Insurance capital rule caught in transatlantic divide

LONDON — The first global standard for investors to compare how much capital insurers from different countries hold to keep policies safe is caught in a transatlantic tussle, casting doubt on whether it is practical, industry and regulatory officials say.

Global banks have used common “Basel” capital rules for decades, and the $180 billion bailout for insurer AIG during the 200709 financial crisis prompted regulators to embark on a similar standard for insurers in 2013 for the world’s top 50 insurers.

But four years into the work there is no completed International Capital Standard (ICS) nor a firm date for its introduction, making it harder for investors and policyholders to compare insurers from different parts of the world.

“The sense is there has been a collective pause around the ICS following elections in the United States and the European Union, as well as Brexit,” said Mike Consedine, chief executive of the National Association of Insurance Commissioners ( NAIC), which groups US state-level regulators.

Slow progress has triggered speculation within the industry that regulators may tell insurers the process is now on hold when they meet in Kuala Lumpur in November.

Hugh Savill, director of regulation at the Association of British Insurers, a trade body, said the ICS lacked sufficient political support for now to drive it through to completion.

“There is a serious stalemate, and I see us no nearer agreement than two years ago,” Savill said. Others were openly critical. “It’s a mess. The US won’t play and the ICS is going nowhere,” said the chief executive of a European insurer.

“I don’t think you will get a material change in global capital because nobody can afford it.”

Few believe, however, that a new capital rule would lead to big hikes in requirements.

The ICS is being written by the International Association of Insurance Supervisors (IAIS) whose chair, Victoria Saporta, a Bank of England executive director, said a significant step forward was taken in July when the first version of the ICS was published for field testing.

“There is no question that arriving at an ICS that achieves greater convergence than that of the different group capital standards adopted in different jurisdictions and regions is a challenging task,” Saporta told Reuters.

“But it is also a necessary one if policyholders of international groups are to be better protected, whilst also enjoying the more inclusive offering that can result from the greater capital efficiencies of international diversification.”

The IAIS has yet to come up with a single approach to calculating the amount of capital the world’s top 50 or so insurers will have to hold.

It is testing two “approaches” for valuing liabilities such as future payouts on policies.

The first approach is based on US accounting rules, while the second is based on market prices, similar to EU capital rules known as Solvency II.

But without as yet unclarified adjustments, the two approaches would come up with different capital requirements and leave investors scratching their heads.