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Insurance Capital Standard not fit for use, says ABI

The latest version of the Insurance Capital Standard (ICS) published by the International Association of Insurance Supervisors (IAIS) is not fit for use in the British market, the ABI has said.25 Jul 2017

The ICS is a measure of capital adequacy for internationally active insurance groups (IAIGs) and global systemically important insurers (G-SIIs), and aims to serve as a minimum standard for a group prescribed capital requirement. G-SIIs are designated annually by the G20’s Financial Stability Board, based on a recommendation by the IAIS.

IAIS released version 1.0 of the standard last week for field testing by around 50 of the world's largest insurance groups, in what it described as "an important step towards the development of ICS version 2.0 by late 2019".

The ABI's director of regulation Hugh Savill said the ICS "makes no allowance for internal models, despite firms spending substantial time and money developing them for Solvency II. It does not allow for appropriate treatment of long-term business with guarantees, like annuities here in the UK. And it gives insufficient recognition of diversification – despite this being at the heart of how insurance works."

"The ABI looks forward to continuing to work with the IAIS to address these issues – but I am doubtful they can be resolved within their ambitious timelines for the development and implementation. I would urge the IAIS to consider a more pragmatic timeline," Savill said.

Insurance expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said: "The main objectives of the ICS are to protect policyholders and to contribute to financial stability. The ICS aims at comparability of outcomes across jurisdictions and therefore provides increased mutual understanding and greater confidence in cross-border analysis of IAIGs among group-wide and host supervisors. It will not be easy to agree the ICS for these reasons. That said, the ICS should be seen as a good thing, albeit increasing unwelcome work for the G-SIIs, as it promotes sound risk management and prudent behaviour."  

It is important to get the standards right, Geiringer said, as many large insurers are also part of groups offering other financial services.

"There must be measures in place that mitigate the risks to the financial system from a failure of an insurance group as that can have significant effects on the real economy," he said.