Insurers crafting regulatory framework

MANILA, Philippines - The world’s insurance industry will soon be guided by an international risk and auditing supervisory framework much like what the banking industry is presently experiencing, with its Basel I, II and III frameworks.

The International Association of Insurance Supervisors (IAIS) is presently deep into outlining the international framework that would “promote enhancements to supervision and supervisory processes, combined with stronger risk management and enhanced approaches to resolvability to minimize adverse externalities.”

The IAIS, formed in 1994, represents insurance regulators and supervisors of some 190 jurisdictions in nearly 140 countries, constituting 97 percent of the world’s insurance premiums. It also has more than 120 observers.

It is to the world’s insurance industry as the Bank for International Settlements (BIS) is to the global banking community.

“These enhancements include group-wide supervision and the development of a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame),” the international body said.

The IAIS is also promoting cross-sectoral macro-prudential monitoring of potential build-up of systemic risk, and planning to develop measures for national authorities to assess degrees of systemic risk.

The ComFrame is a new, integrated package that aims to provide supervisors with the means to assess and compare of internationally active insurance groups (IAIGs) around the world through better aligned and more consistent supervision undertaken by home and host supervisors on a multilateral basis.  

The framework will cover the business structure, business mix and business development from the perspective of risk management. It will likewise focus on quantitative and qualitative elements as well as supervisory cooperation and interaction.

ComFrame will not directly address systemic risk per se.

The IAIS believes insurers and insurance groups should be supervised on a solo entity basis and on a group-wide basis. Group supervision should include consideration of non-regulated entities.

These supervisory enhancements should reduce the probability and potential impact of future insolvencies and insurance market failures. It would increase the role of insurers as stabilizers and decrease their potential susceptibility to systemic risk or their roles as potential transmitters or amplifiers of systemic risk.

“The enhanced insurance supervisory framework should contribute to financial stability and prudential supervision and policyholder protection,” the IAIS added.

In fact, the international body formed a monitoring body to compile comments from the industry.

The monitoring group already released a consultation paper on its assessment of the effectiveness of the reforms to the governance of the International Federation of Accountants (IFAC) which were agreed upon in 2003 (known as the Reforms). This assessment, which was foreseen as part of those reforms, should be completed by November 2010.

The group is composed of six members and one observer. The members are representatives from the Basel Committee on Banking Supervision of the BIS, the European Commission, the Financial Stability Board, the International Organization of Securities Commissions (IOSCO), the World Bank, and the IAIS. The International Forum of Independent Audit Regulators (IFIAR) is an observer.

Earlier, the exposure draft on Phase 2 of the International Financial Reporting Standard (IFRS) 4 Insurance Contracts was issued July, and it is widely expected to influence the insurer’s programs for economic capital management and finance transformation.

The IFRS draft, published by the International Accounting Standards Board (IASB), will replace a confusion of grandfathered generally agreed accounting principles (GAAPs) with a single IFRS for all insurance contracts. To date, insurers have been relying on the GAAP of their individual countries or on elements of US GAAP.

The draft, when applied, would create a level playing field for the insurance industry, since it will provide all financial statement users and preparers with greater comparability and transparency about performance as a direct result of consistent measurement and presentation models brought by the standard Insurers in Asia are expected to face some unique challenges in the implementation of the new standard.

The current insurance accounting is based on regulatory reporting requirements and can be quite formulaic.

The new IFRS standard will require more sophisticated actuarial modeling, and increased levels of management judgment. It will help management and shareholders understand the economics and drivers of their business in a way that hasn’t been possible in the past.

The prestigious SG&V said that the key performance indicators would change, supporting improved decision-making. 

“For many insurers, meeting these challenges head on could act as a catalyst to sort out the current burden of supporting multiple measurement systems and transform their business for the better,” it added.