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Clifford Chance

Clifford Chance

Insurance Insights

ICS Version 2.0: Moving towards a global Insurance Capital Standard?

In 2013 the International Association of Insurance Supervisors ("IAIS") received a mandate from the Financial Stability Board ("FSB") and G20 leaders to develop a common supervisory framework ("ComFrame") for the supervision of Internationally Active Insurance Groups ("IAIGs"). Following this mandate, three goals were achieved by the IAIS in November 2019: (i) the adoption of an agreed ComFrame, (ii) the creation of the Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector and (iii) the agreement of a quantitative Insurance Capital Standard ("ICS"), the so-called 'ICS version 2.0'. 

ICS version 2.0 is the consolidated group-wide reference standard for a globally comparable risk-based measure of capital adequacy for IAIGs. It will be applied by IAIS members over a five-year monitoring period with some members, including the EU-27 through coordination by the European Insurance and Occupational Pensions Authority ("EIOPA"), from January 2020. In the UK, the Prudential Regulation Authority ("PRA") confirmed in its 2021/22 Business Plan, its intention to apply the ICS over the five-year monitoring period starting this year. The PRA also confirmed its intention to implement the ComFrame and the Holistic Framework during 2022.

The data collected from IAIGs during the five-year monitoring period, together with an economic impact assessment undertaken by the IAIS, will to a large extent, determine the final design of the ICS. With this in mind, regulators will want to collect data from different insurance business models to ensure a proper calibration and risk sensitiveness of the ICS, and, indeed, we are already aware of requests from regulators seeking to encourage IAIGs to participate in this common effort to shape the ICS.

Participating insurers may be concerned that the ICS results, which are to be reported confidentially to group-wide supervisors, could influence regulatory engagement. However, the IAIS made clear that during the monitoring period, the ICS results will not be used as a basis for triggering supervisory action because the ICS is not, yet, a Prescribed Capital Requirement ("PCR"). Instead, the ICS data will be used for discussion in supervisory colleges and to provide feedback to the IAIS. Insurers within IAIGs may, if they have not done so already, wish to liaise with their group supervisor to understand the regulatory expectations for ICS reporting and monitoring or discuss how the ICA should be reformed to better reflect that insurer's business model.

The IAIS has no power to impose the ICS on IAIGs. Instead, national legislators will have the discretion to decide whether they are going to implement the ICS as a PCR. For EIOPA, the ICS is "a high priority", and the EU appears committed to "the aim to increase the global convergence and consistency of supervisory practice". Despite being currently engaged with HM Treasury on tailoring the UK's Solvency II regime, the PRA has also flagged its intention of partaking in and developing global capital standards.

It will be interesting to see how the adoption of ICS will progress in the future. If the ICS and Solvency II frameworks converge, then more focus will be given to whether the EU/UK Solvency II regimes can gain greater recognition to avoid two capital regimes, which are currently the same, running in parallel. In the short to medium term, insurers in IAIGs should assess how to best utilise the similarities between the ICS and Solvency II to complete IAIS activities alongside other competing business activities in their current operating environment. The ongoing Covid-19 pandemic provides a good opportunity to reflect on how resilient insurers are from an ICS perspective, and the 2021/22 submissions should provide the IAIS and regulators with some practical and strategic insights for the future.