 By Paul Clarke, Global Solvency II Leader, PwC
Insurers are likely to be facing unprecedented regulatory upheaval, not just in Europe but worldwide.
With the industry falling into the G20 global financial stability net and international guidelines in local markets and regions being updated and harmonised, appetite continues to grow for a risk-based approach to insurance supervision worldwide. Whether this is paving the way for fully synchronised global standards is still open to debate. China and the US, for example, are just some of the many countries that are, alongside the EU, looking to update their regulatory requirements as a result of this reappraisal.
Having already been caught in the slipstream of new banking and market infrastructure regulations, the insurance industry is now subject to further scrutiny from the G20 as it explores the option of extending the global systemically important financial institution (G-SIFI) controls to global systemically important insurers (G-SII). The impact of being on the G-SIFI list could range from heightened scrutiny and the need to prepare detailed recovery and resolution plans to more regular reporting and detailed disclosures.
Global developments
The International Association of Insurance Supervisors (IAIS) promotes common standards for regulation across the world, with its Insurance Core Principles (ICPs). As the global insurance market becomes more and more interconnected, the IAIS is becoming keener to encourage closer collaboration and introduce peer review among members. Moving to a risk-based regime could be a challenge for both insurers and their supervisors, however this should be seen as an opportunity for international groups to harmonise product design and rationalise compliance management.
Another key part of the IAIS current agenda is the development of a common framework (ComFrame) for internationally active insurance groups (IAIGs), which aims to promote greater consistency in how IAIGs are supervised across the world and to ensure that regulation reflects the way they are run, providing an agreed stronger framework for handling home and host issues.
EU developments
The European Systemic Risk Board (ESRB) works alongside the European Central Bank to provide early warnings for systemic threats and advise governments on how to respond and sits at the forefront of the supervisory chain. Pan-European authorities such as the European Insurance and Occupational Pensions Authority (EIOPA) have also now been established. While predecessors were consultative bodies, EIOPA and its counterparts in banking and securities now have a range of legally enforceable powers to allow them to supervise at a macro-prudential level.
Solvency II is now looking beyond capital adequacy at how to influence corporate behaviour and decision making. While there is always a possibility that the launch will be postponed until 2015 following the recent delay of the Omnibus II vote, there is a growing consensus among policymakers that the directive is unlikely to benefit from another year of technical wrangling and any further delays could put the project and the principles that underlie it in jeopardy.
The status of equivalence in a particular country will affect whether your business will have to restate local capital requirements according to Solvency II rules, which may in turn affect the pricing of certain products. Bermuda, Switzerland and Japan are seeking equivalence in the first wave.
In addition to Solvency II, other important EU directives also in development include the updated Financial Conglomerates Directive (FiCOD), Insurance Mediation Directive (IMD), and the Insurance Guarantee Scheme (IGS) also needs to be considered.
Finally, the proposed update of the Institutions for Occupational Retirement Provision (IORP) could extend the three-pillar approach envisaged under Solvency II to pension funds.
US developments
Insurance supervision in the US will continue to be primarily a state affair, the National Association of Insurance Commissioners (NAIC) was closely involved in the revision of the IAIS core principles and its ongoing Solvency Modernisation Initiative (SMI) is considering updates to US regulations to align with these new core principles.
Whilst the Dodd-Frank Act set up the Federal Insurance Office (FIO) as part of its plans to improve financial stability, the precise powers of the FIO and how they interact with state commissioners remain unclear.
Equivalence with Solvency II is important for EU insurers with US operations. Without it, they face the competitive handicap of a twin set of capital requirements, though this may be more of an issue for life than non-life businesses. The US has so far not been included in the countries designated for the transitional equivalence assessment, though there are continuing discussions behind the scenes.
The global regulatory overhaul is not just another compliance hurdle. It will affect and possibly transform the basis for product strategies, organisational structures and tax and capital management. Yet the response to these new regulations is often piecemeal and reactive.
Insurers need to be able to anticipate the changes ahead and deal with them efficiently and proactively to help give them a valuable competitive advantage.
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