International Association of Insurance Supervisors

Global Systemically Important Insurers:
Policy Measures
18 July 2013

About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganization 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. In addition to active participation of its Members, the IAIS benefits from
input in select IAIS activities from Observers representing international institutions,professional associations and insurance and reinsurance companies, as well as consultants
and other professionals.
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), founding member and co-parentof the Joint Forum, along with the Basel Committee on Banking Supervision (BCBS) and theInternational Organization of Securities Commissions (IOSCO), 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), July 2013.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

Page 2 of 32© IAISCover note
The global financial crisis underscored the interconnected nature of financial firms and thewidespread financial and economic costs of their severe distress or failure as well as withpublic sector interventions for those that were distressed or expected to fail. The crisis also
underscored the need for public authorities to act promptly and proactively to identify
financial firms that are systemically important and to take measures to lessen the impact andreduce the moral hazard associated with public sector interventions and the distress or
failure of such financial firms.
As part of this effort, the International Association of Insurance Supervisors (IAIS) is
participating in a global initiative, along with other standard setters, central banks andfinancial sector supervisors, and under the purview of the Financial Stability Board (FSB) andG20, to identify global systemically important financial institutions (G-SIFIs 1). The focus of
the IAIS’ analysis is in relation to potential Global Systemically Important Insurers (G-SIIs).
The IAIS has developed an assessment methodology for insurance-dominatedconglomerates, insurance groups and any insurers whose distress or disorderly failure,because of their size, complexity and interconnectedness, would cause significant disruption
to the global financial system and economic activity. The IAIS has now also completed theframework of policy measures that should be applied to insurers that are determined to be GSIIs.
Interested parties may wish to consult relevant background papers which are available on
the IAIS, FSB and Basel Committee on Banking Supervision (BCBS) websites, including the
IAIS’ report Insurance and Financial Stability (IFS). 2 Other key papers include:
•

•
•
•

the IMF/FSB/BIS (Bank for International Settlements (BIS) staff report submitted to
the G20 Finance Ministers and Central Bank Governors entitled Guidance to Assess
the Systemic Importance of Financial Institutions, Markets and Instruments 3 (October2009);
the FSB’s recommendations on Reducing the moral hazard posed by systemicallyimportant financial institutions (SIFIs) 4 (October 2010);
the BCBS framework for identifying global systemically important banks (G-SIBs) andrequirements for additional loss absorbency for G-SIBs 5 (November 2011); andthe determination of the first cohort of G-SIBs 6 (November 2011).

1

G-SIFIs are defined by the FSB as “institutions of such size, market importance, and global
interconnectedness that their distress or failure would cause significant dislocation in the global financial
system and adverse economic consequences across a range of countries.” G-SIIs are one class of G-SIFIs.

2

See IAIS (2011) http://www.iaisweb.org/Other-papers-and-reports-46

3

See http://www.imf.org/external/np/g20/pdf/100109.pdf

4

See http://www.financialstabilityboard.org/publications/r_101111a.pdf

5

See http://www.bis.org/publ/bcbs207.pdf

6

See Policy Measures to Address Systemically Important Financial Institutions, November 2011, See
http://www.financialstabilityboard.org/publications/r_111104bb.pdf

Page 3 of 32© IAISGlossary of abbreviations
BCBS

Basel Committee on Banking Supervision

BIS

Bank for International Settlements

CDS

Credit Default Swap

ComFrame

IAIS Common Framework for the Supervision of Internationally Active
Insurance Groups

CMGs

Crisis Management Groups

FSB

Financial Stability Board

G-SIBsGlobal Systemically Important Banks

G-SIFIs

Global Systemically Important Financial Institutions

G-SIIsGlobal Systemically Important Insurers

G20Group of Twenty Countries

GWS

Group-wide Supervisor

HLA

Higher Loss Absorbency or Higher Loss Absorption capacity

IAIGs

Internationally Active Insurance Groups

IAIS

International Association of Insurance Supervisors

ICPs

IAIS Insurance Core Principles

IFS

IAIS report Insurance and Financial Stability

IGT

Intra-group Transactions

Key Attributes FSB’s Key Attributes for Effective Resolution Regimes
LA

Loss Absorbency

MCR

Minimum Capital Requirement

NTNI

Non-traditional insurance and Non-insurance

PCR

Prescribed Capital Requirement

RRPs

Recovery and Resolution Plans

SIE

FSB’s Supervisory Intensity and Effectiveness recommendations

SIFIs

Systemically Important Financial Institutions

SRMP

Systemic Risk Management Plan

Page 4 of 32© IAIS

Contents
Cover note..............................................................................................................................3
Glossary of abbreviations .......................................................................................................4
Executive Summary ...............................................................................................................61.

Introduction .................................................................................................................112.

Overview .....................................................................................................................12

3.

2.1

The supervisory challenges in relation to G-SIIs................................................. 12

2.2

Objectives of G-SII policy measures................................................................... 12

The G-SII policy measures ..........................................................................................13
3.1

Overview ............................................................................................................13

3.2

Definition of Traditional Insurance, Non-Traditional Insurance and financial Noninsurance (NTNI) activities ................................................................................. 13
3.2.1 Traditional insurance activities................................................................... 14
3.2.2 Non-traditional, non-insurance activities .................................................... 14

3.3 Enhanced supervision ...........................................................................................18
3.3.1 General description ...................................................................................18
3.3.2 Systemic Risk Management Plan (SRMP)................................................. 21
3.3.3 Enhanced liquidity planning and management .......................................... 21
3.3.4 Effective Separation of NTNI activities ....................................................... 22
3.3.5 Restrictions and prohibitions...................................................................... 24
3.4 Effective Resolution ...............................................................................................25
3.4.1 Resolution regimes and tools for G-SIIs .................................................... 25
3.5 Loss Absorption (LA) capacity – Applicable to all group activities .......................... 27
3.6 Higher Loss Absorption (HLA) capacity – Applicable to NT and NI activities ......... 27
3.6.1 General description and purpose ............................................................... 27
3.6.2 Methodology for calculating the HLA “uplift” .............................................. 28
3.6.3 Location of HLA .........................................................................................29
3.6.4 Acceptable instruments .............................................................................29
4.

Implementation............................................................................................................31
4.1

Implementation timeframe ..................................................................................31

Page 5 of 32© IAIS

Executive Summary

Financial Stability Board (FSB) framework for G-SIFIs
The FSB framework for reducing the moral hazard and risk to the global financial system
posed by systemically important financial institutions (SIFIs) 7 recommends several policies
which should combine to:••••

Apply more intensive and co-ordinated supervision of SIFIs,
Improve the authorities’ ability to resolve SIFIs in an orderly manner without
destabilising the financial system or increasing taxpayers’ exposure to loss.
Require higher loss absorption (HLA) capacity for SIFIs to reflect the greater risks
that these institutions pose to the global financial system, andApply other supplementary prudential and other regulatory requirements asdetermined in conjunction with the national authorities.

Policy measures
The International Association of Insurance Supervisors (IAIS) has developed a framework ofpolicy measures for global systemically important insurers (G-SIIs) in line with the FSB
recommendations; however, the proposed HLA measures will be subject to further
consultation before they are finalised in 2015 in advance of the proposed implementation
date of 2019. Measures will often require strong cooperation among authorities, including
authorities with responsibility for non-insurance entities. Reference in this document toactions by group-wide supervisors (GWS) should be interpreted as including consultation
with other involved supervisors, possibly via the setup of a supervisory college whereregarded as appropriate within the group-supervision framework.
The framework of policy measures includes:
1) Enhanced supervision
The foundation for G-SII policy measures is the existing IAIS Insurance Core Principles 8(ICPs). The FSB’s Supervisory Intensity and Effectiveness recommendations (SIE
recommendations) 9 form the basis of the IAIS’ approach to enhanced supervision. In
addition, the IAIS Common Framework for the Supervision of Internationally Active Insurance

7

Global SIFIs (G-SIFIs) are defined by the FSB as “institutions of such size, market importance, and global
interconnectedness that their distress or failure would cause significant dislocation in the global financial
system and adverse economic consequences across a range of countries.” Global systemically important
insurers (G-SIIs) are one class of G-SIFIs.

8

Refer to http://www.iaisweb.org/view/element_href.cfm?src=1/13037.pdf or to http://www.iaisweb.org/ICP-online-tool-689

9

See http://www.financialstabilityboard.org/publications/r_121031ab.pdf,
http://www.financialstabilityboard.org/publications/r_111104ee.pdf, andhttp://www.financialstabilityboard.org/publications/r_101101.pdf

Page 6 of 32© IAISGroups (ComFrame) 10 will aim to foster global convergence of regulatory and supervisory
measures and approaches for Internationally Active Insurance Groups (IAIGs), whether or
not they are identified as G-SIIs. ComFrame is not expected to establish specific policy
measures that focus on addressing systemic risk for G-SIIs as such, but rather may provide
a baseline for applying supplemental supervisory measures to address the systemic risks ofa G-SII that is also an IAIG. To that end, the key elements of enhanced supervision for GSIIs are summarised below.

10•

The group-wide supervisor should have direct powers over holding companies toensure that a direct approach to consolidated and group-wide supervision can beapplied. Special attention should be paid to group-wide supervision since G-SIIs aremost likely to take the form of a group and NTNI (non-traditional and non-insurance)
activities are often carried out by separate entities within a group and/or the group
may have significant interconnections to other parts of the financial system. The
supervisor should require G-SIIs to have, in particular, adequate arrangements inplace to deal with liquidity risk management for the whole group, primarily for the
NTNI business, but also for the remainder of the G-SII.

•

The group-wide supervisor should oversee the development and implementation of a
Systemic Risk Management Plan (SRMP) by each G-SII (in addition to a recovery
and resolution plans (RRPs)). The purpose of the SRMP is for the G-SII, under theoversight of the group-wide supervisor, to describe how it will manage, mitigate andpossibly reduce its systemic risk. It is anticipated that the SRMP will be madeavailable to the IAIS in order to evaluate and improve its assessment methodology
going forward. Where feasible and appropriate, the SRMP may include effective
separation of systemically important NTNI activities from traditional insurance
business and/or restrictions or prohibitions of specified systemically important
activities or any other measures.

•

Where separation of NTNI activities is contemplated, it is necessary to ensure theself-sufficiency of the separated entities in terms of structure and financial condition.
Structural aspects of self-sufficiency will likely involve a combination of restructuring
measures and the restriction or prohibition of parental guarantees and cross-default
clauses to ensure that any separation into legal entities is not undermined bycontractual obligations. Self-sufficiency in terms of financial condition means there
should be no capital or funding subsidies, multiple-gearing or double leverage. Anynecessary interconnectedness that remains between the separated entity and otherparts of the G-SII should be addressed by the application of other consequential
measures (e.g. restrictions or HLA).

•

It is the role of the group-wide supervisor to prevent the process of effectively
separating NTNI activities from resulting in the creation of non-regulated financial
entities. Financial entities created in the separation process of separating NTNI
activities should be under oversight of the direct supervisory authority and the groupwide supervisor (although these could be one and the same). Consideration should
be given to any direct or indirect measures imposed by functional supervisors.

ComFrame is the IAIS project to develop a Common Framework for the Supervision of Internationally Active
Insurance Groups by 2013, in order to foster group-wide supervision and global convergence of regulatory
and supervisory approaches. See http://www.iaisweb.org/Common-Framework--765

Page 7 of 32© IAIS2) Effective resolution
In 2011, the FSB published an international standard for resolution – Key Attributes ofEffective Resolution Regimes for Financial Institutions (Key Attributes). 11 The authorities who
supervise G-SIIs and G-SIIs themselves should comply with the Key Attributes. This
standard sets out a range of specific requirements that should apply to any financial
institution that could be systemically significant or critical if it were to fail. The requirementsthat apply to G-SIFIs include the: (i) establishment of Crisis Management Groups (CMGs); (ii)elaboration of recovery and resolution plans (RRPs); (iii) carrying out of resolvability
assessments; and (iv) adoption of institution-specific, cross-border cooperation agreements.
For G-SIIs, effective resolution will take account of the specificities of insurance, including:•••Plans and completed steps needed for the separation of NTNI activities fromtraditional insurance activities (e.g. via effective separation of such NTNI activities),
The possible use of portfolio transfers and run-off arrangements as part of theresolution of entities conducting traditional insurance activities, andThe existence of policyholder protection and guarantee schemes (or similararrangements).
3) Loss Absorption (LA) – Applicable to all group activities

As a foundation for HLA requirements for G-SIIs, the IAIS will as a first step develop
straightforward, backstop capital requirements to apply to all group activities, including noninsurance subsidiaries, to be finalised by the end of 2014.
4) Higher Loss Absorption (HLA) capacity – Applicable to NT and NI activities
G-SIIs should have higher loss absorption (HLA) capacity for conducting NT and NI activities.
Mandating a HLA capacity for a G-SII will help to reduce its probability of failure. This isimportant given the greater risks that the failure of a G-SII poses to the global financial
system. After public consultation, the IAIS will develop by the end of 2015 the implementation
details for HLA that will apply to designated G-SIIs starting from 2019. The IAIS will also
consult on related issues (including the scope of the G-SII group on which HLA will beassessed).
The IAIS proposes that a distinction should be made when applying HLA capacity.
Specifically, the calculation should depend upon whether the NTNI financial activities havebeen effectively separated from the traditional insurance business. The IAIS also proposes
that, when possible, HLA should be targeted as follows at the entities where the systemicallyimportant actives are located:•

11

Where the G-SII has demonstrated effective separation of NTNI activities fromtraditional insurance activities, targeted HLA may be calculated based on the NTNI
activities and applied to the separated entities conducting them.
Refer to Key Attributes for Effective Resolution Regimes for Financial Institutions, October 2011. Refer tohttp://www.financialstabilityboard.org/publications/r_111104cc.pdf

Page 8 of 32© IAIS•Where NTNI activities are not effectively separated, HLA may be calculated basedon the NTNI activities in the consolidated insurance group 12 (including the parent
company) taking account of the insurance group’s interconnectedness score(yielding an HLA uplift greater than if the activities had been separated).

HLA capacity requirements should be met by the highest quality capital; namely, permanent
capital that is fully available to cover losses of the insurer at all times on a going-concern
basis.
The HLA assessment may take into account any capital charges imposed to mitigate thesystemic risk of an insurer that are in place under national legislation.
Implementation time frame
It is expected that the first cohort of G-SIIs will be designated and subsequently published inJuly 2013. G-SII measures on enhanced supervision (including development of the SRMP)
and effective resolution should begin to be implemented immediately afterwards. RRPs,
including liquidity risk management plans, should be developed and agreed by CMGs by theend of 2014. The SRMP should be completed within 12 months after designation for the firstgroup of G-SIIs. After that, the implementation should be completed in time for the next
year’s assessment. The implementation of the SRMP should be assessed by the group-wide
supervisor in 2016. Measures on HLA capacity should begin to be implemented in 2019 for
the G-SIIs designated in 2017.
A sound capital and supervisory framework for the insurance sector more broadly is essential
for supporting financial stability. Accordingly, the IAIS will prepare by October 2013 a
workplan to develop a comprehensive, group-wide supervisory and regulatory framework for
IAIGs, including a quantitative capital standard.
The IAIS expects national authorities to prepare a framework in which insurers will be able toprovide high quality data for the indicators in the G-SII assessment methodology. To ensure
the transparency of the methodology (for the benefit of market participants and to promotemarket discipline) and the efficient identification of G-SIIs, the data used should ideally bemade public. The IAIS will work with participating authorities to enable such publication overthe coming years.
Implementation of G-SII policy measures should also be monitored by an IAIS peer review
process in order to ensure international consistency. The full implementation timeframe is:

12

The term ”insurance group” is used throughout this document to mean the entire consolidated firm or enterprise(including the parent company). It does not mean, or refer to, only the group of licensed insurance entities.

Page 9 of 32© IAISKey Implementation
Dates and
Timeframes

Action required(or intermediate activity)
The FSB to designate the initial cohort of G-SIIs based on the
IAIS methodology using 2011 data (with annual updates
thereafter published by the FSB each November, beginning in2014)

July 2013

October 2013

July 2014

July 2014
September 2014

End 2014
End 2015

For designated G-SIIs, implementation commences of resolution
planning and resolvability assessment requirements of the FSB
Key Attributes of Effective Resolution Regimes and enhanced
supervision, including group-wide supervision
IAIS to prepare a workplan to develop a comprehensive, groupwide supervisory and regulatory framework for internationallyactive insurance groups (IAIGs), including a quantitative capital
standard
Crisis Management Groups (CMGs) established for the initialcohort of designated G-SIIs
IAIS to provide the FSB with a recommendation on the G-SII
status of, and appropriate risk mitigating measures for, majorreinsurers
Systemic Risk Management Plan (SRMP) to be completed
IAIS to finalise straightforward, backstop capital requirements(loss absorbency – LA) to apply to all group activities, including
non-insurance subsidiaries
Recovery and resolution plans, including liquidity risk
management plans, for the initial cohort of designated G-SIIs to
be developed and agreed by CMGs
IAIS to develop implementation details for HLA that will apply todesignated G-SIIs starting from 2019

July 2016

Implementation of SRMPs to be assessed

November 2017

The FSB to designate the cohort of G-SIIs, based on the IAIS
methodology and 2016 data, for which the HLA policy measure
will apply, with implementation beginning in 2019

January 2019

G-SIIs designated in November 2017 to apply the HLA
requirements

Page 10 of 32© IAIS1. Introduction(1)

The IAIS is participating in a global initiative, along with other standard setters,
central banks and financial sector supervisors, and under the purview of the FSB
and G20, to identify G-SIFIs 13. The focus of IAIS analysis is in relation to potential
G-SIIs. To this end, the IAIS has developed an initial assessment methodology
Global Systemically Important Insurers (G-SIIs): Initial Assessment Methodology
explaining the initial assessment methodology to identify any insurers whose
distress or disorderly failure would cause significant disruption to the global
financial system and economic activity. Any such insurers will be regarded assystemically important on a global basis.

(2)

The IAIS has now also developed a framework of policy measures for G-SIIs. It isbased upon the general framework published by the FSB 14 with suitableadjustments designed to apply to the distinctive features of insurance dominatedfinancial conglomerates. As with the initial assessment methodology, theseadjustments reflect the factors that make insurers, and the reasons why they might
be systemically important, different to other financial institutions.

(3)

At the Summit meeting in Seoul, November 2010, the G20 leaders endorsed the
FSB’s framework for reducing the moral hazard posed by systemically importantfinancial institutions. The framework recommends several policies which should
combine to:
•
•
•
•
•

(4)

13

Apply more intensive and co-ordinated supervision of SIFIs,
Improve the authorities’ ability to resolve SIFIs in an orderly manner without
destabilising the financial system and exposing the taxpayer to the risk of loss,
Require higher loss absorbency for SIFIs to reflect the greater risks that these
institutions pose to the global financial system,
Strengthen core financial infrastructures, andProvide other supplementary prudential and other requirements as determinedby the national authorities.

As discussed in the IAIS’ report Insurance and Financial Stability 15 the two mostimportant factors for assessing the systemic importance of insurers are NTNI
activities and the degree of interconnectedness. NTNI activities are importantbecause, among other matters, the longer timeframe over which insurance
liabilities can normally be managed may not be present. Interconnectedness isimportant because there can be strong connections between the insurance sector,
banking sector and financial markets that can amplify the impact of stress events.

G-SIFIs are defined by the FSB as “institutions of such size, market importance, and global
interconnectedness that their distress or failure would cause significant dislocation in the global financial
system and adverse economic consequences across a range of countries.” Global systemically important
insurers (G-SIIs) are one class of G-SIFIs.

14

Refer to FSB reports “Reducing the moral hazard posed by systemically important financial institutions” (2010)
http://www.financialstabilityboard.org/publications/r_101111a.pdf and “Policy Measures to Address
Systemically Important Financial Institutions” (2011)
http://www.financialstabilityboard.org/publications/r_111104bb.pdf

15

Refer to http://www.iaisweb.org/Other-papers-and-reports-46

Page 11 of 32© IAISTherefore, the policy measures specifically address these causes of systemic
importance.
2. Overview
2.1

The supervisory challenges in relation to G-SIIs(5)

G-SIIs are a risk to financial stability because their scope, the nature of theirbusiness and their position in the financial system is such that their distress or
failure might, cause disruption to the wider financial system and the real economy.

(6)

G-SIIs are different from Global Systemically Important Banks (G-SIBs), in part
because the traditional insurance business model is not inherently systemicallyimportant. The designation of banks tends to be driven by the sheer size andnature of their core activities, while size alone is less important for traditional
insurers. Insurers vary widely from banks in their structures and activities andconsequently in the nature and degree of risks they pose to the global financial
system. The activities that might make an insurer a G-SII can vary greatly from one
insurer to another, but are generally related to their NTNI activities and any
interconnectedness generated from those activities. This requires a policy
response designed to address the specific nature and source of systemic
importance and the different drivers of possible negative externalities.

2.2
(7)

Objectives of G-SII policy measures
G-SII policy measures should reduce moral hazard and internalize the costs of thenegative externalities stemming from the potential disorderly failure posed by a GSII. These policy measures should:
•
•
•

(8)

Reduce the probability and impact of distress or failure of G-SIIs and thus
reduce the expected systemic impacts which disorderly failure may cause,
Incentivise G-SIIs to become less systemically important, and give non-G-SIIs
strong disincentives from becoming G-SIIs, andBe linked to the drivers of the G-SII status of each individual insurer.

G-SIIs may be regarded as a safe haven by policyholders and institutional
investors, either because of a perceived implicit state guarantee or because thepolicy measures are understood to bring an additional level of security. Within thefinancial market place, this might have substantial distortional consequences. For
example, the G-SII designation of insurers could result in giving G-SIIs access tolower funding costs. The financial strength rating assessments by credit rating
agencies and the proprietary bespoke ratings assigned by banks, investmentbanks, repo dealers and other counterparties today do not assume any implicit
state guarantee for insurers. Conversely, the additional supervisory layer imposedby a G-SII regulatory regime could bring about additional costs through higher
capital requirements that consumers may be willing to bear in exchange for greater
safety. During implementation of the policy measures for G-SIIs, unintended
consequences should be considered and avoided where possible.

Page 12 of 32© IAIS3. The G-SII policy measures
3.1(9)

Overview
The IAIS framework of policy measures for G-SIIs is in line with the FSB
recommendations and includes the following components:
•

•

•

•

3.2

Enhanced supervision: Enhanced supervision applies immediately to all GSIIs to ensure that they rapidly achieve the higher standards of risk
management their G-SII status demands. The ICPs, ComFrame, and the
FSB’s SIE recommendations provide the foundation for the IAIS’ approach toenhanced supervision, while special emphasis is placed on group-wide
supervision and liquidity planning as described below. The group-wide
supervisors should also analyse activities that cause systemic importance of
G-SIIs and take necessary measures to reduce that systemic importance. This
includes overseeing the development and implementation of a SRMP which
could include measures such as separation of NTNI activities from traditional
insurance business and/or restriction or prohibition of systemically important
NTNI activities.
Increased resolvability: The FSB’s Key Attributes provide the basis for
improved resolvability and would help reduce the impact of a G-SII failing.
Under the Key Attributes, all G-SIIs will be required to produce RRPs incooperation with their group-wide supervisor. The relevant authorities will also
be required to establish a CMG, conduct resolvability assessments and havecooperation agreements with other involved supervisors.
Loss Absorbency (LA) capacity: G-SIIs will be required to hold regulatory
capital for all group activities. The development of backstop capitalrequirements will be completed by the end of 2014 and the requirements will
apply shortly thereafter.
Higher loss absorption (HLA) capacity: In addition, G-SIIs will be subject toan increased loss absorption capacity requirement based on the NTNI
activities that those G-SIIs undertake. The calculation and location of theadditional capital requirement may depend upon whether the G-SII has
demonstrated effective separation of NTNI activities from traditional insurance
activities. It is noted that some national supervisory frameworks are expected
to provide for capital surcharges that account for the systemic risk profile of an
insurance group and these additional capital requirements may be taken into
consideration in assessing whether the G-SII has an appropriate level of HLA
capacity. The proposed HLA measures will be subject to further consultation
before they are finalised in 2015 in advance of the proposed implementation
date of January 2019.

Definition of Traditional Insurance, Non-Traditional Insurance and financial Noninsurance (NTNI) activities(10)

The application of the above mentioned measures may rely to a large extent upon
the clear differentiation between traditional and NTNI activities.

(11)

The classification of activities as traditional, non-traditional and non-insurance
relies on the following considerations. First, the NTNI principles set forth below
should guide the determination of whether activities are classified as traditional orPage 13 of 32© IAISnon-traditional/ non-insurance. Second, Table 1 (below) is provided to further help
in this effort by delineating the classifications of specific exemplary products andbusiness activities. Third, as insurance products may vary significantly in their
specific features (and across jurisdictions), the application of the guiding principles
to products that deviate from the exemplary products described in this paper areleft to the judgement of the group-wide supervisor, subject to a peer review for the
purpose of IAIS’ objectives for the harmonisation of insurance standards.
(12)

This document further develops the work begun in the IAIS report Insurance andFinancial Stability (IFS) 16 by expanding on the guiding principles for the allocationof products to the traditional or non-traditional categories. This approach is basedon the predominance of risk characteristics used to determine whether aninsurance product or financial activity is considered either traditional (T) or nontraditional (NT). Therefore, products classified as semi traditional in the IFS paper
have mainly been allocated to the non-traditional classification. 17 As stated above,these products tend to vary significantly in their specific features (and acrossjurisdictions), and group-wide supervisors will need to consider the extent ofsystemic risk posed by specific products.
3.2.1 Traditional insurance activities(13)

The IFS report defines traditional insurance business primarily by building on theconcept of the insurability of risks, in particular the insured events’ accidental
nature, random occurrence and the applicability of the law of large numbers. 18 The
law of large numbers helps an insurer to manage and price risks in an efficientmanner. The ex-ante payment of insurance premiums and the time to theoccurrence of claims, known as an inverted product cycle, usually further benefit
the liquidity and investment management of an insurance company. In these
instances, asset and liability management (ALM) activities aim to closely match thenature of liabilities and assets.

3.2.2 Non-traditional, non-insurance activities
General description(14)

Non-traditional and non-insurance activities involve financial features such as
leverage, liquidity or maturity transformation, imperfect transfer of credit risks, (i.e.
“shadow banking”), credit guarantees or minimum financial guarantees. They also
often involve products that are more financially complex than traditional insurance
products in the shifting of financial market risk to insurers. Other products ofconcern include those where the liabilities are significantly correlated with financial
market outcomes, such as stock prices, and the economic business cycle.

(15)

Financial activities conducted outside of a licensed insurance entity are categorised
as non-insurance.

16

Insurance and Financial Stability, IAIS.

17

The IAIS scoring methodology will need to reflect in its future data analysis and designation work this approachand its categorisation of insurance activities as traditional and NTNI.

18

Insurance and Financial Stability, IAIS, p. 13

Page 14 of 32© IAISNTNI Principles(16)

Principle 1: Products that provide credit guarantees to financial products such as
securities, mortgages and other traded or non-traded instruments - whether
principal or interest - can be considered NTNI.
Explanation: Even though the idiosyncratic parts of the credit risk may be readily
diversifiable, insurers providing such coverage are nonetheless vulnerable tosystematic 19 risk and therefore vulnerable to shocks that affect the entire economy
or that otherwise tighten correlations. The guaranteed debt is often dispersed
throughout the economy, and the impairment of the value of the guarantee of thedebt instrument due to the distress or failure of the insurer could result in a severe
impact on the economy. When credit guarantee or coverage is short-term in naturethen the exposure to systematic events is limited. Such products could beconsidered traditional.

(17)

Principle 2: Policies or products that expose the insurer to substantial market andliquidity risk and require a more complex risk management practice by the insurer
in order to hedge those risks and may require substantial, complex, and dynamic
use of derivatives, can be considered NTNI.
Explanation: The complexity of the risk management necessary to handle suchrisky products exposes insurers to sizeable market and liquidity risk, increases thepotential for modelling errors, makes them more reliant on over-the-counter
derivatives markets and increases their interconnectivity through the greater
volume of transactions. This creates the potential for fire sales or procyclicalhedging strategies. The decision to hedge complex risks, while desirable from a
microprudential perspective, in turn increases the interconnectedness of therespective insurer, thus making it more dependent on functioning derivatives
markets.
Examples:a) Products that give the customer or policyholder the right to choose to invest
premiums in different markets (e.g. the equities market), at thecommencement of or throughout the contract, in conjunction with aguaranteed minimum performance of the account, essentially creates a put
option for the policyholder. This requires complex modelling and forecastingof policyholders’ behaviour and management of complex financial market
risks. In contrast, a minimum guarantee on general account performancedoes not place the insurer in as difficult a situation.
b) Products that give the policyholder a considerable long-term performancepromise and a tangible short-term liquidity promise, which cannot bematched simultaneously by a portfolio of existing cash market securities.

19

As distinct from ‘systemic’.

Page 15 of 32© IAIS(18)Principle 3: Investment and funding or other capital market activities that result inmaturity or liquidity transformation, leverage or imperfect transfer of credit risk,such as repo and securities lending, beyond that justified by the scope and scale ofconducting traditional insurance activities, can be considered NTNI.
Explanation: The categories of traditional, non-traditional and non-insurance also
apply to investment activities, whether on balance sheet or off. The degree to whichinvestment activities involve the points of concern mentioned in this principle andthe extent to which they support traditional insurance business will determine theirclassification as NTNI.
This principle addresses concerns identified by the FSB’s analysis of shadowbanking. It aims to capture those activities that can increase leverage, increaserisks from proprietary speculation, reduce transparency from investments in private
pools of capital, and make the insurer more reliant on the trading and funding
liquidity of capital markets.
Examples:a) If the cash collateral from the repurchase agreement or securities lendingtransaction is reinvested in liquid, high credit quality assets, and if the
security lent or put out on a repo is liquid, then the activity is traditional.
However if the reinvestment is in long-term, or low credit quality or illiquid
securities then the risks are sufficient for the activities to be deemed NTNI.
Moreover if low credit quality or illiquid assets are used for securities
lending or in repurchase agreements, then the risks are sufficient to bedeemed NTNI.
b) If in the course of supporting normal investment management a shortcredit default swap (sold credit protection) is combined with a government
security in order to synthetically replicate an investment in a conventional
fixed income security, which might be a better investment due to better
pricing or liquidity, then it is traditional. Similar investing in foreign currency
corporate bonds and using a foreign currency swap to convert the interest
and principal of these securities into the local currency in which insurance
liabilities are denominated would be traditional. Essentially, if synthetic
replication creates similar risks as investing in the conventional security,then it is traditional. If it adds leverage or reduces liquidity, then it is NTNI.
If comparable credit default swaps are bought and sold in order to profit
from changes in credit spreads or the term structure of credit spreads,
then it is a non-traditional or non-insurance activity. The group-wide
supervisor should be careful to discern other investment strategies
involving the combination of derivatives and securities that might appear
similar but whose motivation is speculation, arbitrage or otheropportunistic views on the market.

(19)

The systemic risk of some variable annuities products (marked with a star in Table
1 below) is associated with the nature and scope of the guarantees and not the
product more generally. Where partial guarantees are provided that arecomparable to the guarantees of traditional products, it may be necessary for thegroup-wide supervisor to consult with involved supervisors and classify the
products as traditional, if appropriate.
Page 16 of 32© IAIS(20)Classification of some typical insurance activities and products (illustrative and still
under active discussion) is shown below:
Table 1. Classification of typical insurance activities
Traditional

Non-Traditional

Non-Life (P&C plus Heath,
Disability)
Non-Life: Long-tail (they involvesome interest rate risk, but are still
predominantly non-financial)
Life - Term - Fixed Death
Benefits, Fixed PremiumLife - Term - Variable Benefit,
Variable Premium (investment
return risk borne by policyholder)
Life - Whole life with fixed death
benefits (implicit fixedaccumulation rate)
Life - Whole Life with variableaccount value (includes risk ofinvestment returns)
Life - Whole Life with someminimum accumulation rate orminimum death benefit
Annuity with Fixed Rate of Return
Annuity with Variable rate of
return (insurer bears longevity
risk, policy holder the investment
returns)
Variable Accumulation, Fixed
PayoutInsurance-linked securities (ILS),
e.g. Cat Bonds and other forms.
Short-term trade credit insurance

Annuity: Variable Annuity - GMIB
(Fixed accumulation returns) (*)
Guaranteed minimum death benefit(GMDB) or Guaranteed minimum
annuitisation rate (*)
Guaranteed Minimum Withdrawal
Benefit (GMWB) (*)
Contingent Deferred Annuity (somelongevity risk, mostly market returnrisk) (*)
Unit-linked accounts withguaranteed account value or nonnegative returns (some longevity
risk, mostly a financial guarantee)(*)
Guaranteed Investment Contracts(GICs)
Synthetic GIC (insurer bears market
value/return risk
Mortgage Insurance (credit
guarantee)
Credit Guarantees - municipal debt,
structured credit products, (purecredit guarantee)
Financing or monetizing ILS, e.g.
Embedded Value/Present Value of
Future Profit securitisations, ILS
with financial risk as material trigger
condition.

Page 17 of 32© IAIS3.3 Enhanced supervision
3.3.1 General description(21)

Enhanced supervision applies immediately to all designated G-SIIs. In line with the
SIE recommendations, enhanced supervision of G-SIIs will generally mean tailored
regulation, greater supervisory resources and bolder use of existing supervisory
tools compared to the supervision of non-systemically important insurers. The
enhanced supervision of G-SIIs should rest on a direct approach to group-wide
supervision. Enhanced supervision should include coordination with involved
supervisors, 20 and should especially focus on the unique risk profile and possible
risk concentrations of G-SIIs in order to lessen the probability and impact of
distress or failure. In so doing, involved supervisors should take into account thereasons for the systemic importance of the G-SII suggested by the results of the GSII assessment methodology.

(22)

The desired outcomes of enhanced supervision are:
•
•

•
•

•

The group-wide supervisor determines a set of measures to reduce the risks
posed by the G-SII and establishes timelines and indicators to adequately
monitor the implementation and effectiveness of the measures.
A group-wide supervisory framework applies to the insurance group as awhole – with a particular focus on its systemic risks – that features cooperation
among involved supervisors, including involved supervisors with responsibility
for the group’s non-insurance entities. Obstacles that could hinder effective
group-wide supervision are identified and removed. For G-SIIs, the group-wide
supervisor has direct powers over holding companies to ensure that a direct
approach to group-wide supervision can be applied. 21 In addition, other
involved supervisors may have direct or indirect powers over holding
companies in their jurisdiction. Consideration should be given to any direct orindirect measures/regulation by functional supervisors.
Enhanced supervisory co-ordination is achieved via supervisory colleges(cross-sector and cross-jurisdictions).
The group-wide supervisor has clear visibility of internal control systems andrisk management and solvency assessment procedures within the insurancegroup. This includes requiring the G-SII to have the ability to aggregate andidentify risk exposures and concentrations quickly and accurately at the groupwide level, across business lines and legal entities. It is expected that the
SRMP will provide much of this information along with the type of assessment
noted in the next bullet.
The G-SII has internal controls and limits that are effective, investment andreinsurance arrangements that are appropriately diversified, greater disclosureand additional stress testing.

20

Involved supervisors refer to home, host and foreign functional supervisors.

21

The ICPs (in paragraph 14 of the Introduction) provide for a direct or indirect approach to group-wide
supervision of insurance groups. For G-SIIs, only the direct approach is acceptable. The IAIS is in the processof amending ICP 23 to clarify some aspects of group-wide supervision.

Page 18 of 32© IAIS(23)The IAIS approach to enhanced supervision builds on:
•
•

•
•

The ICPs, which are applicable to all insurers and are the foundation for the
G-SII policy measures.
ComFrame, which will aim to foster global convergence of regulatory andsupervisory measures and approaches for IAIGs, whether or not they are
identified as G-SIIs. ComFrame is not expected to generate specific policy
measures that focus on addressing systemic risk of G-SIIs as such, but rather
may provide a baseline for applying supplemental supervisory measures toaddress the systemic risks of a G-SII.
Special attention will be paid to group-wide supervision since G-SIIs are most
likely to take the form of a group and NTNI activities can be carried out by
separate entities within a group.
The FSB’s SIE recommendations, especially in relation to:–

Unambiguous mandates, independence and appropriate resources
Mandates geared toward active early intervention can facilitate a culture
where supervisors have the will to act early. The mandate should convey
the point that the group-wide supervisor’s (and often the involved
supervisors’) view of appropriate risk tolerance for an insurance groupwill always reflect a higher degree of conservatism and therefore willoften be a source of conflict when viewed against the respective risk
appetites of senior management, the board and shareholders.
Reinforcing the operational independence and resources of supervisoryagencies is critical to ensuring supervisory effectiveness and credibility ingeneral.

–

Full suite of supervisory powers
Since the crisis, the need for tools such as increased liquidity
requirements, large exposure limits, imposing dividend cuts, requiring
additional capital and stress-testing have come to the forefront. Given
that a full suite of such powers is critical to the ability of a supervisor tofulfil its public mission, the inventory of financial policy tools should be
updated. Supervisors need to ensure that the stress testing undertaken
is comprehensive and commensurate with the risks and complexities ofthese institutions.

–Improved standards and methods
Increased focus on outcomes of governance and business processes
and greater use of horizontal reviews are desirable. Supervisors need toevaluate whether their approach to, and methods of, supervision remain
effective or have, for example, moved too far toward focusing on
adequacy of capital and control systems, and away from detailed
assessments of sources of profits and financial data.
Supervisory interactions with Boards and senior management should be
stepped up, in terms of frequency, level of seniority, and assessment of
their effectiveness. Supervisors should adopt proactive approaches todeal with succession planning and performance expectations for key
positions within G-SIIs (e.g. CEOs, CROs, Internal Auditors), elementsthat should no longer be regarded as only internal matters for institutions.

Page 19 of 32© IAIS–

Stricter assessment regime
Group-wide supervisors should consider how their supervisory
frameworks affect the internal controls (including risk management
frameworks) for G-SIIs, and they should be confident that theassessment criteria for the internal control environment at G-SIIs sets a“higher bar” for these firms to achieve given the potential systemic impactthat they pose. Group-wide supervisors should further explore ways toformally assess risk culture, particularly at G-SIIs. Establishing a strongrisk culture at financial institutions is an essential element of good
governance.

–

Group-wide supervision
Group-wide supervision can be impaired when supervisors do not havethe legal right or ability to review all the insurance group’s entities (e.g.
non-regulated entities, parents and other affiliates), yet those entities
have the potential to pose risks to the regulated entity, the insurancegroup and the financial system. Supervisory blind spots can be created
when there are entities within the insurance group to which the groupwide supervisor does not have access. In cases where the various
functional supervisors have regulatory authority over different businesslines, it is critical that these supervisors share and exchange information
about their respective regulated entities and coordinate closely with otherfunctional supervisors in order to achieve supervisory goals.

–

Risk aggregation
Supervisors should study and adapt data needs and data processing
capabilities in the context of the higher requirements for G-SII
supervision. Where there are deficiencies in any or all of the type of datacollected, the supervisors’ ability to process the data in a timely andfulsome way or the ability to collect ad-hoc data in a timely manner, theseshould be addressed as soon as possible.
Supervisors need to consider putting in place additional data
management and analysis processes for the information available from a
range of sources, such as that collected by trade repositories and othercentralised sources of financial data, so that key players in markets andmarket anomalies are identified. The SRMP developed by the G-SII, as
described below, should incorporate the supervisory view as set forth
above, and can be an important tool in assisting the supervisor inunderstanding how the group is reacting to potential systemic risks.

Page 20 of 32© IAIS3.3.2 Systemic Risk Management Plan (SRMP)(24)

The G-SII in consultation with the group-wide supervisor should start developing
the SRMP immediately after its designation. The purpose of the SRMP is for the GSII, under the oversight of the group-wide supervisor, to describe how it will
manage, mitigate and possibly reduce its systemic risk. The plan should address
the risks identified in the decision to designate the insurance group as a G-SII. The
SRMP is designed to coherently set out in a summary fashion all applicablemeasures, such as higher loss absorbency, improved resolution and enhanced
supervision, that would address the ways the G-SII poses systemic risk to thefinancial system and the overall economy. The formulation of this plan, in
consultation with the group-wide supervisor, is relevant because there may be
choices to make in how to meet these regulatory goals. The G-SII could
restructure, adopt restrictions or limitations on certain systemically important
activities or retain the risk by internalizing the costs of negative externalities (e.g. byadding to its capacity to absorb losses).

(25)

The process for developing the SRMP will require collaboration among the G-SII,
the group-wide supervisor and other involved supervisors. The G-SII begins theprocess by presenting to the group-wide supervisor a draft that addresses thesystemic issues raised in the designation process. The next step involves thegroup-wide supervisor responding with its views on the adequacy of the proposed
measures and recommendations for improvements. After consultation withmembers of the supervisory college, the final version of the SRMP will provide brief
but specific actions the G-SII will take in order to comply with its being designated.
It is anticipated that the SRMPs will be made available to the IAIS in order toevaluate and improve its assessment methodology going forward.

(26)

Where feasible and appropriate, the SRMP should describe the G-SII’s enterpriserisk management (ERM) system (including how it addresses liquidity risk, as
described below), and how its internal controls address the systemic risks.

(27)

The SRMP should include the measures that the G-SII will take to either reduce
systemic risks or to mitigate those risks (e.g. through the use of additional capitalso as to internalise at least some of the cost of the externalities that arise from suchrisk taking). These may include such measures as: effective separation (so as toachieve self-sufficiency) of systemically important activities from traditional
insurance business; restrictions or prohibitions on specified systemically important
activities so as to reduce the amount of such risk; HLA; or combinations of thesemeasures and any other measures.

3.3.3 Enhanced liquidity planning and management(28)

The group-wide supervisor is responsible for evaluating and monitoring liquidity
management and planning on a group-wide basis. The group-wide supervisor
should require the G-SII to conduct regular gap analysis of its liquidity risks and theadequacy of its available liquidity resources, under normal and stressed conditions.
It should consider stress scenarios that are forward looking and not based entirely
on historical data. Adjustments for expected behaviour of market participants andcustomers during stressed conditions - especially in relation to acceleration of
liabilities (e.g. a run on the insurer or rating triggers) - should be considered. The
assessment should focus primarily on NTNI activities and the key channels ofPage 21 of 32© IAISinterconnectedness. Special attention should be paid to the nature ofinterconnectedness, as some indicators – such as intra financial liabilities andderivatives – have a greater potential systemic impact than others. This should also
include an assessment of the G-SII’s Asset Liability Management and its
effectiveness in addressing potential future liquidity demands. These should
include written strategies and policies for regular gap analysis and liquidity risk
management, subject to clearly documented governance requirements. This should
include an assessment of the arrangements the G-SII has in place to manage (soas to mitigate or reduce) those risks for the whole group.

(29)

Relevant issues for liquidity management and planning may include:
•
•

•
•
•
•
•
•

The framework for managing liquidity (for example, regional or central);The extent of concentrated exposures, both assets and liabilities, that
potentially affect the amount of short-term liquidity needs and the ability of thefirm to meet them;
A policy for managing the liability side of liquidity risk and potential effects ofdowngrades on rating triggers;
The ability of securities to meet its liquidity needs even under stressconditions;Ways of managing both the insurance group’s aggregate foreign currency
liquidity needs and its needs in each individual currency;
Access to liquidity facilities;
The use of derivatives (including potential for collateral calls and margin calls);
and
The management of short-term sources of credit, such as from securities
lending and repurchase agreement transactions.

3.3.4 Effective Separation of NTNI activities(30)

The group-wide supervisor may choose to apply effective separation of NTNI
activities of G-SIIs to reduce or mitigate systemic risks.

(31)

The degree of effective separation or interconnectedness within a global insurancegroup is important to its systemic relevance. The IFS report argues that one of the
key lessons from the financial crisis is that the systemic importance of an insurancegroup is correlated with the amount of its NTNI activities. The systemic importanceof the insurance group is also a function of how intertwined the NTNI activities arewith the traditional activities of the insurance group. 22 Effective separation cantherefore reduce systemic importance by helping to prevent the spill-over of
detrimental effects caused by distress from NTNI activities being transmitted to theparts of the group that conduct traditional insurance business. At the same time, if
supervisors allow, some insurance groups will choose not to separate for their own,
sound risk management reasons that they deem to be more important than thecapital benefit of separation. In either case, the G-SII will coordinate with the groupwide supervisor through the development of a SRMP (see section 3.2.2 above) thatwill lay out the reasons for whichever approach is chosen.

22

Insurance and Financial Stability, page 15.

Page 22 of 32© IAIS(32)Effective separation is an ex-ante policy measure intended to reduce the expected
systemic impact of a G-SII by enhancing its resilience and improving its ability to beresolved without inflicting stress on the financial system. In combination withrestrictions and adequate HLA, effective separation can potentially lower the
expected impact of the distress or failure of the separated NTNI activities to below
systemic levels.

(33)

The question of what constitutes effective separation is a critical supervisory policy
issue. Whether or not NTNI activities are effectively separated will directly affect its
resolvability and may affect the calculation of HLA to be applied to the G-SII. The
following five conditions are regulatory policy standards that are intended to serve
as guidelines for the group-wide supervisor in determining whether NTNI activities
are effectively separated. In applying these standards, the group-wide supervisor,
after consultation with other involved supervisors, , should interpret them with
sufficient flexibility as to accommodate the particular organisation of the entire
enterprise, the risks it absorbs and the relevant regulatory environment. Anynecessary interconnectedness that remains between the separated entity and otherparts of the G-SII should be addressed by the application of other consequential
measures (e.g. restrictions or HLA).

(34)

A G-SII must meet the following five regulatory standards, as applied by the groupwide supervisor, in order to be deemed effectively separated. These standards,
taken together, set a high but achievable standard for what is required to bedeemed effectively separated by the group-wide supervisor. The breach of any oneof these standards will result in a loss of status as an effectively separated G-SII.
a. An effectively separated entity (subsidiary or affiliate) must be self-sufficient to thedegree that it can operate without the support of the parent or affiliates. Thisrequires adequate stand-alone capitalization, and this must not be the result of“multiple gearing,” multiple leverage or otherwise funded by debt issued by theholding company or affiliate. The separated entity must not receive credit orcapital financed with debt from the traditional entity or entities. It also entails theability to be resolved, whether through sale, receivership or liquidation, without adrain on the resources of the parent or affiliates or on public resources.
b. The governance of the effectively separated entity or entities should provide for
operational independence of management (including risk management). The term
operational independence means that the management has authority over day-today operations even though strategic decisions may come from the parent orother ownership. The independence might be strengthened through suchmeasures as requiring a portion of the board of directors to be independent
members (independent is defined as being not part of executive management
team of insurance group or its subsidiaries or members of board of parent holding
company or affiliates).
c. The effective separation of NTNI activities from the insurance group’s traditional
business must not result in a non-regulated financial entity. A non-regulated entity
is one that does not have a solo prudential regulator or comparable prudential
regulatory framework. If the group-wide supervisor has the authority to impose
capital requirements or other suitable prudential requirements on an entity that
otherwise lacks solo regulation, then the entity would be deemed prudentiallyregulated for purposes of meeting this condition.

Page 23 of 32© IAIS

d. Any intragroup transactions or commitments with the separated NTNI entities
must be “at arm’s length.” This will help prevent subsidies from the traditional
business to NTNI activities. In addition, the size or amount of these transactions
or commitments should not be so large that it makes either party to sucharrangements critically dependent upon the other as client, vendor orcounterparty. This requirement taken together with measures in paragraph a)above will help prevent the transmission of distress from the separated entity to
the traditional insurance business.
e. Reputation risk – resulting in the parent or affiliate providing financial support toan entity even though there is no legal obligation to do so - is a concern for
intragroup transmission of financial stress. The group-wide supervisor should takesteps necessary to minimise the likelihood and impact from this risk. The selfsufficiency condition in paragraph a) above helps to address some of thisconcern. If an otherwise effectively separated entity nonetheless receives support
in distress circumstances then it will no longer be deemed effectively separated
for the purposes of HLA assessment.
3.3.5 Restrictions and prohibitions(35)

The group-wide supervisor could choose to apply restrictions and prohibitions withthe following goals in mind:•••

To reduce the probability and impact of distress or failure resulting fromsystemically important activities within G-SIIs;
To limit or eliminate systemically important activities based on the nature of
the activity; andTo limit or discourage such activities and thereby encourage G-SIIs to reduceor eliminate their systemically important activities and discourage otherinsurers from undertaking potentially systemically important activities.

(36)

Restrictions and prohibitions are a direct and effective supervisory measure to
reduce systemic risk. They can be applied to NTNI and interconnectedness
activities and can be applied on a stand-alone basis or in combination with otherpolicy measures. Restrictions and prohibitions can also be targeted to specific legal
entities within the G-SII.

(37)

Restrictions and prohibitions cover a broad range of options that include directprohibitions, limitations and restrictions on activities as well as measures thatprovide strong disincentives and/or internalise the costs for engaging insystemically important activities, including:•••

Direct prohibition or limitation of the systemically important activity; 23
Requirements for prior approval of transactions that fund or support
systemically important activities; 24
Requirements for spreading or dispersing risks relating to systemicallyimportant activities; 25 and23

For example, prohibit the issue of certain financial guarantees on CDS or other financial products

24

For example, prior approval of Intra-group Transactions (IGTs) related to NTNI activities

Page 24 of 32© IAIS•(38)

Limiting or restricting diversification benefits between traditional insurance
business and other businesses. This measure improves the overall capital
position and hence provides HLA capacity. In practical terms, it could either beapplied at ultimate parent level or at the NTNI sub-holding or entity level. 26

Given the premise that insurers are not likely to inherently generate systemic riskother than through NTNI and interconnectedness, prohibitions or strict limitations ofan activity can be applied to G-SIIs where the goal is to eliminate the activity or
severely curtail the relevant activity. When a systemically important activity isdeemed necessary or unavoidable then, restriction may play a lesser role whencompared with structural measures (e.g. segregation or separation) and HLA
capacity.

3.4 Effective Resolution(39)

The desired outcomes of effective resolution are to:
•
•
•
•
•

Ensure the resolution of G-SIIs can take place without severe systemic
disruption and without increasing taxpayers’ exposure to loss;
Protect vital economic functions through mechanisms which make it possible
for shareholders and unsecured creditors to absorb losses in a manner that
respects the hierarchy of claims in liquidation;
Ensure that policyholder protection arrangements remain as effective as
possible; 27
Avoid unnecessary destruction of value and ensure that non-viable G-SIIs canexit the market in an orderly way; andIdentify and remove impediments to smooth resolution.
3.4.1 Resolution regimes and tools for G-SIIs(40)

The authorities who supervise G-SIIs and G-SIIs themselves should comply with
the Key Attributes, 28an international standard for resolution published by the FSB.
This standard sets out a range of specific requirements for institutions that should
apply at a minimum to all G-SIFIs including G-SIIs. They include: (i) theestablishment of CMGs; (ii) the elaboration of RRPs; (iii) the conduct of resolvability
assessments; and (iv) the adoption of institution-specific, cross-border cooperationagreements.

(41)

To carry out an effective resolution, authorities need to have at their disposal a
broad range of tools that enable them to intervene safely and quickly to protect

25

For example, limit use of affiliate reinsurance on NTNI lines of business, such as variable annuities withfinancial guarantees or mortgage guarantee insurance.

26

In limiting or restricting diversification effects, G-SIIs are left with fewer options on what business segments canbe recapitalised. Hence, the limitation or restriction of diversification effects shows which business segments
are possibly undercapitalised and subsidised.

27

Refer to ICP 12 “Winding-up and Exit from the Market” which states: “The legislation defines a range of options
for the exit of insurance legal entities from the market. It defines insolvency and establishes the criteria andprocedure for dealing with insolvency of insurance legal entities. In the event of winding-up proceedings of
insurance legal entities, the legal framework gives priority to the protection of policyholders and aims at
minimising disruption to the timely provision of benefits to policyholders.”

28

Refer to http://www.financialstabilityboard.org/publications/r_111104cc.pdf.

Page 25 of 32© IAISpolicyholders and avoid destabilisation of financial markets. At present, many IAIS
jurisdictions have a fourfold power in connection with the trigger points of arecovery system to require a: (i) solvency plan if the “prescribed capitalrequirement” (PCR) is breached; (ii) financing plan if the “minimum capitalrequirement” (MCR) is breached; (iii) recovery plan if the asset/liability ratio isbreached; and (iv) liquidation plan if both the asset/liability ratio and the MCR are
breached. These powers should be considered for RRPs of G-SIIs when they arein good health. The FSB Key Attributes should serve as a point of reference for thereform of national resolution regimes, setting out the responsibilities, instruments
and powers that all national resolution regimes should have to enable authorities toresolve failing G-SIIs in an orderly manner and without exposing the taxpayer to therisk of loss.
(42)

Authorities will also need to determine whether a mainly traditional insurance groupwith a large derivatives portfolio may experience a disorderly run-off due to legallybinding close-out netting of those derivatives under master trading agreements.

(43)

Authorities will consider and take all necessary actions to ensure effective
resolution including removing obstacles to the separation of NTNI activities fromtraditional insurance activities during a stressed event. The resolvability
assessment will include assessing whether, and the extent to which, effective exante separation of activities is in place. See section 3.3.4 Effective Separation of
NTNI activities.

(44)

The Key Attributes provide guidance to assist authorities in implementing therequirements for G-SIFIs. The IAIS concurs that these requirements are also
relevant for G-SIIs, although insurance specificities need to be taken into accountin implementing them. The IAIS also considers that the Key Attributes assessment
methodology being developed by the FSB should contain insurance-specificelements and is therefore working closely with the FSB to ensure that themethodology addresses insurance specificities. 29 Insurance specificities which
need to be taken into account, include:
•
•
•

(45)

29

Plans and steps for separating NTNI activities from traditional insurance
activities;
The possible use of portfolio transfers and run off arrangements as part of theresolution of entities conducting traditional insurance activities; andThe existence of policyholder protection and guarantee schemes (or similararrangements) in many jurisdictions.

The IAIS will also develop a template for assessing the resolvability of G-SIIs. This
template could assist authorities in identifying structural measures that would better
prepare G-SIIs for resolution if the G-SII needs to be resolved. The issues
discussed under the previous section 3.3.2 on effective separation should also be
considered in this context. In particular, the issue of reputation risk in terms offinancial support without any legal obligation should be investigated for all material
entities of a G-SII either in terms of business volume or of the systemic importanceof the operation.

E.g. Particularly in Key Attribute 3.5 (Bail-in), the financing conditions of the insurance business model and in
Key Attributes 3.2 (xii) and 4.3 (i), the timeframes warranted for insurance contracts (and derivative contractsetc.) need to be taken into account.

Page 26 of 32© IAIS3.5 Loss Absorption (LA) capacity – Applicable to all group activities
As a foundation for HLA requirements for G-SIIs 30 , 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.

(46)

(47)
3.6 Higher Loss Absorption (HLA) capacity – Applicable to NT and NI activities
3.6.1 General description and purpose(48)

G-SIIs should have higher loss absorption capacity to reflect the greater risks thatthey pose to the global financial system and the global economy. As stated in
Section 2.2 above, the objectives of these policy measures for G-SIIs are to reduce
the probability and impact on the financial system from distress or failure, and to
discourage firms from becoming more systemically important. One direct policy
measure to achieve these two objectives is the requirement to hold more capital –that is, to require HLA capacity.

(49)

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 of a GSIIs distress or failure by making G-SIIs more resilient to low probability, highimpact 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; andOffsetting any benefit should it arise, such as lower funding costs, associated with
the G-SII status.

(50)

For non-regulated financial entities the requirement of HLA will mean that theymust also be subject to “loss absorbency” or base capital requirements. Theseshould be the backstop capital requirements or the Basel III rules if the entity’s
activities fall within the scope of Basel III. This will result in a more level playing
field across G-SIIs and G-SIBs and prevent regulatory capital arbitrage.

(51)

Group-wide supervisors also may consider the use of regulatory restrictions andlimitations to achieve reductions in systemic risk. If restrictions and limits reduce
systemic risk sufficiently that the insurance group is no longer deemed a G-SII,
then it would eliminate the need for HLA as well as other G-SII related
requirements.

(52)

The method of calculating the amount of required HLA may take into account
whether the insurance group has demonstrated effective separation. Wherever the

30

Application of LA to non-G-SIIs is outside the scope of this document.

Page 27 of 32© IAIS

G-SII can demonstrate effective separation of NTNI activities from traditional
insurance activities, the HLA uplift may be calculated based on the base capitalrequirements for the NTNI activities conducted. This is in line with the principle for
HLA to be targeted, where possible, at activities that have the potential to generateor aggravate systemic risk. Where NTNI is not effectively separated, and someinsurers will choose not to do so, if group-wide supervisors allow, then the HLA
uplift may be calculated according to the base capital requirements of NTNI
activities in the combined insurance entities and the interconnectedness score.
(53)

The approach taken to achieve HLA capacity recognises that there is no current
global accounting or solvency standard for insurance groups. As such, HLA will
initially be based on the backstop capital requirements until a more comprehensive
framework is established. For the purpose of this document the delineation of basecapital requirements is described below.

(54)

The HLA assessment may take into account any capital charges imposed by anational regulatory framework to mitigate the systemic risk of that insurer.
3.6.2 Methodology for calculating the HLA “uplift”
Components of HLA(55)

Building on the LA capacity requirements described above (until a morecomprehensive framework is available) and after public consultation, the IAIS willdevelop by the end of 2015 the implementation details for HLA that will apply todesignated G-SIIs, taking into account a sufficient transitional period for the
introduction of this measure. HLA implementation is scheduled to begin from 2019(see section 4). The IAIS will also consult on related issues (including the scope of
the G-SII group on which HLA will be assessed).

(56)

HLA may be calculated as the multiplication of two components: the required basecapital amount and a percentage uplift or increase to that base capital. The basecapital requirement may be based on the amount of NTNI activities, excluding nonfinancial activities. Note that this approach assumes that all NTNI activities are
subject to some base capital requirement. In this manner, the capital uplift is
focused on those activities that are the most direct drivers of systemic importance.
While traditional and non-financial activities do not directly impact the HLA
requirement, they do indirectly impact the HLA calculation via theinterconnectedness score of the group.
A. Base Capital Requirements(57)

The base capital requirements (LA capacity requirements) will vary based on thetype of activity and the type of entity the activity is being conducted in. It will
typically take one of three forms, until a more comprehensive framework isdeveloped:

1. Insurance entities - The base capital is the proposed backstop capitalrequirements.

2. Non-insurance financial entities for which Basel III rules apply - The base capitalis the required capital under Basel III rules.

Page 28 of 32© IAIS3. Non-insurance financial entities for which Basel III rules do not apply - The basecapital is the proposed backstop capital requirements.
B. Percentage Uplift(58)

The uplift may be applied to G-SIIs’ NTNI activities and may create incentives for
G-SIIs to separate their NTNI activity and reduce their interconnectedness wherepracticable. The calibration of the HLA uplift will be considered provisionally after
the backstop capital requirements are determined and then it will be reconsidered
once the comprehensive framework is available.

Non- Effective Separation of NTNI activities(59)

In the case of entities that are not effectively separated, the percentage uplift may
be determined according to a formula that is based on the G-SII’s
interconnectedness score from the assessment process.
Effective Separation of NTNI activity(60)

The risk to the financial system posed by activities undertaken by effectively
separated entities is considered less than that posed by the same activities
undertaken by entities that have not been effectively separated. The premise of thisapproach is that effective separation will reduce the transmission of the effects of
distress or failure to the financial system and broader economy.

(61)

In the case of NTNI activities in effectively separated insurance entities, thepercentage uplift may be lower than for non-effectively separated activities.
3.6.3 Location of HLA(62)

In the case of effective separation, the capital uplift should be held at the separated
entity or entities where the systemically risky activity is being conducted.

(63)

Where the insurance group has not undergone effective separation, the group-wide
supervisor in consultation with members of the supervisory college should require
the uplift to be located where it will do the most good at reducing the expected
systemic impact. As guidance in this decision, supervisors should consider thefungibility of capital, (the ability to move capital across jurisdictions and between
entities), and the consequences for effectiveness in internalising the costs ofundertaking activities that have a potential systemic impact. In addition, thedecision over where to locate the HLA should account for whether the groupsupervisor or the college has any authority over the non-regulated financial
subsidiaries. For example, the HLA may need to be held at the holding company
because of the lack of prudential regulatory authority to require it at the nonregulated operational subsidiary.
3.6.4 Acceptable instruments(64)

Currently, there is no common global definition of capital in the insurance sector.
ICP 17.11.34 provides an example of broad categorisation of capital as follows:

Page 29 of 32© IAISa.
b.

c.

Highest quality capital: permanent capital that is fully available to cover lossesof the insurer at all times on a going-concern and a wind-up basis.
Medium quality capital: capital that lacks some of the characteristics of highest
quality capital, but which provides a degree of loss absorption during on-going
operations and is subordinated to the rights (and reasonable expectations) of
policyholders.
Lowest quality capital: capital that provides loss absorption in insolvency/
winding-up only.

(65)

The FSB report 31 endorsed at the G20 Seoul Summit in November 2010 states that
G-SIFIs should have greater loss absorption capacity whereby a higher share of
their balance sheets is funded by capital or by other instruments which increase theresilience of the institution as a going concern.

(66)

In line with the FSB recommendation, given the going-concern objective of the HLA
capacity requirement, the HLA capacity should be met by the highest quality capitalas defined in the above-mentioned ICP 17.11.34. Instruments comprising thehighest quality capital – that is permanent capital that is fully available to coverlosses of the insurer at all times on a going-concern basis – are the appropriate
instruments to meet a HLA capacity requirement for the time being.

31

FSB, The Seoul Document, November 8, 2010 and FSB Progress since the Washington Summit in the
Implementation of the G20 Recommendations for Strengthening Financial Stability,

Page 30 of 32© IAIS4. Implementation
4.1

Implementation timeframe(67)

The starting point for the implementation of G-SII policy measures is thedetermination by the FSB and national supervisory authorities, in consultation with
the IAIS, that a particular insurer is found to be a G-SII. For each G-SII, the groupwide supervisor would contact the G-SII to commence the process of implementing
required policy measures. The key dates, timeframes and respective actions
required (or intermediate activities) are outlined below:
Key
Implementation
Dates and
Timeframes

Action required(or intermediate activity)
The FSB to designate the initial cohort of G-SIIs based on
the IAIS methodology using 2011 data (with annual
updates thereafter published by the FSB each November,beginning in 2014)

July 2013

October 2013

July 2014

July 2014
September 2014
End 2014
End 2015

For designated G-SIIs, implementation commences ofresolution planning and resolvability assessment
requirements of the FSB Key Attributes of Effective
Resolution Regimes and enhanced supervision, includinggroup-wide supervision
IAIS to prepare a workplan to develop a comprehensive,
group-wide supervisory and regulatory framework forinternationally active insurance groups (IAIGs), including aquantitative capital standard
Crisis Management Groups (CMGs) established for the
initial cohort of designated G-SIIs
IAIS to provide the FSB with a recommendation on the GSII status of, and appropriate risk mitigating measures for,major reinsurers
Systemic Risk Management Plan (SRMP) to be completed
IAIS to finalise straightforward, backstop capitalrequirements (loss absorbency – LA) to apply to all group
activities, including non-insurance subsidiaries
Recovery and resolution plans, including liquidity risk
management plans, for the initial cohort of designated GSIIs to be developed and agreed by CMGs
IAIS to develop implementation details for HLA that will
apply to designated G-SIIs starting from 2019

July 2016

Implementation of SRMPs to be assessed

November 2017

The FSB to designate the cohort of G-SIIs, based on the
IAIS methodology and 2016 data, for which the HLA policy
measure will apply, with implementation beginning in 2019

January 2019

G-SIIs designated in November 2017 to apply the HLA
requirements

Page 31 of 32© IAIS(68)Discussions with the G-SII would focus first on the particular drivers of G-SII status.
The group-wide supervisor would immediately begin to implement measures withregards to enhanced supervision (including development of the SRMP) andeffective resolution. Recovery and resolution plans (RRPs), including liquidity risk
management plans, should be developed and agreed by crisis management
groups (CMGs) by the end of 2014. The SRMP should be completed within 12
months after G-SII designation for the first group of G-SIIs. The implementation of
the SRMP should be assessed by the authorities 3 years after G-SII designation(69)

Regarding the proposed policy measures on HLA, the IAIS will develop and specify
a concrete plan by early 2015 on HLA and on related issues (including the scope of
the G-SII group on which HLA will be assessed). An impact assessment of the
proposed levels of HLA will be conducted to assist the IAIS and FSB to better
understand the various implications for insurers that are designated as G-SIIs.
Public consultation on proposed policy measures on HLA is scheduled during
2015.

(70)

The HLA capacity requirements will apply from 2019 for those G-SIIs designated in2017 and will be based on the status of implementation of the SRMP in 2017. The
list of designated G-SIIs will be updated every year. After the G-SII designations in
2017, a newly designated G-SII will be allowed to have the same period to meet
the HLA capacity requirement.

(71)

The IAIS expects national authorities to prepare a framework in which insurers will
be able to provide high quality data for the indicators in the G-SII assessment
methodology. To ensure the transparency of the methodology (for the benefit ofmarket participants and to promote market discipline) and the efficient identificationof G-SIIs, the data used should ideally be made public. The IAIS will work withparticipating authorities to enable such publication over the coming years.

(72)

Implementation of G-SII policy measures should be monitored by an IAIS peer
review process in order to ensure international consistency.

Page 32 of 32© IAIS