risks

7. Proportionality of IAIS Supervisory Requirements

8. ICP Review and Revision • The ICPs are comprised of 26 distinct Core Principle statements, each with numerous corresponding standards and guidance material. • ICPs are being reviewed and refined based on Feedback loop from assessments • Comprehensive review over 3 years, taking into account feedback loop and IMF / WB, FSB, etc

9. ComFrame: an Overview Module 1 Module 2 Module 3 Identification of IAIGs IAIG’s legal and management structures Group-wide supervisory process Process of identifying IAIGs Governance Supervisory colleges, cooperation and coordination Scope of supervision ERM ERM Policies Identification of GWS Capital adequacy assessment Crisis management and resolution measures among supervisors • ComFrame development began in July 2010 • Three consultations - each year from 2011 to 2013 • Field testing in 2014/2015

10. IAIGs identification criteria Criteria to identify IAIGs are set in the module 1 of ComFrame Criteria for IAIGs: • A. International Activity • Premiums are written in not fewer than three jurisdictions, and • Percentage of gross premiums written outside the home jurisdiction is not less than 10% of the group’s total gross written premium; AND • B. Size (based on a rolling three-year average): • Total assets of not less than USD 50 Billion, or • Gross written premiums of not less than USD 10 Billion.

11. Ultimate goal for the ICS (no date attached) • The ultimate goal of a single ICS will include a common methodology by which one ICS achieves comparable (i.e. substantially the same) outcomes across jurisdictions. • Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS towards the ultimate goal. • Not prejudging the substance, the key elements include valuation, capital resources and capital requirements.

12. ICS Development Process and Timetable

13. G-SII Policy Framework • Enhanced supervision • Systemic risk management plan (SRMP) • Group-wide supervision • Liquidity management • Effective resolution • Crisis management groups (CMGs) • Recovery and resolution plans • Resolvability assessments • Institution specific cross-border cooperation agreements • Higher loss absorbency • Basic Capital Requirement (BCR): for GSIIs – finalised in Oct 2014 • Higher Loss Absorbency (HLA) : for GSIIs - finalised in November 2015

14. Insurance and Financial Stability – Implications and Challenges for THE Region

15. Insurance and Financial Stability • Differences exist between traditional insurance and banking business in terms of financial stability and systemic importance • The unique insurance business model helps insurance firms to withstand systemic risk better than banks. - HOWEVER - • Insurance sector is susceptible to systemic risk generated in other parts of the financial sector • Insurers may amplify risk under specific circumstances • Non-traditional insurance and non-insurance activities within insurance groups may generate or amplify systemic risk.

16. G-SII Assessment Methodology • IAIS Methodology for Recommending List of G-SIIs to FSB: • 20 indicators in 5 categories: • Size • Global activity • Interconnectedness • Non-traditional insurance and non-insurance (NTNI) activities • Substitutability • Higher weighting for NTNI and interconnectedness (together 80-90%) • Supervisory judgment plays an important role • Methodology (including NTNI definition) is currently under review. See IAIS website for Public Consultation launched 25 November 2015

17. Regionally and Domestically Significant Institutions • While the GSII Methodology provides a guide, there is no explicit IAIS Guidance on criteria for identifying DSII/RSII, or on DSII/RSII policy measures Overall objectives of DSII/RSII Supervision / Regulation should include: • Reduce moral hazard from the failure • Reduce negative externalities from the failure • Reduce the probability and impact of default • Incentivise SIIs to become less systemically important – monetise additional risks (additional risks will not be with tax-payers)

18. Implementation Programme and Assessments

19. IAIS Implementation Cycle

20. Implementation considerations The IAIS implementation programme is based on the following: • IAIS best defined as “catalyst” or “facilitator” • Help generate / shape implementation support through: • Understanding needs / challenges (regional contributions and assessment activities) • Coordinating with partners (such as A2ii, FSI, World Bank) to provide training and technical assistance – identifying opportunities to maximise benefits of implementation support • Developing regional plans / monitoring tools to provide regional / IAIS level encouragement, cooperation and peer learning

21. Supervisory Development Initiatives FIRST ONE • On-line programme for new supervisors • Webinars and self directed learning FSI Connect Licenses • FSI Connect offers on-line web-based tutorials for banking and insurance supervisors • Distributed for free to IAIS Members based on demand / need Core Curriculum • Compendium of knowledge covering supervision & regulation for insurance • The 2010 version is being refreshed by IAIS and World Bank Regional Seminars • IAIS financially supports 10 regional seminars per year, in different regions • Regional seminars are generally organised by FSI Translations • Framework for translating IAIS supervisory material – member driven

22. Assessments Considerations for any assessment • Jurisdictions are assessed “solely on the laws, regulations and other supervisory requirements and practices that are in place at the time” • ICP Observance determined bottoms up – looking at each standard • Observance (generally) requires: 1) Adequate legislation 2) Policies and procedures that demonstrate you undertake the task necessary to achieve the objective 3) Evidence in supervisory practice that you have recently undertaken the task. • If anything is any part of this is not deemed sufficient by the assessor, then observance is not possible Determine where you are before determining where to go!

23. Some Types of Assessment • FSAP / ROSC (review of standards and codes) • Two objectives: Surveillance and Sector Development • Conducted by the IMF and World Bank; very robust and in-depth • Significant review of FSAP programme currently underway; programme likely to change • Self Assessments • Beneficial, but lacks independence • Conducted by jurisdiction • Very flexible Can be conducted at any time on any subject • IAIS Self Assessment and Peer Review • Done with outside expert(s) • Based on responses to fact based questionnaires / expert review • IAIS programme completes on a thematic basis (grouping similar ICPs)

24. Assessing against the objective The Three “P’s”

25. Assessment Categories IAIS Assessment Categories • How is the objective assessed? • Do I have the legal framework? • Do I have the policies and procedures to put the power into practice?

26. Challenges for the Region: Final Considerations • Insurance penetration rates in Central and South America are growing, but remain low • New developments in the markets provide great opportunity but also put pressure on supervisors and create new risks • Market changes • New technology • New business lines • Financial inclusion / inclusive insurance • IAIS Assessment Programme demonstrates implementation of risk based approaches to supervision (including at insurance group level) remains a challenge for jurisdictions • Enhancing supervision important but will be challenging – improved cooperation, greater coordination, enhanced regulatory frameworks and supervisory practices

27. Questions?

28. Contact information Rogier Derksen Member of the Secretariat International Association of Insurance Supervisors Centralbahnplatz 2 c/o BIS P:+41 61 280 84 92 M:+41 76 350 84 92 E: Rogier.derksen@bis.org