Global insurance capital standard adds uncertainty: Fitch

Fitch Ratings has cautioned that plans by the International Association of Insurance Supervisors (IAIS) to develop a risk-based global insurance capital standard add further uncertainty for the insurance industry.

Applying to approximately 50 internationally active insurance groups (IAIGs), the plan is to have the proposed standard fully implemented for 2019, notes a statement issued Thursday by Fitch.

“Any positive effects as a result of increased capital could be partly offset by negatives from the cost of higher capital and its impact on pricing and competitive position,” Fitch states of the proposed standard.

“We believe the impact will also depend on how consistently individual national regulators interpret and apply any eventual standard that emerges, as well as the degree of effective co-ordination between the various different national regulators responsible for any given IAIG,” the statement adds.

Fitch reports that size will be an important criterion for insurers to be treated as an IAIG – specifically, entities with total assets of more than US$50 billion or gross written premiums of more than US$10 billion.

In terms of how insurers are viewed by global investors, the rating agency suggests the standard could ultimately be positive for insurers from a comparability and consistency perspective. That said, it “comes at a time when there are already other important related initiatives under development and adds to existing uncertainties.”

Fitch points out that most of the major insurers likely to be affected by the new standard are already well-capitalized and relatively highly rated. Widespread rating actions as a consequence of the standard are not anticipated since “those companies are also generally constrained not by capital, but by other factors.”

The rating agency regards the five-year timeframe to develop, test and refine the standard as “ambitious, and delays would not be a surprise based on experience with other comparable projects.”

Earlier in 2013, the IAIS designated nine insurers as globally systemically important insurers (G-Slls); the plan was to announce in mid-2014 which reinsurers will be added to the list.

“Although the IAIS has said that the development of the capital standard will be ‘informed’ by its G-SII work, it is not clear at this stage how the G-SII requirements and the global capital standard will interact,” Fitch notes.

It also remains unclear how the global standard will interact with other regulatory standards, and in particular Solvency II, the statement adds. Solvency II is now supposed to be come into effect in the European Union from 2016, some three years earlier than the proposed IAIS standard.