January 29, 2021

New Rules Provide International Framework for Insurer Insolvency

In our December edition of Experience Insurance, we reported on the Annual Conference of the International Association of Insurance Supervisors (IAIS). We now turn our international lens to recent international activity related to insurance insolvency policy, or in the international vernacular, “resolution” policy.

International Association of Insurance Supervisors

In 2019, the IAIS adopted the Insurance Core Principles (ICPs) and Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). The ICPs provide a global framework for insurance regulators that is accepted by all IAIS member jurisdictions. They apply to all insurance companies and groups, regardless of size, complexity, types of products or level of international activity. ComFrame builds upon the ICPs, focusing on effective group-wide supervision of internationally active insurance groups, or IAIGs. It’s designed to help supervisors address group-wide risks and avoid supervisory gaps by providing a common language.

Even though the ICPs and ComFrame weren’t finalized until the end of 2019, the resolution provisions have been stable since 2018. The IAIS’s Resolution Working Group (ReWG) has been working to supplement those resolution elements by drafting application papers on resolution-related topics. On November 9, 2020, the ReWG published a consultation paper on resolution powers and planning, which is open for comment until February 5. The goal of the paper is to provide guidance on regulatory practices related to resolution. It focuses on resolution powers — the toolkit that insurance receivers should have at their disposal when faced with an insurance company resolution — and resolution plans — the method for identifying in advance the options for resolving all or parts of an insurer or insurance group with the aim to be better prepared for resolution.

Financial Stability Board

The Financial Stability Board (FSB) also has been active with respect to resolution policy. The FSB was formed by the G20 to bring together senior financial policymakers and international standard-setters to monitor global financial stability by setting international policies and minimum standards that its members commit to implement at the national level.

In late 2020, the FSB published the Key Attributes Assessment Methodology for the Insurance Sector (Insurance KAAM). To put this in context, in 2011 the FSB adopted the Key Attributes of Effective Resolution Regimes (Key Attributes) setting forth international standards for the resolution regimes that should be applied to any financial institution that “could be systemically significant or critical if it fails.” In 2014, the FSB adopted an annex that clarified how the Key Attributes should apply in the insurance context. The recently adopted Insurance KAAM sets out the methodology to assess whether a jurisdiction complies with the Key Attributes in the insurance sector. The Insurance KAAM will be used in a jurisdiction’s resolution regime self-assessment, peer assessments and IMF/World Bank assessments.

COVID-19 Impact

Over the past decade, the international standard-setters addressed regulatory weaknesses exposed by the 2008 financial crisis. With the adoption of the ICPs and ComFrame, those standard-setters were ready to shift their attention to emerging trends impacting the global insurance industry such as climate risk, technological innovation and cyber resilience. If the COVID-19 pandemic highlights new or unaddressed weaknesses in global financial regulation, however, we may be in for another round of crisis-related international standard-setting activity.

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