Fitch Ratings says that the Insurance Capital Standard (ICS) could augment the analysis of insurers’ capital by serving as a comparator benchmark across geographies.
The standard, due to be implemented globally by 2025, aims to provide a globally comparable risk-based measure of the capital adequacy of Internationally Active Insurance Groups (IAIGs). In theory, it should improve comparability between groups that operate under different solvency regimes. However, it will only be effective if all major jurisdictions implement it consistently. Fitch expects the ICS to be neutral for ratings as it is unlikely to replace the regulatory capital frameworks that apply to insurers, including IAIGs.
The ICS is a consolidated group-wide capital measurement standard for IAIGs, as well as for global systemically important institutions as determined by the Financial Stability Board. It is guided by ten principles published by the International Association of Insurance Supervisors (IAIS), a key principle being the comparability of outcomes across jurisdictions to support cross-border analysis by insurance supervisors.
Fitch wrote: “The ICS has much in common with Solvency II. Assets are valued at market value, and liabilities as a market-consistent expected present value of future cash-flows, but there are different approaches to the illiquidity premium. However, the ICS, like Solvency II, includes a margin above best-estimate liabilities to reflect the uncertainty in future cash flows due to non-financial risks, and its capital requirements are based on 1-in-200-year balance-sheet stresses over one year.”
The ICS has been in development since 2013, as part of wider reforms to increase the resilience of the global financial system in the aftermath of the 2007–2008 financial crisis. It is now about halfway through its five-year monitoring phase, due to end in 2024. During this, the ICS is being used for private reporting to supervisors and will not be used to trigger supervisory action. From 2025, it is intended to apply as a group-wide prescribed capital requirement for IAIGs, which could add to, but not take away from, existing regulatory capital requirements.
Fitch added: “Agreeing a global standard tends to require flexibility to accommodate national market specificities, which may compromise consistency of application. The IAIS is assessing whether the Aggregation Method, a capital-measurement standard being developed in the US, provides comparable outcomes to the ICS. In contrast to the ICS, the Aggregation Method is not a brand-new set of rules and principles. It builds on existing US state-specific capital requirements, aggregating them into a single measure.”
It concluded: “If the Aggregation Method is deemed outcome-equivalent, it could be used in place of the ICS in the US and elsewhere, including as a prescribed capital requirement for IAIGs. It will therefore be essential to have a robust and quantitative comparison between the Aggregation Method and the ICS to ensure a level playing field and to prevent material deviations from the global standard.”
