global insurance supervision, illiquidity premium criticized, standard model, banks v insurers on bonds II
Tottering toward global insurance supervision
A lack of consistency in global regulation is costing the insurance industry an extra $25 billion a year. The FT reports that the figure, calculated by KPMG, highlights the differences in international regulation between the banking and insurance; there is no Basel III equivalent in the insurance industry.
The International Association of Insurance Supervisors (IAIS), a body representing insurance regulators and supervisors in about 190 jurisdictions, is developing a global Common Assessment Framework, known as ComFrame. ComFrame aims to: “foster global convergence of regulatory and supervisory measures and approaches,” according to the IAIS.
The IAIS will publish a “Concept Paper” in July this year, which will discuss the three year implementation of ComFrame.
Illiquidity premium under attack
Using illiquidity premiums to discount liabilities under Solvency II is unsound and could produce market distortion. VoxEU.org published a paper in which six insurance academics* criticise the idea that insurers can hold less capital against long-term assets which are more stable and thus “illiquid”. The Directive describes this as an ‘illiquidity premium’.
“The illiquidity of insurance liabilities cannot be treated as equivalent to asset liquidity, as asset owners can sell at their discretion, while this is not usually possible for insurance policies,” the authors of the paper said. They argue this could encourage risk arbitrage.
A more favourable alternative would be a gradual transition to a long-term funding basis of the insurance industry. “Other measures may include a regulatory buffer on the asset side of the balance sheet or a ladder of intervention. Insurance companies with long-term liabilities should not be heavily penalised at stress times of flight to quality.”
Further discussion of “illiquidity premium” can be found on the Linklaters website.
* A prudential regulatory issue at the heart of Solvency II is written by Jon Danielsson, Frank de Jong, Roger Laeven, Christian Laux, Enrico Perotti and Mario Wüthrich
Calculating SCR using the standard model
Next Finance discusses the use of the standard model to calculate Solvency Capital Requirement (SCR). It is also researching investment solutions that optimise SCR constraints and asset allocation models under Solvency II.
From the Sphere
Implications of Basel III vs Solvency II on long-date bonds
Following on from the Bloomberg article about the tension between Basel III and Solvency II on the use of long-dated bonds, The Big Picture blog says: “This issue is likely to impact numerous other issues — the end of ZIRP, regulatory changes, bank capital rules, even FASB 157.”
Tweets before posting
@TheActuaryMag: GI news round-up incl AIG, Solvency II, Lloyd’s, bodily injury, climate change http://bit.ly/hD8EXn #insurance #actuarial
@handymapper: Solvency II, a noi!
@actuariaatWU: Solvency II cat risk proposals sent to European Commission http://dlvr.it/M0ryP]]>
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