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  • ABIR ICS 2016 Consultation Response - Executive Summary

    Int'l Regulatory | Statements / Letters | 11.01.2016

    Key themes from ABIR’s 2016 ICS consultation submission:

    General comments

    1. Timeline: ABIR is concerned around the timeline to implementation being very tight, with ICS V1.0 due for adoption for confidential reporting in 2017 and V2.0 due for adoption at the end of 2019. In targeting this timeframe, it is crucial to allow transitional measures as well as provisions for grandfathering of existing capital instruments to minimize market disruptions in such a short timeframe.
    2. Internal Models: ABIR supports the consideration of Internal Models, either full or partial, as an alternative approach to calculating the ICS. Internal models are both risk-sensitive and are tailored to the circumstances of each company.
    3. Flexibility of approach: ABIR urges IAIS to maintain flexibility within the implementation of ICS and in particular not have as a goal convergence to a single regulatory capital standard applied universally. Rather, while ICS can be used as broad benchmark, capital standards should ultimately be determined by jurisdictional regulators, encapsulating the specificities of the local market. Further, in development of the ICS standard, IAIS should recognize that many existing regulatory regimes already provide a strong capital framework and should be leveraged to avoid unnecessary duplication of efforts.

    Valuation Basis

    1. GAAP Plus vs Market Adjusted Valuation (MAV): GAAP Plus does not yield a comparable outcome to MAV due to variations in jurisdictional GAAP. Further work needs to be done to allow GAAP plus going forward as a valuation method.
    2. Margin over current estimate (MOCE): The choice of MOCE (risk margin) needs to be tied closely to the valuation basis. Prudence-MOCE should apply to GAAP Plus basis while Cost of Capital-MOCE best aligns with MAV.
    3. Cost of Capital: A constant cost of capital is preferred by ABIR members. A variable rate would cause additional volatility in results and introduce practical difficulties in planning and pricing activities.
    4. Reinsurance: Definitions of reinsurance should not be standardized in the ICS; local jurisdictional definitions of reinsurance and risk transfer should stand.

    Capital Resource

    1. Transitional measures: Transitional measures and grandfathering arrangements for existing capital instruments are key for the successful implementation of ICS without disrupting local markets.
    2. Structural subordination: Subordinated debt raised at the holding company level and pushed down to subsidiaries is structurally subordinated to policyholders and should be recognized as eligible capital resources.
    3. Preference shares: Preference shares which can be easily accessed and able to be deployed to absorb losses within the group should be considered eligible capital resources.
    4. Asset encumbrances: Encumbered assets should be assessed as eligible capital resources if they meet certain criteria, with the key considerations being fungibility, liquidity and transferability.

    Capital Requirement

    1. Premium & Reserve Risks: The current Premium and Reserve Risk calibration leads to excessive capital requirements and needs to be fixed prior to finalization. Examples include:
      a. Segmentation of lines of business
      b. Lack of granularity of geographic diversification regions
      c. Double count of risk exposures within Premium Risk and Catastrophe Risks
      d. Parameterization of risk charges
      e. Recognition of diversification benefits between lines of business and risks
    2. Catastrophe risk models: ABIR supports the use of external Catastrophe Risk models within the ICS capital requirement.
    3. Man-made catastrophes: ABIR questions the need for individual Man Made Catastrophe scenarios within the ICS formula and considers these to be more useful as tools for forming part of a holistic risk management framework, e.g. as part of ComFrame.