Last week, the International Association of Insurance Supervisors (IAIS) published for consultation its proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector.
The IAIS hopes that the new framework will evolve its current approach to systemic risk by (i) recognising that systemic risk may arise from both the collective activities and exposures of insurers at a sector-wide level (as well as distress or disorderly failure of individual insurers); (ii) addressing cross-sectorial aspects of systemic risk by comparing the potential systemic risk arising from the insurance sector with other parts of the financial system; and (iii) moving away from a binary approach in which additional policy measures are only applied to identified global systemically important insurers (G-SIIs) to a more proportionate application of an enhanced set of policy measures.
This approach is intended to make it less likely that insurers will need to be classified as globally systemic. The Financial Stability Board (FSB) welcomed the consultation, noting that the new holistic framework, appropriately implemented, would “provide an enhanced basis for mitigating systemic risk in the insurance sector.”
The key elements of the holistic framework include:
A global annual monitoring exercise conducted by the IAIS
It is hoped this will allow for the detection of potential build ups of systemic risk in the global insurance sector. This will encompass an Activities-Based Approach to addressing systemic risk as a prioritised, key component of the holistic framework.
An enhanced set of pre-emptive supervisory policy measures
These include macroprudential surveillance by supervisors, enhanced requirements on enterprise risk management, liquidity management and measures related to crisis management and recovery planning. The measures will be incorporated in the IAIS supervisory material (Insurance Core Principles, ICPs) and Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) and will be applied in a proportionate manner.
Powers of intervention
Supervisors will have various powers at their disposal in order to enable a prompt and appropriate response where potential ststemic risk is detected. This will include reports on the management of systemic risk, restrictions on business activities, reinforcement of financial positions and large exposure limits.
This includes an assessment of whether the enhanced supervisory policy measures are established in legislation, embedded in the supervisory framework and being applied in practice.
In terms of next steps, once the consultation feedback is complete, the specific measures to be incorporated into the IAIS supervisory material will be exposed for further public consultation. The IAIS will then finalise the holistic framework in 2019 for implementation in 2020. In light of this work with the proposed holistic framework, the FSB, in consultation with the IAIS and national authorities, has decided not to engage in an identification of G-SIIs in 2018. The FSB will assess the IAIS’s recommendation to suspend G-SII identification from 2020 once the holistic framework is finalised in November 2019. The G-SII identification process to identify globally-systemic insurers had originally been introduced by the FSB in July 2013 using an assessment methodology developed by the IAIS.