IAIS Releases Comparability Criteria between Aggregation Method and Insurance Capital Standard

On March 9, the International Association of Insurance Supervisors (IAIS) announced the criteria, available here, that will be used to assess whether the Aggregation Method, or AM, provides comparable outcomes to the Insurance Capital Standard (ICS). The ICS is a key metric of capital adequacy developed by IAIS for internationally active insurance groups (IAIGs, groups of insurers and their affiliates that operate across countries), and the AM is the U.S.-based methodology (developed by the National Association of Insurance Commissioners, or NAIC) for determining group capital levels of insurance groups. U.S.-based IAIGs should continue to monitor this area as U.S. regulators continue to pivot to a more group-based capital adequacy approach.

As background, the IAIS writes that the ICS reflects the goal of imposing a single standard that achieves comparable outcomes across jurisdictions for the amount of capital an insurance group should be required to hold. By contrast, in the U.S., the NAIC has been developing an “aggregation method” model of group capital that tallies up the capital requirements at the constituent entities within a group. This is pursuant to the NAIC’s recent “group capital calculation” requirement, made a feature of the NAIC’s model insurance holding company law in 2020. While the AM is not part of the ICS, the IAIS is seeking to assess whether the AM provides comparable outcomes to the ICS. If so, AM will be considered an outcome-equivalent approach for implementation of ICS as a prescribed capital requirement (PCR).

The purpose of the IAIS’s March 9 release is to set out the criteria that the IAIS will use for the comparability assessment between ICS and AM in the context of the six “high-level principles” (HLPs) for comparability adopted in 2021. The release is based on public consultations and stakeholder feedback. The criteria are summarized below.

HLP 1: AM and ICS results are significantly correlated in that they change similarly in response to changing economic and financial market conditions over the business cycle, not short-term market fluctuations, although the quantum of change may differ.

Relevant Criteria:

• The ICS and AM results are significantly correlated, changing similarly in response to changing economic and financial market conditions over the business cycle.
• In assessing whether the results are significantly correlated, correlation of results is analyzed over the business cycle. The correlation analysis is based on multiple points in time over the business cycle.
• 1.3. Each Volunteer Group in the representative sample conducts sensitivity analysis using scenarios that reflect changing risks that are relevant and material for the sector (life or non-life).
• 1.4. For life business, the IAIS will rely on previously submitted data to the extent possible, as well as data that is already planned to be submitted or publicly available. Three scenarios will be used to inform the analysis of correlation of results over the business cycle: 2020 pandemic, 2022 interest rate and inflation spike, and 2007-09 Global Financial Market Crisis scenario.
• 1.5. For non-life business, the IAIS will rely on previously submitted data to the extent possible, as well as data that is already planned to be submitted or publicly available. Three scenarios will be used to inform the analysis of correlation of results over the business cycle: 2020 pandemic, 2022 interest rate and inflation spike, and a scenario that captures specific changes to non-life insurance risks, such as a catastrophic event.
• 1.6. Volunteer Groups also provide the following information to inform the analysis: (a) The AM results and a description of an economic and/or underwriting scenario that would cause AM capital resources to become less than AM capital requirement at the group level, as well as the corresponding impact on the ICS; (b) The ICS results and a description of an economic and/or underwriting scenario that would cause ICS capital resources to become less than ICS capital requirement at the group level, as well as the corresponding impact on the AM.

HLP 2: Individual elements of a group solvency approach, i.e., valuation, capital resources and capital requirement, will be analyzed; however, the decision on comparable outcomes will consider the elements in totality.

The following will be assessed in undertaking the analysis of the individual elements:

The AM captures the same underlying risks as the ICS, even if this is achieved differently within the quantitative calculation of the group capital requirement. The overall AM capital requirement and ICS capital requirement provide a similar level of solvency protection.

The overall quality and eligibility of capital resources allowed in the AM are similar to the ICS and are assessed considering the same five key principles identified for ICS capital resources: loss absorbing capacity, level of subordination, availability to absorb losses, permanence and absence of encumbrances, and mandatory servicing costs.

Relevant Criteria:

• 2.1. When carrying out the analysis of individual elements of a group solvency approach (i.e., valuation, capital resources and capital requirements), prudence in one element may be used to offset less prudence in another element.
• 2.2. The AM captures the same underlying risks as the ICS. An analysis of risks is performed to understand and determine how all of the risks covered in the ICS are captured in the AM calculation.
• 2.3. The analysis includes whether the overall AM, which relies on underlying legal entity valuation and capital requirements, provides a similar level of solvency protection as the ICS. As part of this analysis, the proportion of non-risk-based regimes as determined by the AM represents less than 5% of available capital.
• 2.4. The overall quality and eligibility of capital resources allowed in the AM are similar to the ICS for the representative sample.

HLP 3: The AM could be more but not less prudent than the ICS, which is being developed as a minimum standard.

Relevant Criteria:

• 3.1. The AM triggers supervisory action on group capital adequacy grounds under similar conditions over the business cycle as the ICS, showing that the level of solvency protection of the two methods is similar in totality (or where not, the AM could be more but not less prudent than the ICS).

HLP 4: The AM and ICS use the same scope of the group, consistent with that set out in the IAIS’s Common Framework (ComFrame).

Relevant Criteria:

• 4.1. The scope of the group for the AM is determined under the same Insurance Core Principle (of the IAIS) as the ICS. All entities in the scope of the ICS calculation are also captured in the AM calculation.

HLP 5: A representative sample of volunteer groups, covering a diversity of business models, provide both ICS and AM data under various economic and financial market conditions over the business cycle.

Relevant Criteria:

• 5.1. The sample of the volunteer groups providing both AM and ICS results is representative of the business models, geography and risks of IAIGs headquartered in the U.S. or other interested jurisdictions. Representativeness is determined separately for life and non-life operations, with composite groups being split between their life and non-life operations.
• 5.2. For purposes of the determination of representativeness: Material geographical areas, as determined by the legal entity location, of U.S. (or other interested jurisdictions) IAIGs are included in the representative sample including, as applicable, North America, Europe and South Africa, Japan, Asia and Oceania. Specific criteria are set out for life and non-life volunteer groups.
• 5.3. The number of volunteer groups providing both AM and ICS data and the overall scope and quality of information that they provide are stable or increase during the monitoring period.

HLP 6: The AM and ICS are similarly transparent, in terms of facilitating understanding and comparability, within and across jurisdictions, of the group solvency position through public disclosure and reporting to group-wide supervisors.

Relevant Criteria:

• 6.1. When introduced in ComFrame, IAIG capital reporting will also apply to AM.
• 6.2. The assessment considers preparatory work that shows evidence of a commitment to meet ComFrame public disclosure and supervisory reporting requirements.