Public

Higher Loss Absorbency Requirement for
Global Systemically Important Insurers (G-SIIs)

5 October 2015

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5 October 2015

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About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganisation of insurance supervisors and regulators from more than 200 jurisdictions innearly 140 countries. The mission of the IAIS is to promote effective and globally consistentsupervision of the insurance industry in order to develop and maintain fair, safe and stable
insurance markets for the benefit and protection of policyholders and to contribute to global
financial stability.
Established in 1994, the IAIS is the international standard setting body responsible fordeveloping principles, standards and other supporting material for the supervision of theinsurance sector and assisting in their implementation. The IAIS also provides a forum forMembers to share their experiences and understanding of insurance supervision andinsurance markets.
The IAIS coordinates its work with other international financial policymakers and associationsof supervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB), member of the Standards
Advisory Council of the International Accounting Standards Board (IASB) and partner in the
Access to Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS also isroutinely called upon by the G20 leaders and other international standard setting bodies for
input on insurance issues as well as on issues related to the regulation and supervision of
the global financial sector.

International Association of Insurance Supervisors
c/o Bank for International Settlements
CH-4002 Basel
Switzerland
Tel: +41 61 225 7300
Fax: +41 61 280 9151
www.iaisweb.org© International Association of Insurance Supervisors (IAIS), 2015.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated. This document is available free of charge on the IAIS website under
www.iaisweb.org.

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Contents
Preface...................................................................................................................................5
1

2

3

4

Executive summary .......................................................................................................6
1.1

Overview .....................................................................................................6

1.2

IAIS global capital standards .......................................................................7

1.3

BCRUplift .......................................................................................................8

1.4

HLA required capital....................................................................................8

1.5

HLA capital resources .................................................................................9Context........................................................................................................................10
2.1

Background ...............................................................................................10

2.2

The purposes of HLA at July 2013 ............................................................ 10

2.3

IAIS position on systemic risk .................................................................... 11

2.4

HLA relationship with the ICS .................................................................... 12

2.5

Development of the HLA ........................................................................... 12

2.6

Formulas for the BCR2014 .......................................................................... 12

2.7

Components of BCR2015 + HLA ................................................................. 13

The BCRUplift ................................................................................................................14
3.1

Formulas for BCRUplift and BCR2015 ............................................................ 14

3.2

The BCRUplift ..............................................................................................14

3.3

Impact of BCRUplift .....................................................................................15

3.4

Transition period for Uplifts ....................................................................... 17

The HLA required capital formula ................................................................................18
4.1

Structure of the HLA required capital formula ............................................ 18

4.2

HLA calibration..........................................................................................19

4.3

Managing the tension between risk sensitivity, complexity and dispersion 19

4.4

Buckets .....................................................................................................20

4.5

HLA Factors ..............................................................................................21

4.6

Relativity between HLA factors ................................................................. 24

4.7

Assessing the HLA formula against the HLA Principles ............................. 25

4.8

Impact of BCRUplift and HLA ....................................................................... 26

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5

6

7

HLA capital resources .................................................................................................28
5.1

BCR and HLA capital resources ................................................................ 28

5.2

Transition period for Uplifts ....................................................................... 28

Impact on G-SIIs .........................................................................................................29
6.1

Computing BCR and HLA required capital amounts .................................. 29

6.2

HLA required capital dispersion between G-SIIs ....................................... 29

6.3

BCR+HLA Ratio ........................................................................................30

Operational matters .....................................................................................................31
7.1

HLA interaction with other IAIS reviews..................................................... 31

7.2

BCR and HLA review process ................................................................... 31

7.3

HLA reporting process ..............................................................................32

7.4

Field testing...............................................................................................32

7.5

HLA Interaction with the ICS ..................................................................... 32

Annex A: Glossary...............................................................................................................33
Annex B: HLA Principles .....................................................................................................35
Annex C: Qualifying capital resources .................................................................................37
Annex D: Cumulative BCR factors by BCR segment ........................................................... 41
Annex E: Formulas for capital requirements ........................................................................ 44
Annex F: Sample calculation of BCR2015 and HLA required capital amounts for
hypothetical G-SIIs................................. 47

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PrefaceThis document describes the first version of the Higher Loss Absorbency (HLA)
requirement for Global Systemically Important Insurers (G-SIIs). The HLA builds on the
Basic Capital Requirements (BCR) and addresses additional capital requirements for GSIIs reflecting their systemic importance in the international financial system. The current
foundation for the HLA is the BCR, which the IAIS intends to replace with the Insurance
Capital Standard (ICS) as that foundation when the ICS is developed. As the ICS isdeveloped, the design and calibration of the HLA will be reviewed. Additionally, certain
aspects of the HLA relate to requirements applicable to other regulated financial sectors(e.g. banking, asset management) for which capital rules already exist or are underdevelopment. The IAIS will continue to ensure consistency with such other requirements
so as to minimise opportunities for regulatory arbitrage.
The IAIS acknowledges the need to monitor developments and to make changes to the
HLA as necessary. In the near term, the ongoing and related IAIS work on thedefinitions of Non-Traditional and Non-Insurance (NTNI) activities and on the frameworkof the G-SII Assessment Methodology – each to be the subject of separate consultations
to be released by the IAIS in November 2015 – will be closely monitored and evaluatedin the context of the HLA. Changes to the NTNI definitions or the G-SII Assessment
Methodology will lead to a change in HLA design and calibration.
As described in Section 7.2 of this HLA Document, it is anticipated the periodic annual
analyses of insurer field testing data in 2016-2018 and the BCR and HLA review process
will also lead to changes to the HLA design and calibration, prior to the proposed
implementation of HLA.

The HLA is scheduled to be formally adopted by the IAIS at its General Meeting on 12
November 2015.

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1

Executive summary

1.1

Overview

1.

The purpose of this document is to describe the Higher Loss Absorbency (HLA)
requirement to apply to Global Systemically Important Insurers (G-SIIs).

2.

Together with the Basic Capital Requirements (BCR), the HLA will provide a globallycomparable group capital requirement that is intended to apply to all G-SIIs. The HLA
presumes G-SIIs are going concerns. The primary purpose of the HLA is to assist
reducing the probability and impact on the financial system of the distress or failure of a
G-SII. 1 The HLA will apply to all group activities (as is the case for the BCR), including
non-insurance subsidiaries. Capital resources supporting the HLA required capitalneed to be of the highest quality.

3.

The HLA builds on, and is in addition to, the BCR for G-SIIs. The BCR provides a
globally comparable foundation on which the HLA can be developed. The BCR wasdeveloped in 2014 and published in October 2014 2 and is referred to as the BCR
Document. The BCR required capital amount determined by the BCR document isreferred to as the BCR2014.

4.

The HLA builds on the BCR and addresses additional capital requirements for G-SIIs
reflecting their systemic importance in the international financial system. When the
HLA is implemented in 2019, all G-SIIs will be expected to hold regulatory capital that is
not less than the sum of the required capital amounts from the BCR and the HLA.

5.

The construction process for the HLA separates BCR required capital exposures by
Traditional Insurance, Assets, Non-Traditional Insurance (NT), and Non-Insurance (NI).
This permits existing global regulatory requirements in non-insurance sectors to bealso reflected. The definition of NT and NI used in this document are those as provided
in the BCR Document. The overall impact of the HLA is determined by the amounts of
HLA from both Insurance and NI business.

6.

For the total BCR+HLA required capital six components are considered. For each of
Insurance and NI there are three components:

1

2

•

BCR2014. This is as specified in the BCR Document.

•

BCRUplift. The BCR required capital has been recalibrated based on field testing
and work performed in 2015 to determine the HLA requirements. The amount bywhich the prior BCR required capital is increased is called the BCRUplift. The

See paragraph 49 of the G-SII Policy Measures paper.
See http://iaisweb.org/index.cfm?event=getPage&nodeId=25233 and then the “Financial Stability &Macroprudential Policy & Surveillance” section under the “Supervisory Material” tab.
See Basic Capital Requirements for Global Systemically Important Insurers, 23 October 2014.
See http://iaisweb.org/index.cfm?event=getPage&nodeId=25233 and then the “Financial Stability &Macroprudential Policy & Surveillance” section under the “Supervisory Material” tab.

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recalibrated BCR (BCR2015) is the sum of the prior BCR (BCR2014) and the increase,
BCRUplift.
•

HLA. Additional capital requirements, in addition to the BCR requirements.

7.

An important consideration in the development of the HLA is that G-SIIs should be
required by their group-wide supervisors to hold higher levels of regulatory capital thanwould be the case if they were not designated as G-SIIs. This is because G-SIIs are
considered to have more systemic risk than insurers that have not been designated as
G-SIIs.

8.

The HLA will be privately reported by G-SIIs to group-wide supervisors commencing in
2016. This is in addition to private reporting of the BCR to group-wide supervisors,which commenced in 2015.

9.

The HLA will initially be based on BCR as a foundation, but later will be based on therisk based group-wide global Insurance Capital Standard (ICS) as a foundation.

10.

The review and refinement process for the BCR and HLA has two aspects:•

The calibration of both the BCR and HLA, which are interlinked, may be modified
depending on future experience and analysis. Monitoring the calibration level of the
combined BCR and HLA required capital for G-SIIs will form part of an annual
review process for the BCR and/or HLA, until after the ICS is implemented. These
reviews will recommend refinements, if deemed necessary.

•

When the ICS is developed, the calibration and structure of the HLA will be
reviewed and may need to be revised.

These reviews will be supported by ongoing IAIS field testing to support thedevelopment of the ICS.
1.2

IAIS global capital standards

11.

The HLA is the second milestone in the IAIS’ project to develop group-wide global
capital standards. The first milestone was the BCR; the third is the ICS.

12.

The first version of the ICS is due to be completed by the middle of 2017 and isscheduled to apply to Internationally Active Insurance Groups (IAIGs) from 2020 afterrefinement and final calibration in 2018 and 2019. For ICS purposes all G-SIIs are
considered to be IAIGs. The development of the ICS will be informed by, among otherthings, monitoring the results from the application of the HLA and the BCR.

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13.

Comments on the public Consultation Document on the HLA, issued on 25 June 2015,
were received, considered and reflected in the HLA development process. 3 The fieldtesting exercise to collect data to inform HLA development commenced in 2014 andcontinued in 2015.

1.3

BCRUplift

14.

The uplift of required capital amounts, for both Insurance and NI, will increase the
BCR2014 of each to reduce the expected gap between the BCR2015 and the future
Insurance Capital Standard (ICS). This BCRUplift is essentially achieved by increasing
the BCR alpha factor (α) from 100% to 133%. The same 33% uplift is applied to the NI
component of the BCR2014. This generates the BCR2015, which is equal to the BCR2014
plus the BCRUplift. 4

15.

The NI component of the BCR2015 relating to regulated banking activities will be themaximum of the BCR2014 requirement of 3% of the Basel III banking Leverage Ratio
and 8% of Risk Weighted Assets (RWA).

16.

The BCRUplift, for both Insurance and NI, will be phased in over a three year transition
period (2016, 2017 and 2018) 5 in three equal steps (that is, with the BCR alpha factor
set at 111%, 122% and 133%, respectively). During the transition period thecalculation of the HLA components will reflect the full amounts computed for the
BCR2105, rather than the reduced amounts computed for transition purposes.

1.4

HLA required capital

17.

The HLA required capital amount is calculated using a factor-based approach. It will be
determined based on the bucket in which a G-SII is placed and then by the HLA factorsthat pertain to each bucket as applied to BCR required capital exposures. There arethree buckets specified. Currently the top (highest) bucket is not populated (that is, nocurrent G-SII is allocated into this bucket under the criteria in this document).

3
4
5

The comments received on the HLA Consultation Documents are available on the IAIS website.
See: http://iaisweb.org/index.cfm?event=getPage&persistId=FBF6630A155D896B00DCE8157DA5BD0C.
The Uplift for the NI components are subject to global regulatory requirements for other sectors, in particularregulated banking.
This transition is expected to be completed during the HLA private reporting period, prior to the implementationof the HLA, which is scheduled for 2019.

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18.

The HLA required capital, on average, over the current set of G-SIIs, is approximately
10% of the BCR2015 required capital amount. G-SIIs have different risk profiles andbusiness models so there is variation around this average outcome between them. 6
This level of calibration results in HLA required capital amounts for the current G-SIIs
that do not significantly exceed the amounts for banks in the lowest G-SIB bucket (on arelative basis).

19.

The IAIS considers that the HLA formula approach with the three buckets and theirassociated HLA factors is optimal to produce an appropriate balance between risk
sensitivity, complexity and dispersion. The third (highest) bucket is relevant to address
the possibility that a G-SII becomes more systemic than is recognised by the twocurrently populated buckets.

20.

It is anticipated that the revised G-SII Assessment Methodology would permit annual
publication of the bucket allocations for all G-SIIs.

21.

In September 2014, the IAIS published a set of principles to support the development
the HLA. These are reproduced in Annex B. The HLA formula approach is consistent
with these principles.

1.5

HLA capital resources22.

The specification of qualifying capital resources to support the BCR remains the sameas given in the BCR Document.

23.

The capital resources that support the HLA required capital must be of the highest
quality (as stated in HLA Principle 6).

6

The HLA required capital amounts, for Insurance and NI, will increase the BCR components by factors that
range from 6% to approximately 19% for the populated buckets.

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2

Context

2.1

Background24.

Following the global financial crisis, the Financial Stability Board (FSB) and G20
initiated work to identify Global Systemically Important Financial Institutions (G-SIFIs).
As part of this broad initiative the IAIS published a framework of policy measures in
July 2013, the G-SII Policy Measures, 7 that should be applied to insurers designated as
G-SIIs.

25.

The G-SII Assessment Methodology 8 provided a basis under which the initial cohort of
G-SIIs was identified in 2013. The same basis was applied to support the identificationof the second cohort of G-SIIs 9 in 2014. A review of the methodology to identify G-SIIs
is underway. The results of this review are not yet available (see section 7.2).

26.

The G-SII Policy Measures identified three main areas of focus: enhanced supervision,
effective resolution, and loss absorption (addressed by the BCR) and HLA capacity.
Progress to date in these areas provides a context and a starting point for work todevelop the HLA.

27.

The IAIS has completed further work since the G-SII Policy Measures were publishedin July 2013. In particular, the IAIS has:•Developed the BCR, which applies to G-SIIs. This was endorsed by the FSB in
October 2014 and the G20 Summit in November 2014.

•

Conducted field testing work in 2014 and 2015 to support the development of the
BCR, HLA and ICS.

2.2

The purposes of HLA at July 201328.

On 18 July 2013, the IAIS and the FSB made the following joint commitment:“As a foundation for HLA requirements for G-SIIs, the IAIS will as a first stepdevelop straightforward, backstop capital requirements to apply to all group
activities, including non-insurance subsidiaries, to be finalised by the end of 2014.”

29.

7
8
9

This clearly indicates that the scope of activities covered by the HLA is the same asthat of the BCR, and so includes consideration of all group activities.

See http://iaisweb.org/index.cfm?event=getPage&nodeId=25233 and then the “Financial Stability &Macroprudential Policy & Surveillance” section under the “Supervisory Material” tab.
See http://iaisweb.org/index.cfm?event=getPage&nodeId=25233 and then the “Financial Stability &Macroprudential Policy & Surveillance” section under the “Supervisory Material” tab.
See
http://www.financialstabilityboard.org/2014/11/fsb-announces-update-of-list-of-global-systemicallyimportant-insurers-g-siis/.

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30.

The G-SII Policy Measures, in paragraphs 48 – 56, 10 provides the IAIS perspective on
developing an HLA as at July 2013.
In particular, paragraph 49 provides the following summary:“The desired outcomes of HLA capacity, all of which work to reduce the probabilityof distress or failure and thus the expected impact, include:•

Internalising some of the costs to the financial system and overall economy,
which are otherwise externalities to the insurance group that occur as a result ofa G-SIIs distress or failure by making G-SIIs more resilient to low probability,
high impact events;•

Allowing for earlier supervisory intervention and more time to address emerging
risks to the financial system;•

Providing disincentives to carrying out activities that pose a threat to the financial
system; and•Offsetting any benefit should it arise, such as lower funding costs, associatedwith the G-SII status.”

2.3

IAIS position on systemic risk

31.

A definition of systemic risk 11 is:“Systemic risk is the risk of disruption of financial services that is caused by
impairment of all or parts of the financial system and has the potential for serious
negative consequences for the real economy.”

32.

10
11

The IAIS position on systemic risk, as indicated in the G-SII Policy Measures, can besummarised as:•

Differences between the traditional insurance business model and the banking
business model need to be considered when assessing the systemic importance of
insurance.

•

The time dimension is important in insurance (both in respect of business modeland regulatory action) as runs on insurers are uncommon though not impossible.

•

There is little evidence of traditional insurance either generating or amplifying
systemic risk.

•

NT and NI activities within insurance firms or groups may generate or amplify
systemic risk.

See http://iaisweb.org/index.cfm?event=getPage&nodeId=25233 and then the “Financial Stability &Macroprudential Policy & Surveillance” section under the “Supervisory Material” tab.
See Report to G20 Finance Ministers and Governors, Guidance to Assess the Systemic Importance ofFinancial Institutions, Markets and Instruments: Initial Considerations, October 2009.

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The insurance sector is susceptible to systemic risk generated in or transmitted
through other parts of the financial sector.

•

Insurer activities may amplify systemic risk under specific circumstances e.g.
through reacting to downturns in capital markets or through unexpected withdrawalof capacity.

33.

Insurers are designated as G-SIIs due to an assessment that their distress or failure
may result in a systemic risk event. Designation is not, however, driven solely by the
NTNI component of their designation score; a number of other factors are taken into
account, such as interconnectedness. It may nevertheless be appropriate toemphasise NT and NI-related issues in the HLA design in accordance with the goal toprovide disincentives to carrying out activities that pose a threat to the financial system.

34.

The IAIS is also currently reviewing the definitions of NT and NI activities, and revisiting
the G-SII Assessment Methodology. 12 When these reviews are completed, their impact
on the BCR and HLA will be reviewed (see section 7.2).

2.4

HLA relationship with the ICS

35.

The IAIS has indicated that when the ICS is developed, the HLA will be reviewed andits foundation changed from the BCR to the ICS. This may then require a review of the
HLA, both in terms of its structure and calibration.

2.5

Development of the HLA

36.

Similar to the approach used for the BCR, a number of Principles have been articulated
to support the development of the HLA. The HLA Principles were published by the IAIS
in September 2014 and are reproduced in Annex B.

37.

The IAIS currently plans to review the HLA, for the purpose of replacing the BCR with
the ICS as its foundation, subsequent to the ICS’ scheduled application to IAIGs from
2020.

2.6

Formulas for the BCR2014

38.

Mathematical formulations for required capital amounts can help remove ambiguity ininterpretations. Details of the formulas for BCR2014, BCRUplift, and BCR2015 are provided
in Annex E. Some terms defined in this Annex may be used subsequently in the main
body of this document.

12

Consultation documents regarding both these reviews are scheduled to be published by the IAIS by the end of
2015.

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2.7

Components of BCR2015 + HLA

39.

A summary graphic is given below in Figure 2.1 that gives the relationship between the
BCR2014, the BCRUplift, the BCR2015 and the HLA required capital amounts.

40.

The total BCR+HLA required capital is split into six components, each of which isaddressed separately below. No component may be negative. The total BCR+HLA
required capital is the sum of the results from the six components, with the BCR2014,
BCRUplift, and HLA components being separated into Insurance and NI.
•

The total HLA required capital amount is represented by the red boxes.

•

The BCR2015 is the sum of the BCRUplift from the orange boxes and the BCR2014
required capital from the blue boxes. The Insurance and NI components are
separated within these different colours.

•

The Insurance components include Traditional Insurance, assets and NT.

•

NI activities include regulated banking, unregulated banking, assets undermanagement and other activities.
Figure 2.1: BCR2015, BCR2014, BCRUplift and HLA components (not to scale)41.

Existing jurisdictional Prescribed Capital Requirements (PCRs) are not globallycomparable. The IAIS developed the BCR to provide a globally comparable foundation
so that, together with the HLA, there could be a consolidated group-wide globallycomparable regulatory capital requirement. However, a comparison of the averages
between BCR and jurisdictional PCRs still provides an approximate high-level sectoral
measure of regulatory required capital. The lack of global comparability of PCRs isconceptually represented in the figure above by the shading at the top of the box
labelled “PCR Proxy”.

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3

The BCRUplift

3.1

Formulas for BCRUplift and BCR2015

42.

The BCRUplift is achieved by recalibrating the BCR2014. The BCRUplift is, essentially,
achieved by increasing the BCR2014 scalar α (alpha) from 100% to 133%. With the
exception the Non-Insurance Regulated Banking (NI-RB) component, the 33% uplift
will also be applied to the NI components. The treatment of the NI-RB component is
specified below.

43.

Formulas for BCRUplift and BCR2015 = BCR2014 + BCRUplift are provided in Annex E.

3.2

The BCRUplift

44.

Based on 2014 and 2015 field testing data, the average BCR2014 required capital,
expressed as a percentage of PCR in aggregate for all G-SIIs, was 75%. To scale theamount of the aggregate BCR2015 required capital up to 100% a 33% uplift of the
BCR2014 in needed. 13

45.

The BCR Document states that where global capital standards are in place for noninsurance sectors, the outcomes from those other sectoral standards should not be
exceeded in the BCR. Consequently the uplift to the NI component of the BCRUpliftneeds to be addressed separately to consider other sectoral global standards. The
uplifts in BCRUplift are:•Uplift Insurance. Increasing the BCR calibration factor from its current 100% to133%. That is, αBCR = 1.33.

•

Uplift Non-Insurance – other than regulated banking. Apply a factor of 33% tothe relevant components of BCR2014 NI required capital.

•

Uplift Non-Insurance – Regulated Banking (NI-RB). The component BCRUplift
for the regulated banking sector, NI-RBBCR Uplift, is determined by reference to thebanking sector requirements 14 and the requirement that it may not be negative. NIRBBCR 2015 is taken to be the maximum of the BCR2014 component (3% of the
Leverage Ratio) and the Basel III Risk Weighted Assets (RWA) requirements (of13

For reporting purposes, in contrast to HLA required capital calculation purposes, a transition process is
specified (See section 3.4). The calculation specified here and in Annex E is for the full BCRUplift and should
be used for the calculation of the HLA. The calculations appropriate to reporting through the transition periodrequire the 0.33 factor used in the formulas in this section to be replaced by the specified transitional reporting
period numbers.

14

The BCR2015 is calibrated to an average PCR level to reduce the expected gap between BCR2015 and thefuture ICS. In the banking sector, the equivalent measure is the higher of 8% of RWA or the 3% leverage
ratio. Therefore, in the BCR2015 the maximum of these two requirements will replace the 3% leverage ratio in
the BCR2014 for NI regulated banking business

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8% as noted below). 15 NI-RBBCR Uplift is then the increase over the NI-RBBCR 2014 (the3% of the Leverage ratio). This is expressed as follows:
NI-RBBCR 2015 = Max [ 3% Leverage ratio, 8% RWA ]NI-RBBCR Uplift = NI-RBBCR 2015 – NI-RBBCR 2014 .
46.

The BCR Document specifically states that the BCR calibration level may be modified
depending on the HLA requirements as well as refinement work during the period of
confidential reporting. BCR2015, the BCR2014 plus the BCRUplift is part of the recalibrationof the BCR.

47.

The appropriate Basel III capital ratio requirements for the purposes of determining the
BCRUplift are the 8% of RWA and the 3% Leverage Ratio. This RWA percentage
excludes any HLA required capital.

48.

The quality of capital resources required to support the BCRUplift will be the same as for
the BCR2014. In particular, Qualifying Additional capital cannot exceed 50% of BCR
required capital.

49.

Where BCR2015 (or BCR2014 or BCRUplift) references are limited to Insurance, Traditional
Insurance, Assets, NT, NI or a specific combination of these then a relevant descriptor
will be used.

3.3

Impact of BCRUplift

50.

Table 3.1 provides some examples of the impact of the rescaling on a selection of BCR
factors due to the BCRUplift. The full list of the rescaled BCR2014 factors after the
BCRUplift is given in Annex D. These rescaled BCR factors reflect the cumulative
impact, in terms of required capital, of the BCR2014 and the BCRUplift. These rescaled
factors show the contribution to the BCR2015 attributable to the underlying BCR
exposures. Therefore, an assessment of the reasonableness of these cumulative
factors in the insurance business context is a useful criterion to assess theappropriateness of BCR2015 required capital outcomes.

15This formulation treats regulated banks in aggregate and not separately. In theory this permits offsetting
between banks in the calculation. In practice this is considered unlikely to be a concern. If this is shown not
to be the case then a review in the future will be considered.

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Table 3.1: Examples of cumulative uplifted BCR factor values for BCR for
insurance activities
BCR segment

BCR proxymeasure for risk
exposure

BCR2014 Factor
value(αBCR2014 = 1.00)

BCR Factor
value(αBCR = 1.33)

Net Current Estimate

0.60%

0.80%

Premium Measure

6.3%

8.4%

Notional Value

1.2%

1.6%

Fair Value

0.70%

0.93%

Traditional Life (TL)
Participating products
Traditional Non-life (TNL)
Property
Non-Traditional (NT)
Variable annuities
Assets (A)Credit - investment grade

51.

The changes in the NI components are as follows•

For NI-RB business, banking sector requirements are as discussed above.

•

For Non-Insurance - Unregulated Banking (NI-UB) business the 133% multiplierapplies but the cap at 8% of RWA does not.

•For Non-Insurance – Assets Under Management (NI-AUM), the BCR uses thestandard indicator method for addressing operational risk of asset management
activities in Basel II. 16 Currently this is 12% of gross income (averaged over 3
years). Like insurance business, this is subject to a multiplier of 133%.

•

For Non-Insurance – Other (NI-O) business the 133% multiplier applies.

Table 3.2: Examples of Uplifted BCR Factor values for NI
BCR segment

BCR proxy measure
for risk exposure

BCR2014 Factor
value(αBCR2014 = 1.00)

BCR Factor
value(αBCR = 1.33)

Banking – regulated (notecap of 8% RWA subject tono negative uplift)

Leverage ratio exposure
measure3.0%

n/aBanking – unregulated

Leverage ratio exposure
measure

3.0%

4.0%

Assets undermanagement

3 year average grossincome

12.0%

16.0%

Non-Insurance

16

Paragraph 654 of the Basel II Comprehensive Version (http://www.bis.org/publ/bcbs128.pdf).

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There is no single BCR Factor value for regulated banking since the result is the
maximum of two amounts for each G-SII, as stated above.
3.4

Transition period for Uplifts

52.

The BCRUplift, for both Insurance and NI, will be phased in over a three year transition
period (2016, 2017 and 2018) in three equal steps (that is, with the BCR alpha factor
set at 111%, 122% and 133%, respectively). This transition is expected to becompleted during the HLA private reporting period, prior to implementation of the HLA,
which is scheduled for 2019.

53.

During the transition period the calculation of the HLA insurance component and the
HLA NI component will be calculated based on the full amounts computed for BCR
insurance Uplift and BCR NI Uplift, rather than the reduced amounts computed fortransition purposes.

54.

Having a transition period for the Uplifts permits review and possible refinement of thefull uplift factors to reflect future data and experience. 17 This recognises that the uplift
factors are based on two data points from field testing in 2014 and 2015. The transition
period will allow the IAIS to review the Uplift based on field testing data in 2016, 2017and 2018 to avoid variance with the then current desired target.

17

Note also HLA Principle 4 (Resilient). As indicated in section 7.2, the annual review process for the BCR andHLA can be expected to consider the behaviour of the BCR and HLA in varying economic conditions. It isnoted that the economic conditions in 2013 and 2014 were similar.

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4

The HLA required capital formula

4.1

Structure of the HLA required capital formula55.

The HLA required capital formula builds on the foundation of the BCR required capital
formula, which is factor-based. 18 The HLA required capital formula 19 is also factorbased and the HLA required capital formula specifies factors to be applied to
exposures based on components of the BCR required capital. 20

56.

A factor-based approach has a number of advantages, including:•Flexibility. It is possible to change a factor without necessarily being required tochange others.

•

Transparency. The direct linkage to the BCR components and their associated
BCR required capital exposures is more intuitive and increases transparency.

•

Independence. A G-SII can see the impact of changes in its business mix, fromthe perspective of HLA required capital. These changes are independent of the
behaviour of other G-SIIs (for a particular set of factors/bucket).

57.

A factor is specified for the BCR required capital exposures for each component of the
BCR2015 required capital formula. The BCR2015 required capital exposure is the sum of
the BCR2014 and the full BCRUplift required capital amounts.

58.

G-SIIs have varying business mixes and business models so it is expected that the
combined impact of the BCR and HLA required capital will vary by G-SII. It follows that
it is appropriate for the HLA required capital calculation to reflect this diversity in risk
profile. This is directly reflected by using differing factors for differing businesscomponents in the HLA required capital formula.

59.

The G-SIIs also have been split into a number of groups, called buckets, based on their
G-SII designation scores. Separate sets of factors appropriate for each bucket arethen applied.

60.

The outcomes from this approach are summarised in the following table. The Low, Mid
and High buckets are specified in section 4.4.

61.

The rationale for the choices of factors in each bucket and their relativities is discussed
in the following sections.

18
19

20

A factor-based formula is the sum over a number of products of an exposure multiplied by a factor.
Where it can be done without ambiguity, phrases such as ‘HLA required capital formula’ are shortened (forexample, to ‘HLA formula’). Where additional specification is needed it will be included (for example, ‘HLA
Traditional Insurance required capital formula’).
For clarity, it is noted that the BCR required capital amounts are themselves generated from the factor-based
BCR formula. It is important to remember that the exposures used for the HLA required capital calculation,
the BCR required capital amounts, are not the same as the exposures used to compute those BCR required
capital amounts.

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Table 4.1: HLA required capital formula factors
BCR required capital exposure

HLA Factors
Low
BucketMid
BucketHigh
Bucket

6%

9%

13.5%

12%

18%

27%

NI-RBBCR 2015: Non-Insurance – Regulated
Banking

8.5%

12.5%

18.75%NI-UBBCR 2015: Non-Insurance – Unregulatedbanking

12.5%

18.75%25%

TLBCR 2015: Traditional Life insurance
TNLBCR 2015: Traditional Non-Life insurance
ABCR 2015: Assets
NTBCR 2015: Non-Traditional insurance
NI-AUMBCR 2015: Non-Insurance – Assets
Under Management
NI-OBCR 2015: Non-Insurance – Other

4.2

HLA calibration

62.

The outcomes from the HLA formula should generate a meaningful HLA required
capital amount for each G-SII and also achieve an appropriate balance between risk
sensitivity, complexity and dispersion.

63.

On average, over the set of G-SIIs designated in November 2014, the HLA required
capital amount with the two populated buckets and HLA factors generated an averageof approximately 10% of the BCR2015 amount. This outcome is considered acceptable.

64.

By way of comparison for cross sectoral consistency, it is noted that this level ofcalibration results in HLA required capital amounts for the current G-SIIs that do notsignificantly exceed that of a bank in the lowest G-SIB bucket.

4.3

Managing the tension between risk sensitivity, complexity and dispersion

65.

In order to design a risk sensitive HLA some additional emphasis on NT and Nl isdesirable. However, too high an additional emphasis on NT and NI could create
undesirable dispersion (that is some G-SIIs with very high HLA amounts and some withmuch lower amounts). It was also considered that the NT and NI BCR required capital
only captures some of the sources of systemic risk. Floors and ceilings wereconsidered as possible options to limit unwarranted dispersion, in particular, in the caseof high emphasis on NT and NI. The additional complexity created by floors andceilings was considered undesirable.

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66.

Reflecting the need to avoid unwarranted dispersion, additional emphasis on NT and
NI activities achieved by applying a factor of two to the factors deemed appropriate fortraditional business (subject to caps from any global sectoral standards) was regarded
as optimal to produce an appropriate balance between risk sensitivity, complexity anddispersion. Floors and ceilings then were not considered necessary due to theconstruction of the HLA required capital formula.

4.4

Buckets

67.

Based on analysis from 2014 and 2015 field testing, the IAIS has identified factors for
the Low bucket. The Mid bucket is constructed with factors 50% higher than those in
the Low bucket. This approach is similar to the approach used for bucketing of G-SIBs
and produces adequate risk sensitivity. The High bucket is then constructed withfactors 50% 21 higher than those in the Mid bucket.

68.

The HLA design uses bucketing to reflect the risk sensitivity as measured by the G-SII
Assessment Methodology. An analysis of results from the last three sets of G-SII
designation processes shows two populated buckets with an additional empty bucket(the highest) in all sets of results. Having two populated buckets is consideredappropriate by the IAIS. The use of buckets is designed to provide a disincentive for a
G-SII to increase its systemic importance. Hence the third (highest) bucket is relevant
to address the possibility that a G-SII becomes more systemic than is recognised by
the two currently populated buckets.

69.

On the one hand, the current G-SII Assessment Methodology reflects a broad range ofindicators of potential systemic risk, including interconnectedness, global activity,
substitutability and size, in addition to NT and NI activities. On the other hand, the BCR
required capital calculation does not reflect all the indicators that the G-SII Assessment
Methodology does. Consequently, the use of a number of buckets together with the useof different factors applied to BCR2015 required capital exposures provides a richer,more flexible and more (systemic) risk responsive outcome for the HLA required capital
calculation.

70.

The use of buckets based on how systemic a G-SII is allows the application of higher
factors to those G-SIIs that are more systemic.

71.

For the purposes of HLA calculations:•21

The results used to determine the bucketing are the full scores assigned to G-SIIs
in the G-SII Assessment Methodology.

The specification of the High bucket does not follow the banking approach in that increments used for thebanking buckets are additive, and the High bucket is obtained using a multiplicative approach. This isintended as it leads to a larger absolute increase in factors from the Mid to the High bucket than from the Low
to Mid bucket.

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72.

•

The buckets are determined by comparison between the individual G-SII’s fullscore and the average from the G-SII Assessment Methodology for all G-SII
candidates considered.

•

Allocation to a bucket determines the factors to apply to relevant exposures foreach G-SII.

The procedure to determine the buckets is:•

Bucket 1 – Low bucket: All G-SIIs with a full score below 0.04 22 in the G-SII
Assessment Methodology (where there are 50 participating insurers, hence theaverage score is 0.02 = 1/50).

•

Bucket 2 - Mid bucket: All G-SIIs with a full score between 0.04 and below 0.06 in
the G-SII Assessment Methodology.

•

Bucket 3 – High bucket: All G-SIIs with a full score of 0.06 or above in the G-SII
Assessment Methodology.

73.

Based on G-SII Assessment Methodology results of the designation processes to datethe High bucket is empty. The determination of the buckets may require review when
the revised G-SII Assessment Methodology is finalised (see section 7.2).

74.

It is anticipated that the revised G-SII Assessment Methodology would permit annual
publication of the bucket allocations for all G-SIIs.

4.5

HLA Factors

75.

The HLA factors reflect the assessed systemic risk of each G-SII. The HLA reflects amore macroprudential perspective than the BCR, which is more microprudential infocus. Consequently, the levels and relativities of risk assessments may differ fromthose that may be taken from a BCR perspective.

76.

Therefore, the differing level of overall systemic riskiness of G-SIIs is picked up throughthe use of a number of buckets into which G-SIIs are allocated.

77.

The set of factors within the buckets is to be read as a package, and not as a set ofindependent factors. They represent an overall assessment and balance between anumber of differing criteria as discussed in section 4.2. This is particularly the casewith the Low bucket since the Mid and High buckets are developed based on thisbucket. Thus, if one factor is changed then the overall impact on the outcomes andthe relationships between factors needs to be considered.

22

The 0.04 boundary from the G-SII assessment methodology can be equivalently represented as 200% of theaverage score (of 0.02) over the full set of participating insurers. Similarly the 0.06 boundary can be
represented as 300% of the average score. For clarity, the designation scores that lead to a G-SII being put
into the Low, Mid and High buckets are bucket are [0, 0.04), [0.04, 0.06), and [0.06,1.00) respectively.

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78.

In coming to its views on the relativity of the factors within and between the buckets,
the IAIS also considered the cumulative factors that would be applied to the underlying
exposures in the BCR (noting that the HLA required capital formula applies its factors
to the BCR2015 required capital outcomes, and not to the underlying exposure used in
obtaining the BCR2015 required capital amounts).

79.

The IAIS has determined that the HLA factors applied to the BCR2015 required capitalfor Traditional Life insurance, Traditional Non-Life insurance and Assets should be thesame. It is deemed that their BCR2015 required capital component reflects the samelevel of risk in the context of systemic risk.

80.

The degree of additional emphasis on NT and NI activities (and components of theBCR) is a key consideration in the HLA design. NT and NI activities of G-SIIs are
regarded as those most likely to cause or amplify systemic risk events. Accordingly, it
is appropriate for such activities to be given greater weight in the HLA formula.
However, as indicated previously, other activities conducted by G-SIIs, as reflected in
the G-SII Assessment Methodology indicators, may also cause or amplify systemic risk.

81.

The IAIS has determined that the HLA factor applied to the BCR2015 required capital for
NT should be two times that applied in the case of Traditional Insurance and Assets as
this relativity is regarded as achieving the most appropriate balance between risk
sensitivity, complexity and dispersion.

82.

The IAIS has determined that the HLA factor applied to the BCR2015 required capital for
NI-RB should be the linked to the HLA factor applied to G-SIBs in the lowest banking
bucket. This is a circumstance in which a current global sectoral requirement from a
non-insurance sector is reflected in the insurance sector’s HLA required capitalamount. The decision to reflect banking sector outcomes leads to different approach todetermine the factors to be used in the higher buckets (above the Low bucket).

83.

The IAIS has decided that it is appropriate to apply the level of HLA from the lowest
banking bucket (for G-SIBs) to the Mid Bucket. Then, reflecting the overall approach offactors in the Mid bucket being 50% higher than those in the Low bucket, the IAIS
determined the factor for the Low Bucket. In terms of the High bucket the IAIS has
followed the banking bucketing approach and applied the banking HLA factor from thesecond lowest banking bucket.
The specific outcomes of this are that, for NI–RB:•

The HLA factor for the Mid bucket is 12.5%. This follows from the lowest banking
bucket having a 1% of RWA uplift on an 8% RWA base (1 of 8 is 12.5%).

•

The HLA factor for the Low bucket is then 12.5% divided by 1.5. This gives 8.33%,
which is rounded to 8.5%.

•

The HLA factor for the High bucket is 18.75%. This follows from the second lowest
banking bucket having a 1.5% of RWA uplift on a 8% RWA base (1.5 of 8 is
18.75%).

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84.

Once an insurer has been designated as a G-SII the question of whether its banking
activities would have independently and separately led to it being designated as a GSIB is not relevant. However, some recognition of the fact that regulated banking
activities conducted by G-SIIs are not typically as large as those conducted by a G-SIB
is warranted, so the lower factor in the Low bucket is appropriate.

85.

The IAIS has determined that the HLA factor applied to the BCR required capital for NIUB 23 should be linked to the HLA factors applied for regulated banking, but that itshould take the regulated banking factors from the next highest bucket. That is, for the
Low bucket the regulated banking factor from the Mid bucket is used, and the factor for
the Mid bucket is taken from the High bucket for regulated banking. The factor for theHigh bucket is then based on the G-SIB factor in the next G-SIB bucket.

86.

This step up in HLA factors for unregulated banking relative to regulated banking is apragmatic way of reflecting the lack of risk mitigation through regulation in theunregulated banking sector.

87.

The IAIS has determined that the HLA factor applied to the BCR2015 required capital for
NI-AUM should be the same as that applied to NT.

88.

To avoid misinterpretation, it is noted that the HLA exposure for the NI-AUM charge is
the BCR required capital obtained by multiplying the BCR factor by the 3 year averageof gross income. In general it is considered unlikely that such gross income will exceed
1% of the assets under management. Consequently the HLA charge for assets undermanagement is 2 – 3 basis points. 24

23

For the purposes of BCR and HLA, ‘Unregulated banking activities’ are: financial activities that are conducted
outside of a regulated insurance company or regulated banking subsidiary. Unregulated banking business isconducted from a subsidiary to which no regulatory capital requirement is applied. All financial activities
conducted from unregulated entities should be included in unregulated banking business. For example,
aircraft leasing carried out by a non-regulated subsidiary should be considered as unregulated banking.
Activities
thatclassify
asshadowbanking
accordingto
FSB's
definition(http://www.financialstabilityboard.org/publications/r_130829c.pdf) should be considered unregulated banking
activities, regardless of their legal form.

24

A numerical example illustrates this. Assume 1,000 units of assets under management. Gross income is thentaken as 10 units. The BCR2014 charge is 12% of this, or 1.2 units. Note this 12% is provided by Basel II
requirements and is not related to HLA Factors. The BCRUplift, then contributes another 0.4 units. Using the
Mid bucket HLA Factor of 12% then contributes, approximately, another 0.3 units. The total BCR+HLA charge
is therefore just under 2 units compared to the 1,000 units of asset under management. This approximately
20 basis point charge can be considered relatively low (as shown by considering the impact of a unit pricing
error of magnitude 30 to 50 basis points).

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89.

It is noted that the FSB, in cooperation with IOSCO and other relevant standard-setting
bodies, have commenced work to develop within the SIFI policy framework theincremental policy measures needed to address the systemic risks posed by Non-Bank
Non-Insurance (NBNI) SIFIs. In the interim, until outcomes from this work are available,
the IAIS will continue to base its approach on that given in the BCR Document 25 for the
BCR2014. If more appropriate globally comparable regulatory capital requirements are
implemented, the IAIS will review them and consider their application to the BCR and
HLA.

90.

The IAIS has determined that the HLA factor applied to the BCR2015 required capital for
NI-O should be the same as that applied to NT. This maintains parity of treatment interms of HLA required capital between the NI-AUM and NI-O sectors and the IAIS does
not consider it appropriate to differentiate between them at this time.

4.6

Relativity between HLA factors

91.

The following table summarises the relativities between the factors in each bucket in
Table 4.1. The HLA factors in the buckets are reproduced by multiplying the relativities
by 6%, 9% and 13.5% for the Low, Mid and High buckets, respectively. These values
follow from starting with 6% (from the Low bucket) and applying the factor of 1.5 tomove up from one bucket to the next bucket as described in section 4.4.

25

That is, currently, the standard indicator method for addressing operational risk of asset management activities
in Basel II (See Paragraph 654 of the Basel II Comprehensive Version http://www.bis.org/publ/bcbs128.pdf).
Currently this is 12% of gross income from such activities, but may be reviewed by the BCBS.

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Table 4.2: Relativity between HLA factors in each bucket
BCR required
capital exposure

Relativity between
HLA factors

Comment

TLBCR:

1

See paragraph 79

TNLBCR:1

See paragraph 79

ABCR:

1

See paragraph 79

NTBCR:

2

See paragraph 81

NI-RBBCR:

1.4

See paragraph 83. Using the Low bucket,
8.5% / 6.0%, approximately 1.4

NI-UBBCR:

2.08

See paragraph 85. Using the Low bucket,
12.5% / 6.0%, approximately 2.08

NI-AUMBCR

2

See paragraph 87

NI-OBCR:2

See paragraph 90

92.

Formulas for HLA required capital are given in Annex E.

4.7

Assessing the HLA formula against the HLA Principles

93.

The HLA formula was assessed against the HLA Principles as described below:•

HLA Principle 1 (Comparability): The HLA formula produces results which arecomparable, since the exposure measures to which the formula is applied are the
BCR2015 required capital amounts. The BCR was developed by the IAIS in 2014 to
be a comparable measure of required capital across G-SIIs. As stated in the 2014
BCR document, the BCR serves as a comparable basis for the application of
proposed HLA requirements.

•

HLA Principle 2 (G-SII risks): The use of buckets, noting the Low and Mid buckets
are currently populated, reflects all of the components of the G-SII designation
process and the risks it captures. Increased emphasis on the NT and NI
components of the BCR reflects all of the components of the BCR risks but with ahigher weighting on those risks regarded as being more systemically important.

•

HLA Principle 3 (Internalise costs): The HLA formula achieves a material degree ofinternalising costs.

•

HLA Principle 4 (Resilient): The HLA structure and factors are intended to work
effectively in a stressed environment, especially reflecting the volatility of capital
resources. This feature will be assessed carefully during annual field testing,including consideration of results from the application of stresses to relevant
components of the balance sheet.

•

HLA Principle 5 (Going concern): The BCR2015 achieves a “going concern” level ofrequired regulatory capital while a lower BCRUplift would be less likely to achievethat level.

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HLA Principle 6 (Quality of capital): The HLA structure requires the highest qualityof capital to cover the HLA required capital.

•

HLA Principle 7 (Pragmatic): The use of designation scores and the BCR
components in the HLA formula strikes an appropriate balance between granularity
and simplicity without the need for ceilings or floors.

•

HLA Principle 8 (Consistent): The factors are expected to produce consistent HLA
amounts over time and over the range of insurance and non-insurance entities they
will need to cover. The HLA formula produces outcomes that are more consistentthan if higher emphasis is placed on NT and NI as the full BCR2015 is morecomparable between G-SIIs than the NT and NI components of the BCR2015 alone.

•

HLA Principle 9 (Transparent): The HLA structure and factors provide a transparent
framework for G-SIIs and other interested parties, within the current confidentiality
constraints, at least to the same degree of transparency from the G-SII assessment
methodology that is used for allocation of G-SIIs to buckets.

•

HLA Principle 10 (Refinement): The HLA structure and factors provide a flexible
framework that could be easily refined over time. For example, it provides thecapacity to be recalibrated to a higher or lower level of emphasis on NT and NI, orto adjust for any potential revisions to the G-SII assessment methodology(especially in relation to the scoring system and allocation of G-SIIs to buckets) or
NT and NI definitions.

4.8

Impact of BCRUplift and HLA

94.

Table 4.3 provides some examples of the impact of the rescaling on a selection offactors due to the BCR and HLA. The full list of the rescaled BCR2014 factors after the
BCRUplift and HLA is given in Annex D. These rescaled factors reflect the cumulative
impact, in terms of required capital, of the BCR2015 and the HLA when applied to theunderlying BCR exposures (as distinct to the BCR2015 required capital amounts
determined by the BCR calculation).

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Table 4.3: Examples of cumulative uplifted BCR and HLA Factor values for
insurance activities
BCR segment

BCR proxymeasure for risk
exposure

BCR2014
Factor value(αBCR 2014 =1.00)

BCR Factor
value

Cumulative BCR
and HLA Factor(αBCR = 1.33)(Mid Bucket)

0.60%

0.80%

0.87%

6.3%

8.4%

9.15%

Notional Value

1.2%

1.6%

1.89%

Fair Value

0.70%

0.93%

1.015%

Traditional Life (TL)
Participatingproducts

Net Current
Estimate

Traditional Non-life (TNL)
Property

Premium Measure

Non-Traditional (NT)
Variable annuities
Assets (A)Credit investment grade

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5

HLA capital resources

5.1

BCR and HLA capital resources

95.

The IAIS has determined that, for the purposes of the development of the HLA, thedefinitions of Core and Additional capital used for BCR purposes will apply to the HLA.
That is, the quality of capital resources required to support the BCRUplift will be thesame as for the BCR2014. In particular, qualifying Additional capital cannot exceed 50%
of BCR2015 required capital.

96.

The HLA is to be met by the highest quality capital. In the context of the above
discussion this means Core capital as defined for BCR purposes.
Annex C provides
further detail on the capital resources that qualify as Core and Additional for BCR andHLA purposes. 26

97.

The BCR framework contains a limit on the amount of Additional capital resources thatcan be used to meet BCR required capital. That is, qualifying Additional capital cannot
exceed 50% of BCR required capital.

98.

For those G-SIIs that reach the limit in terms of use of Additional capital to meet BCR
required capital, there is an incentive to raise Core capital as opposed to Additional
capital since doing so will have a positive impact on the BCR capital ratio. Raisingfurther Additional capital once the limit has been reached will not improve the BCR
capital ratio.

99.

The IAIS will also consider how, prior to HLA implementation, a transition of existing
financial instruments may be most appropriately addressed.

100. When the HLA is reviewed to change its foundation to the ICS, the capital resources for
HLA purposes will also be reviewed. The annual review process for BCR and HLA,
which will commence in 2016, may also lead to some refinement of the capital
resources for BCR and HLA purposes.
5.2

Transition period for Uplifts

101. In section 3.4 it was indicated there is a three year transition period for reporting the
uplifts from the BCR2014 to the BCR2015 and that during the transition period thecalculation of the HLA Insurance component and the HLA NI component will reflect thefull amounts computed for the BCR2015.
102. The reporting of capital resources to support the BCR and the HLA will continue toreflect the total of the capital resource a G-SII has available, but the HLA ratio will becomputed to reflect the transition period required capital amounts.

26

Annex C of this document is not identical to Annex D of the BCR Document. Changes have been made to
improve clarity reflecting experience from IAIS field testing. There are no changes of substance or intent. In
the case of a perceived difference in meaning, the meaning from Annex C of this document should be used.

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6

Impact on G-SIIs

6.1

Computing BCR and HLA required capital amounts

103. The average BCR required capital, over the set of G-SIIs (as designated in 2013 and2014) is, by design, approximately the same as the average PCR. It is acknowledgedthat PCRs are not considered to be sufficiently globally comparable to use as afoundation for HLA. This is illustrated by looking at the ratios of BCR2015 and BCR2015
plus HLA to PCR, that is, BCR2015 required capital (or BCR2015+HLA required capital)
divided by PCR. 27
Averaging over the 2013 and 2014 results, the ratio of BCR2015 required capital to PCR
is 100% for G-SIIs and 90% for all Volunteers (these numbers are rounded to thenearest 5%).
104. Averaging over the 2013 and 2014 results, the ratio of (BCR2015 + HLA) required capitalto PCR is 110% for G-SIIs and 100% for all Volunteers (these numbers are rounded to
the nearest 5%). For HLA calculations all Volunteers that are not G-SIIs have beentreated as if they are in the lowest HLA bucket. Note the calculations for “AllVolunteers” are illustrative since neither the BCR nor the HLA are intended to be
applied to insurers that are not G-SIIs.
105. For specific BCR2014 required capital calculations, the factors and the exposures towhich they apply are provided in Annex D. These match those included in the BCR
Document. Note these BCR factors do not include the uplift required to bring the
BCR2014 up to the BCR2015.
6.2

HLA required capital dispersion between G-SIIs

106. The relative impacts of BCRUplft and HLA in terms of the BCR2014 are, on average overthe set of designated G-SIIs, approximately as follows:•

BCRUplift is approximately 33% of BCR2014.

•

HLA is approximately 13% (10% divided by 75%) of BCR2014.

107. It is useful to provide some examples of the impact of the HLA required capital amount.
To ensure confidentiality, calculations are made for hypothetical G-SIIs. Specifically,
the outcomes computed do not relate to any actual G-SII.
108. These hypothetical examples of hypothetical G-SIIs, in terms of their BCR required
capital exposures as used for the HLA calculations, are provided in Annex F. These
are all presented as a proportion of the BCR2015. Comments on results from thesecalculations include:•

27

Results in the Low bucket range from approximately 6.5% to 9.5% of BCR2015.

For clarity, note the BCRs and PCRs are at a group level.

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6.3•

Results in the Mid bucket range from approximately 10.0% to 14.0% of BCR2015.

•

Over the two populated buckets results vary from approximately 6.5% toapproximately 14% of the BCR2015.

•

Results in the High bucket range from approximately 14.5% to 20.0% of BCR2015.
Note that the High bucket is empty (based on G-SII designations).

•

There is no “cross-over” between the Low and Mid buckets, or between the Mid
and High buckets.

BCR+HLA Ratio

109. The combined BCR and HLA required regulatory capital status of a G-SII is captured
by its BCR+HLA ratio:
BCR+HLA Ratio = Total Qualifying capital resources (for BCR and HLA)BCR2015+HLA required capital
The Total qualifying capital resources for the BCR and HLA are:
Core capital + min (Additional capital, 50% BCR).
110. Averaging over the 2013 and 2014 results, the BCR+HLA Ratio is 260% for G-SIIs and305% for all Volunteers (these numbers have been rounded to the higher 5%). As
above, for HLA calculations all Volunteers that are not G-SIIs have been treated as if
they are in the lowest HLA bucket.

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7

Operational matters

7.1

HLA interaction with other IAIS reviews

111. The HLA has been developed on the basis of the current established and applied G-SII
Assessment Methodology and the definitions of NT and NI activities.
112. The IAIS is currently reviewing some aspects of the G-SII Assessment Methodology
and the definitions of NT and NI activities.
113. If future changes are made to the G-SII Assessment Methodology and/or the definitionsof NT and NI activities that impact the HLA, these changes will be reviewed andamendments to the HLA design incorporated as appropriate.
7.2

BCR and HLA review process

114. The design and calibration of the BCR will be monitored and reviewed by the IAIS and,if appropriate, refined. This review and refinement process will be informed by fieldtesting, which is scheduled to continue up to and including 2018.
115. The review and refinement process will include (but not be limited to) consideration of:•

Impact of outcomes from review of NT and NI activities.

•

Impact of outcomes from review of G-SII Assessment Designation Methodology,
including the determination of buckets used for HLA required capital purposes.

•

How appropriate transitions for existing financial instruments may be managed interms of their allocation as Core or Additional capital resources for BCR and HLA
purposes.

•

Review of analysis from ongoing IAIS field testing.

•

Review of interaction between BCRUplift and HLA with sectoral capital requirementsfrom non-insurance sectors, including both regulated and unregulated banking
activities, assets under management and NI-O activities.

•

Assessment of the appropriateness of the BCR and HLA factors and theirrelativities.

•

HLA Principle 4 (Resilience) and the behaviour of the BCR and HLA in varying
economic conditions, including assessment of potential volatility and procyclicality.

116. The review and refinement process used for the HLA will be the same as that used for
the BCR as they are interlinked and should be considered together. Consequently, theimpact of any changes made should be considered in the overall context of the BCR
and HLA.
117. The IAIS intends to review the parameters for the BCR and HLA required capitalamounts on an annual basis and recommend any changes, if these are deemednecessary.

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7.3

HLA reporting process

118. The same confidential reporting process as used for BCR will be applied for the HLA.
7.4

Field testing

119. The development of the HLA has been informed by field testing in 2014 and 2015.
120. Thirty-four volunteer insurance groups (including all 9 G-SIIs designated in 2013 and2014) participated in the 2014 and 2015 field testing exercise. 28 The data collected inboth years (reflecting end of financial year dates in 2013 and 2014 respectively) wasused to inform the HLA design, specific factors and calibration level.
121. Future BCR and HLA refinements may also be informed by field testing in 2016 andfollowing years.
7.5

HLA Interaction with the ICS

122. The IAIS has indicated that when the ICS is developed, the HLA will be reviewed andits foundation changed from the BCR to the ICS. This may then require a review of the
HLA, both in terms of its calibration and structure.
123. The current IAIS timeline to review the HLA, for the purpose of replacing the BCR with
the ICS as its foundation, is subsequent to the completion of the development of the
ICS in 2019.

28

The group of volunteers was not the same in 2014 and 2015, however in both years the group participated in
the exercise covered a wide range of products and geographical markets.

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Annex A: Glossary
Abbreviation

Meaning

Additional capital

A category of capital resources as defined for BCR and HLA purposes

BCBS

Basel Committee on Banking Supervision (also Basel Committee)

BCR

Basic Capital Requirements

BCR2015

Refers to the current BCR required capital

BCR2014The BCR required capital as specified in the BCR Document of October
2014

BCR Document

The document published by the IAIS on 23 October 2014 titled
Basic Capital Requirements for Global Systemically Important Insurers

BCR Capital
Resources

This is the amount of qualifying capital resources for BCR purposes

BCR Required
CapitalThis is the amount of required capital to satisfy the BCR

BCRUplift

The uplift applied to the previous specification of the BCR required
capital, BCR2014, to get to the current BCR required capital. That is:
BCR2015 = BCR2014 + BCRUplift

ComFrame

The IAIS Common Framework for the Supervision of Internationally
Active Insurance Groups

Core capital

A category of capital resources as defined for BCR and HLA purposes

FSB

Financial Stability Board

G-SIFI

Global Systemically Important Financial Institution

G-SIB

Global Systemically Important Bank

G-SII

Global Systemically Important Insurer

G-SII Policy
Measures

The document published by the IAIS in July 2013 titled
Global Systemically Important Insurers: Policy Measures

G20

Group of Twenty Countries

HLA

Higher Loss Absorbency

HLA Required
CapitalThis is the amount of required capital to satisfy the HLA

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IAIG

Internationally Active Insurance Group

IAIS

International Association of Insurance Supervisors

IASB

International Accounting Standards Board

ICPs

IAIS Insurance Core Principles

ICS

Risk–based global Insurance Capital Standard

NI

Non-Insurance, as specified in the BCR Document

NT

Non-Traditional insurance as specified in the BCR Document

NTNI

Non-Traditional Insurance and Non-Insurance combined

PCR

Prescribed Capital Requirement as defined by ICP 17

RWA

Risk Weighted Assets as specified by the BCBS for Basel III standard
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Annex B: HLA Principles
A set of ten HLA Principles to support the development of the HLA was published by the IAIS
in September 2014. 29 These, with their explanatory comments, are reproduced below:“The following principles will be followed in the development of Higher Loss Absorbency(HLA) for Global Systemically Important Insurers (G-SIIs).
HLA Principle 1 – Comparability. Outcomes should be comparable across jurisdictions.
This implies the need to minimise distortions, including those arising from differing levels ofconservatism included in valuation or other relevant processes or requirements. The level of
discretions that may be applied or introduced should be minimised across jurisdictions andover time. ‘Comparable’ implies results should be similar and consistent across jurisdictions,but does not require that they be identical.
HLA Principle 2 – G-SII risks. The HLA should reflect the drivers (but is not restricted toonly those drivers) of the assessment of G-SII status.
These drivers are indicative of the risks intended to be addressed by the HLA. The HLA
should reflect individual characteristics of each G-SII.
HLA Principle 3 – Internalise costs. The failure or distress of a G-SII may result in costs tothe financial system and overall economy. The HLA should internalise some of these costs
that are otherwise external to that G-SII.
G-SIIs should be required by their group-wide supervisors to hold higher levels of regulatory
capital than would be the case if they were not designated as G-SIIs. The HLA should be set
at a level that offsets any advantage that may be expected to arise from the G-SII
designation. Through internalising external costs, HLA may lead to a reduction in systemic
activities as they become more expensive and therefore less attractive.
HLA Principle 4 – Resilient. HLA should work, and remain valid, in a wide variety of
economic conditions (including a stressed macro environment).
In order to reflect the impact of major drivers of economic experience that are relevant to thescope of HLA, the adopted approaches should be able to be tested against historic data andcircumstances.

29

See http://iaisweb.org/index.cfm?event=getPage&nodeId=25233 and then the
Macroprudential Policy & Surveillance” section under the “Supervisory Material” tab.

“Financial

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HLA Principle 5 – Going concern. The HLA, and its foundation, assume G-SIIs are ‘going
concerns’.
In practice this requires that the capital requirement given by the sum of the foundation
requirement and the HLA requirement is set reflecting a ‘going concern’ perspective, not a‘gone concern’ perspective. The current foundation for the HLA is the BCR, but it is intended
to replace the BCR with the ICS when the ICS is developed.
HLA Principle 6 – Quality of capital. The HLA capital requirement is to be met by the‘highest quality capital’.
HLA Principle 7 – Pragmatic. The design of the HLA needs to be pragmatic and practical,
with an appropriate balance between granularity and simplicity.
The form of presentation of the HLA, focusing on meaningful communication to external
parties, should be practical yet sufficiently granular for the results to be fit for purpose. The
HLA should utilise the minimum number of parameters and data requirements while attaining
valid and robust outcomes with a focus on material issues.
HLA Principle 8 – Consistent. The structure of the HLA should be consistent and be
applicable over the range of insurance and non-insurance entities it will need to cover andover time.
HLA Principle 9 – Transparent. The level of transparency, particularly with regard to thefinal results provided and the use of public data, should be optimised.
HLA Principle 10 – Refinement. The HLA will be refined in light of experience and data
gathered by the IAIS in the course of Field Testing exercise.”

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Annex C: Qualifying capital resources 30
1.

For HLA and BCR purposes, the IAIS defines Qualifying capital resources as either
Core or Additional.

2.

The G-SII’s Core capital is comprised of qualifying financial instruments and capitalelements other than financial instruments that contribute to financial strength, absorb
losses both on a going-concern and winding-up basis and otherwise contribute tosurvival through periods when the G-SII is under stress.

3.

The G-SII’s additional capital is comprised of qualifying financial instruments andcapital elements other than financial instruments that protect policyholders in windingup. The key characteristics of capital instruments that qualify as additional capital aresubordination and availability to absorb losses in winding-up.

4.

Qualifying capital resources include the following:

Financial Instruments
5.

Financial instruments are classified as Core capital if all of the following criteria aremet:•

The instrument is fully paid-up and available 31 to absorb losses.

•

The instrument is subordinate to the rights of policyholders in an insolvency or
winding-up.

•

The instrument is perpetual (i.e. it does not have a maturity date and it does notcontain a step-up or another incentive to redeem).

•

The instrument is only redeemable at the option of the issuer after a minimum of
five years from the date of issue (i.e. the instrument is not retractable by the holder)
and the redemption is subject to prior supervisory review or approval.

•

The G-SII has full discretion at all times to cancel distributions (i.e. dividends andcoupon payments are non-cumulative). Non-payment is, therefore, not an event ofdefault.

•

The instrument does not have fixed serving costs (e.g. fixed interest payments andprincipal repayments).

•

The instrument is free from charges, claims or other hindrances and does notinclude a right by the holder to receive compulsory payments.

30

This Annex is not identical to Annex D of the BCR Document of October 2014. Changes have been made to
improve clarity reflecting experience from IAIS field testing. There are no changes of substance or intent. In
the case of a perceived difference in meaning, the meaning from this Annex should be used.
31
Availability and subordination may be encumbered if there is any arrangement or connected transaction thatprevents the financial instrument from meeting the criteria.

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6.

7.

32

•

The instrument does not have distributions that are tied or linked to the credit
standing or financial condition of the G-SII or another related entity, such that those
distributions may accelerate insolvency.

•

The instrument is neither undermined nor rendered ineffective by encumbrances (inparticular, policyholder priority order should not be compromised by guarantees or
security arrangements given by either the G-SII or another related entity for the
benefit of investors).

Where financial instruments do not meet the criteria for classification as Core capital,
they may be classified as Additional capital if all of the following criteria are met:•

The instrument is fully paid-up 32 and available to absorb losses.

•

The instrument is subordinate to the rights of policyholders in an insolvency or
winding-up.

•

The instrument has an initial maturity of at least five years, where the instrument’s
limited protection as it nears maturity is captured either:o

By the notional amount of the instrument being amortised on a straight-line
basis in the final five years to maturity; oro

Due to the existence of a requirement for the G-SII to suspend repayment orredemption if it is in breach of its capital requirement or would breach it if the
instrument is repaid or redeemed.

•

Redemption of the instrument is subject to review or approval from the relevantsupervisor.

•

The instrument does not have distributions that are tied or linked to the credit
standing or financial condition of the G-SII or another related entity, such that those
distributions may accelerate insolvency.

•

The instrument is neither undermined nor rendered ineffective by encumbrances (inparticular, policyholder priority order should not be compromised by guarantees or
security arrangements given by either the G-SII or another related entity for the
benefit of investors).

•

The instrument does not give holders rights to accelerate the repayment of futurescheduled principal or coupon payments, except in bankruptcy, insolvency,
winding-up or liquidation.

G-SIIs will only be permitted to include non-paid-up capital items (e.g. unpaid
preference shares, unpaid subordinated debt, letters of credit, guarantees) in additional
capital where those items contain legally binding commitments that increase theamount of qualifying paid-up capital at the discretion of the G-SII, at any time. Nonpaid-up capital items are limited to an amount not greater than 10% of BCR. Non-paid-

A proportion of Additional capital may be non-paid-up. See paragraph 7 below.

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up capital items that qualify as additional capital are subject to supervisory review orapproval.
Elements other than financial instruments
8.

Core capital elements other than financial instruments may include, for example:•

Retained earnings•

Surplus funds•

Contributed surplus•

Paid-up initial funds (e.g. mutual entities)•

Non-participating account (e.g. mutual entities)•

Participating policyholders’ equity or account (e.g. joint stock entities)•

Accumulated Other Comprehensive Income (AOCI)•

Margins Over Current Estimates (MOCE)/Reserves included in GAAP equity orotherwise allocated to equity.

9.

Capital instruments issued by a fully consolidated regulated financial subsidiary of the
G-SII to third-party investors (minority interests) may be recognised as consolidatedCore capital of the G-SII only if the instrument meets or exceeds all of the criteria forclassification as Core capital.

10.

Capital instruments issued by a fully consolidated regulated financial subsidiary of the
G-SII to third-party investors may be recognised as consolidated Additional capital of
the G-SII only if the instrument meets or exceed all of the criteria for classification as
Additional capital.

Adjustments, exclusions and deductions
11.

The following items are excluded or deducted from Core capital: 33a) Goodwill.
b) Intangible assets, including computer software intangibles.
c) Each net defined benefit pension plan asset that cannot be easily and promptly
accessed for the own use and on-going operations of the G-SII.
d) Deferred Tax Assets (DTAs) that rely on the future profitability of the G-SII. DTAs
may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and33

Items (a) to (c) should be net of associated DTLs that would be extinguished if the item becomes impaired orderecognised under the valuation approach. DTLs are permitted to be netted against DTAs provided that theyexclude amounts that have been netted against items (a) to (c).

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DTLs relate to taxes levied by the same taxation authority and offsetting ispermitted by the relevant taxation authority.
e) Reciprocal cross holdings, arranged either directly or indirectly between financial
institutions and that artificially inflate the Core capital position of the G-SII.
f)

Direct investments in own shares and in own Core capital financial instruments.

g) Reinsurance assets arising from arrangements deemed to constitute non-qualifying
reinsurance or arrangements that are either not legally binding or not executed
within a six-month grace period from the effective date of reinsurance coverage.
Non-qualifying reinsurance refers to arrangements:•

With entities providing reinsurance that are neither regulated nor subject to riskbased solvency supervision, including appropriate capital requirements; or•That do not provide a sufficient transfer of risk.

h) Total secured (encumbered) assets in excess of the sum of:

i)

12.

13.

•

The value of the G-SII’s on-balance sheet liabilities secured by the(encumbered) assets; plus•

The value of the G-SII’s incremental supervisory capital requirements forliabilities secured by the (encumbered) assets; plus•

The value of the G-SII’s incremental supervisory capital requirements forsecured (encumbered) assets.

No deduction is required for encumbered assets relating to off-balance sheet
securities financing transactions (e.g. securities lending and borrowing, repos andreverse repos) that do not give rise to any liability on the balance sheet.

The following items are excluded or deducted from Additional capital:•

Reciprocal cross holdings, arranged either directly or indirectly between
financial institutions and which artificially inflate the Additional capital position of
the G-SII•

Direct investments in own additional capital financial instruments.

The following items, though excluded or deducted from Core capital, are added back or
included in Additional capital:•

Realisable value of net DTAs that rely on future profitability•

Realisable value of computer software intangibles•

50% of each net pension plan asset.

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Annex D: Cumulative BCR factors by BCR segment
The following tables set out the cumulative impact of the BCRUplift and the HLA on eachsegment for the BCR calculation. Table D.1 reflects the Low HLA bucket. Table D.2 reflects
the Mid HLA bucket. The High bucket is not shown (it is currently unpopulated). The
underlying BCR Factors are not changed from those published in the BCR Document. The
cumulative factors, moving to the right across the tables, show the impact of first the BCRUplift
and then the additional impact of the HLA.
The BCR+HLA factor are the full factors (and do not reflect any transition considerations) thatwould be applied to the underlying BCR exposure (the ‘BCR proxy measure for risk
exposure’ given in the tables) in order to compute the BCR+HLA required capital attributable
to the specific BCR segment.
Please note that the NI banking regulated result is not factor driven. It is the maximum of two
numbers that reflect current banking sectoral requirements (for each G-SII). The following
tables have been constructed assuming the outcome of this maximum is the 3% Leverage
Ratio amount.
Please also note that numbers in the tables have been rounded to avoid the impression of
spurious accuracy.

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Table D.1: Cumulative impact of BCRUplift and HLA on underlying BCR Factors. HLA
Low Bucket
BCR segment

BCR proxymeasure for risk
exposure

BCR2014
Factorvalue

BCR
Factorvalue(αBCR2014 =1.00)(αBCR =
1.33)

HLA
Low
Bucketuplift%HLA
component

BCR+HLAfactors(BCR Factor
value * HLA
uplift%)(BCR Factor
Value +HLA
Component)

Traditional Life (TL)
Protection life

Net Amount At Risk

0.06%

0.080%

6.0%

0.005%

0.085%

Participating products

Net Current Estimate

0.60%

0.80%

6.0%

0.05%

0.85%

Annuities

Net Current Estimate

1.2%

1.6%

6.0%

0.10%

1.7%

Other life

Net Current Estimate

0.60%

0.80%

6.0%

0.05%

0.85%

Property

Premium Measure

6.3%

8.4%

6.0%

0.50%

8.9%

Motor

Net Current Estimate

6.3%

8.4%

6.0%

0.50%

8.9%

Casualty

Net Current Estimate

11.3%

15.0%

6.0%

0.90%

16.0%

Other non-life

Net Current Estimate

7.5%

10.0%

6.0%

0.60%

10.6%

Variable annuities

Notional Value

1.2%

1.6%

12.0%

0.19%

1.8%

Mortgage insurance

Risk in Force

4.0%

5.3%

12.0%

0.64%

6.0%

GICS & Synthetic GICS

Notional Value

1.1%

1.46%

12.0%

0.18%

1.64%

Other non-traditional

Net Current Estimate

1.3%

1.73%

12.0%

0.21%

1.94%

Credit - investment grade

Fair Value

0.70%

0.93%

6.0%

0.06%

1.0%

Credit - non investment
grade

Fair Value

1.8%

2.4%

6.0%

0.14%

2.54%

Equity, real estate & noncredit investment assets

Fair Value

8.4%

11.2%

6.0%

0.67%

11.8%

Banking – regulated (Seenote above)

Leverage ratio
exposure measure

3.0%

3.0%

8.5%

0.25%

3.25%

Banking – unregulated

Leverage ratio
exposure measure

3.0%

4.0%

12.5%

0.50%

4.5%

Assets under management

3 year average grossincome

12.0%

16.0%

12.0%

1.9%

17.9%

Traditional Non-life (TNL)

Non-Traditional (NT)Assets (A)Non-Insurance

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Table D.2: Cumulative impact of BCRUplift and HLA on underlying BCR Factors. HLA
Mid Bucket
BCR segment

BCR proxymeasure for risk
exposure

BCR2014
Factorvalue

BCR
Factorvalue(αBCR2014 =1.00)(αBCR =
1.33)

HLA
Mid
Bucketuplift%HLA
component

BCR+HLAfactors(BCR Factor
value * HLA
uplift%)(BCR Factor
Value +HLA
Component)

Traditional Life (TL)
Protection life

Net Amount At Risk

0.06%

0.080%

9.0%

0.007%

0.087%

Participating products

Net Current Estimate

0.60%

0.80%

9.0%

0.07%

0.87%

Annuities

Net Current Estimate

1.2%

1.6%

9.0%

0.14%

1.74%

Other life

Net Current Estimate

0.60%

0.80%

9.0%

0.07%

0.87%

Property

Premium Measure

6.3%

8.4%

9.0%

0.75%

9.15%

Motor

Net Current Estimate

6.3%

8.4%

9.0%

0.75%

9.15%

Casualty

Net Current Estimate

11.3%

15.0%

9.0%

1.35%

16.35%

Other non-life

Net Current Estimate

7.5%

10.0%

9.0%

0.90%

10.9%

Variable annuities

Notional Value

1.2%

1.6%

18.0%

0.29%

1.89%

Mortgage insurance

Risk in Force

4.0%

5.3%

18.0%

0.96%

6.28%

GICS & Synthetic GICS

Notional Value

1.1%

1.46%

18.0%

0.26%

1.72%

Other non-traditional

Net Current Estimate

1.3%

1.73%

18.0%

0.31%

2.04%

Credit - investment grade

Fair Value

0.70%

0.93%

9.0%

0.084%

1.015%

Credit - non investment
grade

Fair Value

1.8%

2.4%

9.0%

0.215%

2.61%

Equity, real estate & noncredit investment assets

Fair Value

8.4%

11.2%

9.0%

1.00%

12.2%

Banking – regulated (Seenote above)

Leverage ratio
exposure measure

3.0%

3.0%

12.5%

0.38%

3.38%

Banking – unregulated

Leverage ratio
exposure measure

3.0%

4.0%

18.8%

0.75%

4.75%

Assets under management

3 year average grossincome

12.0%

16.0%

18.0%

2.9%

18.9%

Traditional Non-life (TNL)

Non-Traditional (NT)Assets (A)Non-Insurance

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Annex E: Formulas for capital requirements
The BCR2014 formula
1. The BCR2014, as specified in the IAIS BCR document, is:where:

4

4

4

3

n

i=1

i=1

i=1

i=1

i=1

BCR 2014 = α �� ai TLi + � bi TNLi + � ci NTi + � di Ai � + � NIi•

α (alpha) is the scalar (set at 100% in 2014) to determine the overall BCR level.

•ai, bi, ci, and di represent the BCR factors applied to the exposures.

•

TLi, TNLi, NTi, and Ai represent the exposures where:o

TLi represent Traditional Life liability exposuresoNTi represent Non-Traditional liability exposuresoo•TNLi represent Traditional Non-Life liability exposures
Ai represent Asset exposures.

NIi reflect the charges for non-insurance activities. These charges may be provided
by sectoral rules – for example, Basel Accord requirements, established by theBasel Committee on Banking Supervision (BCBS).

2. The development of the HLA requires several formulas, for BCR2014, BCRUplift, BCR and
HLA.
It is thus necessary to label parameters and components of formulas
unambiguously. Further, while based on the BCR2014 formula, the BCRUplift, BCR and
HLA formulas focus at a higher level than the BCR2014 formula. In particular, the BCR2014
formula reflects factors and exposures at the level of the individual BCR segments, as
specified in the BCR Document. The other formulas focus at the higher level ofTraditional Life (TL), Traditional Non-Life (TNL), Assets (A), Non-Traditional (NT) and thecomponents of NI.
3. Items in formulas need to carry several pieces of information, the formula they refer to,and the component of the formula they are (signifying the role they play in the formula).
For example, the summary exposure relating to Traditional Life insurance a formula is∑4i=1 ai TLi . The start of its label is TL. To clarify that a TL is part of the BCR2014 Formula,
its label need to include this information. A precise label is therefore TLBCR 2014.
4. Using this approach, the BCR2014 formula can be written as:

BCR2014 = αBCR 2014 * [ TLBCR 2014 + TNLBCR 2014 + ABCR 2014 + NTBCR 2014]+ NI-AUM BCR 2014 + NI-O BCR 2014

+ NI-RBBCR 2014 + NI-UB BCR 2014 ]where:
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𝛼𝛼BCR 2014 is the scalar to determine the overall BCR2014 level. 𝛼𝛼BCR 2014 = 1.00
TLBCR 2014 = ∑4𝑖𝑖=1 𝑎𝑎𝑖𝑖 𝑇𝑇𝑇𝑇𝑖𝑖TNLBCR 2014 = ∑4𝑖𝑖=1 𝑏𝑏𝑖𝑖 𝑇𝑇𝑇𝑇𝑇𝑇𝑖𝑖•NTBCR 2014 = ∑4𝑖𝑖=1 𝑐𝑐𝑖𝑖 𝑁𝑁𝑁𝑁𝑖𝑖•

ABCR 2014 = ∑3𝑖𝑖=1 𝑑𝑑𝑖𝑖 𝐴𝐴𝑖𝑖

NI-RBBCR 2014 is the BCR2014 required capital for Regulated banking•

NI-UBBCR 2014 is the BCR2014 required capital for Unregulated banking•

NI-AUMBCR 2014 is the BCR2014 required capital for Assets Under Management•

NI-OBCR 2014 is the BCR2014 required capital for Other NI business.

•

Note that:•

TLBCR 2014 TNLBCR 2014 NTBCR 2014 and ABCR 2014 do not now refer directly to theunderlying exposure used for in the BCR2014 formula, but to composite exposures of
BCR2014 required capital amounts. These BCR2014 required capital amounts
themselves are determined using a factor-based approach as specified in the BCR
Documents.

•

NI-RBBCR 2014 NI-UBBCR 2014 NI-AUMBCR 2014 and NI-OBCR 2014 are also required capitalamounts. They are specified separately as their derivations may differ.

BCRUplift formulas
5. The approach used for the BCR2014 formula can be used to describe other formulas(BCRUplift, BCR2015 and HLA) unambiguously through changing the subscript ‘2014’ (to‘Uplift’ or ‘2015’ respectively.
6. The values of the TLBCR 2014 TNLBCR 2014 NTBCR 2014 and ABCR 2014 depend on the values ofthe factors, ai, bi, ci, and di, as specified in the BCR document. These BCR2014 factors
are not changed in this document.
7. The BCRUplift is, essentially achieved by increasing the BCR2014 scalar α (alpha) from 1.00
to 1.33. Using the approach shown in above, this gives the following formula for the
BCRUplift:
BCRUplift = 0.33 * [TLBCR 2014 + TNLBCR 2014 + NTBCR 2014 + ABCR 2014]+ NI-RBBCR Uplift+ 0.33 * [ NI-UB BCR 2014 + NI-AUM BCR 2014 + NI-O BCR 2014 ]Note that all the terms in the BCRUplift are specified by applying a multiplier of 0.33 tothe corresponding term from the BCR2014 formula. The only exception is the NI-RBBCR
Uplift term, which is the maximum of two amounts (for each G-SII) less the NI-RBBCR 2014.

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8. Similarly, the BCR2015 formula can be written as:
BCR2015= BCR2014 + BCRUplift= 1.33 * [TLBCR 2014 + TNLBCR 2014 + NTBCR 2014 + ABCR 2014 ] + NI-RBBCR 2015
+ 1.33 * [NI-UBBCR 2014 + NI-AUMBCR 2014 + NI-OBCR 2014 ]= [TLBCR 2015 + TNLBCR 2015 + NTBCR 2015 + ABCR 2015] + NI-RBBCR 2015
+ [NI-UBBCR 2015 + NI-AUMBCR 2015 + NI-OBCR 2015 ]This later formula is used when describing the HLA formula. Note it makes clear thatthe HLA formula is based on the current BCR2015 formula and not on the BCR2014
formula.
These formulas need to be appropriately modified to use different scale factors for the
purposes of transitional BCR reporting.
HLA Formula
9. A generic HLA formula for a specified bucket can be written as the sum over the eight
BCR required capital exposures multiplied by their HLA Factors. When a specific bucket
is used, then the generic “HLA-Bucket” is replaced by “Low”, “Mid” or “High” asappropriate.
HLA= HLA-BucketTL * TLBCR 2015 + HLA-BucketTNL * TNLBCR 2015
+ HLA-BucketNT * NTBCR 2015 + HLA-BucketA * A BCR 2015
+ HLA-BucketNI-RB * NI-RBBCR 2015 + HLA-BucketNI-UB * NI-UBBCR 2015
+ HLA-BucketNI-AUM * NI-AUMBCR 2015 + HLA-BucketNI-O * NI-OBCR 2015

10. It is difficult to provide a single ‘HLA formula’ which takes into account the relationships
between the factors when moving between buckets.
11. When a particular bucket is focused on then the formula above may be simplified. The
HLA factors may then be presented as multiples of a chosen base. For example
consider the Mid Bucket and choose the HLA factor for TLBCR as a base. Denote thisbase as HLA Mid-Factor (it is 9.0%). Then the Mid Bucket formula can be written as:
HLAMid = 0.090 * [ TLBCR 2015 + TNLBCR 2015 + A BCR 2015
+ 2 * NTBCR 2015 + 2 * NI-AUMBCR 2015 + 2 * NI-OBCR 2015
+ 1.4 * NI-RBBCR 2015 + 2.08 * NI-UBBCR 2015]

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Annex F: Sample calculation of BCR2015 and HLA required capitalamounts for hypothetical G-SIIs
1.

2.

The following assumptions are made:•

Each hypothetical G-SII has a BCR2014 of 750 units (this permits comparability
between the hypothetical G-SIIs).

•

Each hypothetical G-SII has a BCRUplift of 250 units. That is, no impact ofregulated banking (or other) caps is reflected in computing the BCR2015 for the
hypothetical G-SII. The BCR2015 for each hypothetical G-SII is therefore 1,000
units.

•The HLA required capital calculation is done for all buckets.

The following hypothetical G-SIIs are considered. They have the following percentage
splits of their 750 units of BCR2014 or 1000 units of BCR2015 required capital:
Table F.1: Percentage split of hypothetical G-SII BCR2014 and BCRUplift required
capital amounts

3.

NI-RB%NI-UB%

NI-AUM%

NI-O%

10

0

0

0

0

45

10

0

0

10

0

15

35

20

0

10

0

0

0

30

30

20

0

0

10

10

E

15

5

25

5

50

0

0

0

F

15

10

25

25

0

25

0

0

G-SII

TL%

TNL%

A%

NT%

A

5

35

50

B

35

0

C

20

D

The required capital outcomes, for both BCR2015 and HLA, by bucket, are thendetermined by summing the products of the HLA factors from Table 4.1 with the
BCR2015 required capital exposures (the percentages in Table F.1 multiplied by the
BCR2015):
Table F.2: HLA required capital amounts for hypothetical G-SIIs

G-SII

BCR2014

BCRUplift

BCR2015

HLA Low Bucket

HLA Mid Bucket

HLA High Bucket

Units

Units

Units

Units

%BCR2015

Units% BCR2015

Units% BCR2015

A

750

250

1,000

66

6.6%

99

9.9%

149

14.9%

B

750

250

1,000

72

7.2%

108

10.8%

162

16.2%

C

750

250

1,000

79

7.9%

118

11.8%

174

17.4%

D

750

250

1,000

84

8.4%

126

12.6%

189

18.9%

E

750

250

1,000

75

7.5%

112

11.2%

168

16.8%

F

750

250

1,000

91

9.1%

137

13.7%

198

19.8%

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End of Document

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